Pay-When-Paid vs. Pay-If-Paid
Two contingent-payment provisions in construction subcontracts. A "pay-when-paid" clause is a timing provision, the subcontractor will be paid within a reasonable time after the prime contractor receives payment. A "pay-if-paid" clause is a condition precedent, the subcontractor receives nothing unless the prime contractor receives payment. Pay-if-paid clauses are limited by Tex. Bus. & Com. Code Chapter 56, and on private projects Property Code Chapter 28 requires a contractor to pay its subcontractors within seven days after receiving the owner's payment.
Pay-when-paid and pay-if-paid clauses are two distinct contingent-payment mechanisms used in construction subcontracts to allocate the risk of owner non-payment between the prime contractor and its subcontractors. The clauses look superficially similar but have very different legal effects. Texas courts have recognized both clause types but distinguish them carefully, and in practice the Prompt Payment Act's 7-day downstream payment rule (Property Code Ch. 28) limits how far the contingency can be pushed.
Pay-when-paid (timing provision)
A pay-when-paid clause is interpreted as merely setting the timing of payment, the subcontractor will be paid within a reasonable time after the prime contractor receives payment from the owner. If the owner ultimately does not pay, the subcontractor is still entitled to payment from the prime contractor; the prime simply has a reasonable additional time to obtain funds from another source. Texas courts default to a pay-when-paid construction unless the contract very clearly establishes a condition precedent.
Pay-if-paid (condition precedent)
A pay-if-paid clause attempts to make owner payment a true condition precedent, if the owner never pays, the subcontractor is never entitled to payment. Such a clause must be drafted with clear condition-precedent language, and even then Chapter 56 restricts its enforcement. The chapter does not apply to contracts solely for design services, civil-engineering projects such as roads and utilities, or a detached single-family residence, duplex, triplex or quadruplex. Common enforceable patterns: "Receipt of payment from the Owner is an express condition precedent to Subcontractor's right to payment" or similar. Generic "pay when paid" or "pay only when received" language defaults to the timing construction.
Prompt Payment Act overlay
On private projects, once the prime contractor receives payment from the owner, Property Code Chapter 28 requires it to pay each subcontractor its share within seven days, subject to withholding for a good-faith dispute, and an attempted waiver is void (public projects: 10 days under Gov't Code § 2251.022). The interaction matters: a pay-if-paid clause may shift the risk of owner non-payment to the subcontractor, but it cannot delay payment beyond the 7-day window once funds are received. Multi-tier flow-down is similarly capped.
Texas case law trends
Chapter 56 bars enforcement of a contingent payment clause: (1) to the extent the owner's nonpayment results from the contingent payor's own failure to meet its contractual obligations; (2) for later work, once the subcontractor gives written objection after the 45th day following a proper payment request and the notice takes effect; (3) where the payor is in a sham relationship with the owner; and (4) where enforcement would be unconscionable, which the payor can rebut by showing it disclosed the owner's financial arrangements before contracting and pursued collection or offered an assignment of its claim. The clause is an affirmative defense, and the chapter cannot be waived.
Lien rights preserved
By statute, a contingent payment clause may not be used as a basis to invalidate the enforceability or perfection of a mechanic's lien under Property Code Chapter 53 (Tex. Bus. & Com. Code § 56.055). A subcontractor's lien is limited by Chapter 53, generally to funds the owner withheld after notice and to the reserved funds.
Contingent payment terms are frequently negotiated in Texas subcontracts. Points that commonly arise include whether the clause is a timing provision or a condition precedent, an outside date for payment, the Chapter 56 notice right and diligence disclosures, and the status of lien and payment-bond rights. Chapter 56 and Property Code Chapter 28 cannot be waived by contract.