Payment Provisions in Construction Contracts: Mitigating Risk of Nonpayment in a Volatile Market

Description

In a volatile real estate market, nonpayment in construction projects is becoming more common. Therefore, well drafted payment provisions in construction contracts are imperative to ensure parties are paid in a timely manner, or alternatively, have appropriate remedies at their disposal if they are not paid.

Three of the most common provisions relating to payment in construction contracts are stop work, PIP, and PWP provisions. Stop work provisions inform all parties about the consequences for slow or non-payment and typically include, among other things, a timeline or process for stopping the project. Without a well drafted stop work clause, suspension of work could result in liability for the non-paid party.

PIP and PWP provisions establish when lower-tier subcontractors and suppliers are paid. A PIP provision is a condition precedent that requires payment from the owner to the general contractor or higher-tier subcontractor before payment is made to the lower-tier subcontractor or supplier. PIP clauses shift the risk of nonpayment to the lower-tier subcontractors or suppliers. Jurisdictional enforceability of PIP clauses varies greatly.

On the other hand, PWP clauses are essentially timing provisions that allow the general contractor or higher-tier subcontractor a reasonable amount of time to comply with its duty to pay the lower-tier subcontractor or supplier, but it does not extinguish the responsibility for payment. PWP clauses are also jurisdiction sensitive. Therefore, counsel should clearly understand the jurisdictional treatment for both provisions as well as how these provisions may interact with other enforcement rights. For example, in some states where PIPs are allowed, the provision may not be enforceable where a mechanics lien has been filed.

In the event of nonpayment, counsel should be aware of enforcement mechanisms under these contractual provisions as well as others such as those under general contract and common law.

Listen as our expert panel provides best practices for negotiating and drafting payment provisions in construction contracts and addresses various enforcement mechanisms in the event of nonpayment.