Under the Nebraska Construction Prompt Pay Act, general contractors (“GC”) are required to pay subcontractors within 10 days. But, does that mean within 10 days of job completion or within 10 days of the general receiving payment from the owner?
General contractors are required to pay subcontractors within 10 days of receiving payment for the portion of work completed by the subcontractor.
It is understood that the GC’s obligation to pay its subs arises when it receives a partial, progress, or final payment covering that portion of the sub’s work. That is, the GC is under no obligation to pay until it receives payment. However, absent a pay-if-paid clause (see below), the ultimate obligation to pay a subcontractor is not completely discharged. Stop and make sure you understand that last sentence! Even if the general contractor never receives payment, it is still obligated to pay its subcontractors. The only thing the Nebraska Construction Prompt Pay Act does, in terms of the GC’s obligation to pay its subs, is to outline the maximum amount of time it can delay after it receives payment. At some point, although it is not defined in the statute, the general has to pay its sub even if it never receives payment from the owner.
Pay-if-paid clauses condition the general contractor’s obligation to pay its subcontractor upon it receiving payment from the owner.
Contrary to the explanation above, if a subcontractor enters into a contract with the general or prime contractor and that contract contains a “pay-if-paid” clause, then the general contractor receiving payment from the owner for the subcontractor’s work becomes a condition precedent to its obligation to pay the sub. In other words, a properly drafted pay-if-paid clause will completely absolve the general contractor from paying its sub if it doesn’t receive payment from the owner.
Now, a general contractor seeking to limit its liability in the case of owner non-payment need to take special care in how its contracts are drafted. Poorly drafted clauses may be interpreted as “pay-when-paid” clauses, which essentially do exactly what the Nebraska Construction Prompt Pay Act does – it simply gives the general a “reasonable” amount of time to pay after it receives payment. A “pay-if-paid” clause, on the other hand, makes payment by the owner to the general a condition precedent to the general’s obligation to pay its subs and thereby discharges the obligation is the general never receives payment.
If you are a subcontractor who has not received payment for work completed and you need help protecting your rights or securing payment, or you are a general seeking to shift the risk of owner non-payment from yourself and on to your subcontractors through a pay-if-paid clause, contact a construction law attorney at Johnson Tabor & Johnson Law today. To be effective and enforceable, these clauses need to be carefully drafted and this is not something you should attempt to draft without the aid of legal counsel.
Adam P. Johnson is an attorney licensed in Nebraska who currently practices employment, personal injury & construction law with Johnson Tabor & Johnson Law in Omaha, Nebraska. Mr. Johnson is also a founding member and current President of Johnson Roofing & Construction - a small, family-owned roofing contractor in Omaha. Mr. Johnson is a second generation Omaha native and is proud to serve its community with honest and ethical legal services. Johnson's wife, Ande, is an active volunteer in the community and currently serves on the board of the Boys & Girls Clubs of the Midlands, the Rose Theater Family Guild, and in leadership positions with the Junior League.