General contractors who contract with owner/developers and who construct large, complex projects such as office buildings, shopping centers, and warehouses, often seek to shift the risk of owner/developer non-payment to their lower-tier subcontractors, such as mechanical, electrical, and plumbing subcontractors. Historically, general contractors achieved this goal by utilizing in their subcontracts a contractual risk-shifting provision known as a “pay-when-paid” contract clause (sometimes known as a “pay-if-paid” clause).
What is a Pay-When-Paid Clause?
Stated simply, the pay-when-paid subcontract clause provides that general contractors are not obligated to pay their lower-tier subcontractors until such time as the project owner pays the general contractor for the work of each respective subcontractor.
Thus, much to the dislike and disfavor of subcontractors, the risk of owner “slow-pay” (and sometimes even owner “no-pay”!) could be shifted from the general contractor to the project subcontractors.
Is a Pay-When-Paid Clause Still Legal in Virginia?
As of January 1, 2023, pay-when-paid clauses are largely unenforceable in Virginia construction contracts.
In 2022, after years of discussion and intense (and expensive) lobbying by construction industry trade organizations, the Virginia General Assembly modified Virginia law applicable to both state and private construction projects in such a way that:
(i) ensures that subcontractors who perform their work properly get paid for their work in a reasonable time period, and
(ii) still allows general contractors to withhold payment from non-performing and improperly performing subcontractors.
The new law was made applicable to any state or private construction contract entered into on or after January 1, 2023. General contractors are now required to pay a properly performing subcontractor within the timeframes set by law, even if the owner hasn’t paid yet.
How Does the Law Affect Public Construction Contracts?
On the public-sector side, any construction contract awarded by any Virginia state agency or local government and signed on or after 1-1-23 is now required to include a provision obligating the general contractor to pay properly-performing subcontractors within sixty (60) days after the subcontractor bills for the work, even if the general contractor has not been paid by the state agency or local governmental body.
Importantly, however, the general contractor is NOT obligated to pay for improperly performed work, but instead may withhold payment by notifying the subcontractor, within fifty (50) days of receiving the sub’s bill, of the amount being withheld and the reason for non-payment.
State construction contracts are also required to include a provision obligating the general contractor, when they are paid by the owner, to pay subcontractors within seven (7) days of receiving payment from the state agency or local government for the work of each respective subcontractor.
How Does the Law Affect Private Construction Contracts?
Private, non-public, construction contracts in Virginia are now required to include similar provisions relating to the timing of the flow of money. On private projects, general contractors are now required to pay properly performing subcontractors within sixty (60) days of being billed, even if the general contractor has not been paid by the owner. If the private owner has paid the general contractor, the GC must pay subcontractors performing the work for which the GC has been paid within seven (7) days of owner payment.
Private project general contractors may still withhold payment from improperly performing subcontractors by giving written notice to the sub, within fifty (50) days of being billed, of the amount being withheld and the reason for the withholding.
Importantly, if a private project owner or developer becomes insolvent or files a petition for bankruptcy, a general contractor may withhold payment from subcontractors indefinitely if the subcontract provides for such withholding in the event of owner insolvency or bankruptcy.
Need Help Interpreting the Law or Getting Paid?
Virginia’s construction payment law now provides a more balanced framework for managing financial risk on large, complex projects. It ensures that subcontractors who perform their work properly are paid within a reasonable timeframe, while still allowing general contractors to protect themselves from issues like poor performance or owner insolvency.
