A pay-when-paid clause is a Subcontract term that ties the Subcontractor's payment to the Main Contractor being paid by the Client. It is meant to protect the main contractor's cash flow. In the UK, the Construction Act makes most such clauses ineffective, so a clause that says "pay when paid" often does not decide when the money is due.
Worked example
A subcontractor submits an application for £30,000 for the month. The subcontract says payment is due 7 days after the main contractor receives payment from the client. The client's payment of £150,000 to the main contractor is two weeks late.
If the clause worked as written, the subcontractor would wait the extra two weeks. In practice, the subcontract's due date and final date for payment still run from the Valuation, and the main contractor still has to issue a Payment Notice and, if it intends to pay less, a Pay Less Notice.
If it does neither, the sum applied for can become payable on the final date, whether or not the client has paid. The main contractor funds the £30,000 from its own cash for those two weeks.
Pay-when-paid in the cash flow
The clause does not move the risk off the main contractor in the way many people expect, so forecast payables on the subcontract's payment dates, not on the dates the client pays you. A main contractor with ten live subcontracts and a client paying late can be carrying several £30,000 sums at once. That gap needs working capital or an overdraft, and it grows with the number of jobs.
For subcontractors, the point works the other way. Do not accept "the client hasn't paid us" as the reason for a late payment without checking the notices in the subcontract.
In the UK
Section 113 of the Construction Act says a provision making payment conditional on the payer receiving payment from a third party is ineffective, unless that third party is insolvent.
The Act does not remove the right to agree long payment periods or valuation dates, so read the payment terms with the notice requirements, and take legal advice before relying on or resisting a clause. The US term "pay-if-paid" has no safe place in a UK subcontract for the same reason.
Related terms
Interim Payment, Retention, Main Contractor, Subcontract, Adjudication.
Planyard's subcontractor payment applications record each application against the subcontract order with the Retention and due date, so you see what you owe and when, regardless of what the client has paid you.
