What Is a Pay-When-Paid Clause?
A pay-when-paid clause is a subcontract term that makes a subcontractor’s payment conditional on the head contractor first receiving payment from the client or principal — in effect, shifting the risk of the principal not paying down onto the subcontractor. In Australia, pay-when-paid and pay-if-paid clauses are void and unenforceable in relation to progress payments for construction work under state and territory Security of Payment legislation, meaning a subcontractor’s right to be paid does not legally depend on the head contractor being paid first, regardless of what the contract says.
Key takeaways
- A pay-when-paid clause ties a subcontractor’s payment to the head contractor first being paid by the client or principal.
- It is also called pay-if-paid, sometimes drafted even more strictly as a condition that payment never falls due unless the head contractor is paid.
- Under Australian Security of Payment legislation, these clauses are void and unenforceable for progress payments on construction work.
- Being void does not always stop the clause causing confusion or delay — subcontractors may still need to pursue payment through statutory progress claims or adjudication.
- This is general information about how these clauses are typically treated, not legal advice — always confirm the current position for your state or territory.
What a Pay-When-Paid Clause Says
A pay-when-paid clause links a subcontractor’s payment to an event outside the subcontractor’s control: the head contractor actually receiving payment from the client or principal above them. A stricter version, sometimes called pay-if-paid, goes further again — it treats payment from the principal as a condition precedent, meaning the subcontractor is never owed the money at all if the principal never pays, rather than simply being paid later.
Why These Clauses Exist — and the Risk They Create
Pay-when-paid clauses were historically used by head contractors to manage their own cash flow risk, effectively passing the credit risk of the principal down to subcontractors who had no relationship with, and no visibility over, the principal’s finances.
The practical effect was that a subcontractor could complete good work on time and still wait indefinitely for payment — or lose it altogether — if the principal disputed payment, became insolvent, or simply delayed. That risk flowed straight down the contracting chain to the businesses least able to absorb it.
- Subcontractor carries the principal’s credit risk instead of the head contractor
- Payment delay can become open-ended rather than a fixed number of days
- Disputes higher up the contracting chain flow straight down to the subcontractor
- Cash flow pressure compounds for smaller subcontractors with less financial buffer
Why Pay-When-Paid Clauses Are Void Under Security of Payment Legislation
Every Australian state and territory has Security of Payment legislation designed to protect cash flow through the construction industry, and a core feature of that legislation is that pay-when-paid and pay-if-paid clauses are declared void in relation to progress payments for construction work. In practice, this means a subcontractor’s statutory right to a progress payment does not depend on the head contractor first being paid by the principal, regardless of what the subcontract itself says.
| Clause type | What it says | Enforceable in Australia? |
|---|---|---|
| Pay-when-paid | Delays payment to the subcontractor until the head contractor is paid by the principal | No — void for progress payments under SOP legislation |
| Pay-if-paid | Payment only becomes due at all if the principal ever pays — a condition precedent | No — also void under SOP legislation |
| Standard payment term | Pay within a set number of days of a valid progress claim, regardless of the principal’s payment | Yes — the enforceable default position |
General information, not legal advice
Security of Payment legislation is state and territory based, and drafting and procedural detail can differ between jurisdictions. Always check the current legislation for the relevant state or territory, and the specific contract, before relying on this as a basis for action.
What to Do if a Subcontract Still Has a Pay-When-Paid Clause
Pay-when-paid wording still turns up in older or copied subcontract templates even though it carries no legal weight for progress payments. Where it does appear, the practical response is usually to submit a properly structured progress claim under the applicable Security of Payment legislation anyway, rather than treating the clause as a valid reason to wait.
A clean, itemised progress claim — with dates, scope and amounts clearly set out — is easier to rely on if a payment dispute does end up going to adjudication. MTH’s tender and quote document templates help produce that kind of clear, well-structured paperwork from the start, so a subcontractor’s payment position stands on its own regardless of what an outdated clause tries to say.
Frequently asked questions
Is a pay-when-paid clause legal in Australia?
Pay-when-paid clauses can still be written into a contract, but they are void and unenforceable in relation to progress payments for construction work under Security of Payment legislation in every Australian state and territory.
What is the difference between pay-when-paid and pay-if-paid?
Pay-when-paid typically affects only the timing of payment — the subcontractor is paid once the head contractor is paid. Pay-if-paid goes further, treating the head contractor’s payment as a condition precedent, so the subcontractor may never be owed the money if the principal never pays. Both are void under Australian SOP legislation.
Can a head contractor delay paying a subcontractor until they get paid?
Not lawfully, in relation to progress payments for construction work — Security of Payment legislation overrides pay-when-paid style clauses, so a subcontractor’s right to a progress payment does not depend on the head contractor being paid first.
What should I do if my contract has a pay-when-paid clause?
Treat the clause as unenforceable for progress payment purposes, and still submit a compliant progress claim under the relevant Security of Payment legislation. If payment is refused or delayed, statutory adjudication is generally available as a next step.
Does Security of Payment legislation apply to subcontractors?
Yes. Security of Payment legislation across Australia is specifically designed to protect the right to progress payments throughout the contracting chain, including subcontractors, regardless of contrary clauses like pay-when-paid.
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