What is a pay-when-paid (back-to-back payment) clause?
A pay-when-paid clause makes a main contractor's payment to its subcontractor depend on the main contractor having been paid by the client for the same work.
Also called back-to-back payment, pay-if-paid, conditional payment clause.
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Pay-when-paid in plain words
The payment terms of the main contract are passed down. If the client pays the main contractor late, the subcontractor is paid late. Pay-if-paid is the stricter form, where no payment is owed at all unless the client pays.
Why does pay-when-paid matter?
It moves the cost of the client's delay onto the subcontractor, which is why subcontractors build it into their rates or chase for payment on WhatsApp for weeks. It also means the main contractor's own certification delays become its subcontractors' delays.
Where does pay-when-paid mislead?
Whether such a clause is enforced depends on its exact wording and on the law that applies to the contract. For micro and small suppliers, the payment time under section 15 of the MSMED Act, 2006 may apply regardless of what the contract says. Check with a lawyer before relying on it either way.
What do people get wrong about pay-when-paid?
- Not telling the subcontractor why it is waiting
- A subcontractor told only that payment is delayed assumes the worst. The client bill's status is the answer, and it costs nothing to share.
- Using the clause to cover your own delay
- Where the main contractor's bill was late because of its own rework, the clause is cover for an internal problem, and subcontractors notice.
How does Crestline measure pay-when-paid?
Crestline ties each subcontractor payment to the client bill it depends on, so a late payment is traced to a certification delay and not to the accounts team.
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