Contract Clauses to Watch Out For in Construction Contracts

3. Payment terms:

Pay attention to the payment clause in construction contracts. Many times it states the following (or words to the effect of the following):

The general contractor does not have to pay the subcontractor if the owner does not pay the general contractor.

Variations of this clause have been ruled by the courts to be illegal, but there is a way that the general can make the clause legal, and that is to include the words "condition precedent".

At last check (February 2008) California Law requirements on payment are that the general contractor pay the subcontractor within 10 days of receipt of payment from the owner "unless the parties have agreed to other payment arrangements in the contract".

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From the California Business and Professions Code

7108.5. A prime contractor or subcontractor shall pay to any
subcontractor, not later than 10 days of receipt of each progress payment, unless otherwise agreed to in writing, the respective amounts allowed the contractor on account of the work performed by the subcontractors, to the extent of each subcontractor's interest therein. In the event that there is a good faith dispute over all or any portion of the amount due on a progress payment from the prime contractor or subcontractor to a subcontractor, then the prime contractor or subcontractor may withhold no more than 150 percent of the disputed amount.

Any violation of this section shall constitute a cause for disciplinary action and shall subject the licensee to a penalty, payable to the subcontractor, of 2 percent of the amount due per month for every month that payment is not made. In any action for the collection of funds wrongfully withheld, the prevailing party shall be entitled to his or her attorney's fees and costs.

The sanctions authorized under this section shall be separate from, and in addition to, all other remedies either civil, administrative, or criminal.

This section applies to all private works of improvement and to all public works of improvement, except where Section 10262 of the Public Contract Code applies.

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The general contractor can put whatever payment terms he wants to into the construction contract and it is up to you to decide if those terms are acceptable or not.

Be aware that even though some general contractors might write into their contract that they will pay you within 30 days of your invoice, most of them don't unless they have been paid by the owner.

If the construction contract states that you will be paid within 30 days of your invoice but you are not paid by that time, then your general contractor is in breach of his contract with you regardless of whether he has been paid by the owner or not.

Construction Contracts Continued on Page 5

[Because contract law seems to constantly change, you really do need someone in the know on your side. Please don't take the info I have posted here at my site and use it as a substitute for legal advice. Do consult with an attorney or legal expert.]