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Adam Leitman Bailey and Dov Treiman

Construction projects entail financial risk—risks for the owners of the property, risks for the banks financing them, risks for the general contractor, subcontractors, even the construction workers. Naturally, all of these risk takers seek to push off the risk to someone else. Many of these push-offs the law allows; others are legally intolerable. Where the risk imperils the viability of the construction industry itself, one highly favored by all who seek “progress,” legislatures select whom they will protect. Across the United States, legislators have spent a century considering the particular form of protection known alternately as “pay if paid” and “pay when paid.”

Pay-If-Paid Defined

The idea behind “Pay-If-Paid” is that a general contractor will often wish to lower its financial risk by entering into deals with its subcontractors under which the subcontractor is only paid if, as, and when the general contractor receives payment. Such a provision greatly reduces the up-front expenditures of the general contractor and generally forces the subcontractor to advance funds to its employees for which it has not yet received any reimbursement. If there is no such advance to the workers (of whom some may well be self-employed), then the risk of nonpayment is fully shifted to those least likely able to afford nonpayment, the actual manual laborers.

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