Pay When Paid vs Pay If Paid: What Subcontractors Need to Know

Payment clauses are among the most fought-over provisions in any subcontract. And yet two of the most common — pay when paid and pay if paid — are routinely misunderstood, or worse, treated as the same thing. They are not. The distinction matters enormously, both legally and commercially, and getting it wrong could mean the difference between a delayed payment and no payment at all.

This guide explains both concepts, sets out the legal position under the Construction Act 1996, and tells you what to do when you find either clause in a subcontract you're being asked to sign. If you're working through a broader contract review, our subcontractor contract review checklist covers twelve clauses that deserve attention before you commit.

What Is a Pay When Paid Clause?

A pay when paid clause makes your payment as a subcontractor conditional on the main contractor first receiving payment from the employer. In simple terms: the contractor pays you when they get paid — not on a fixed calendar date tied to your application.

These clauses were once common across UK construction. The appeal for main contractors is obvious — they pass cash flow risk down the supply chain. If the employer is late paying, the contractor has a contractual justification for delaying payment to you.

The practical effect can be significant. If the employer withholds payment, delays certification, or simply takes their time, your payment could be deferred indefinitely — even if your own work is complete and properly invoiced. In a tight market, even a four-week delay caused by an upstream dispute you had nothing to do with can create real problems.

What Is a Pay If Paid Clause?

A pay if paid clause is more aggressive. It conditions your right to payment entirely on the main contractor receiving payment from the employer. If the employer never pays — whether because of a dispute, a refusal to certify, or insolvency — you receive nothing, regardless of the value of work you've completed.

Where pay when paid defers payment, pay if paid purports to extinguish it. That's a much starker position. It effectively shifts the entire upstream credit risk onto the subcontractor, who typically has the least leverage and the least visibility into the relationship between the contractor and employer.

In practice, these clauses are often loosely or interchangeably drafted. You may encounter language such as "payment shall be made only when and to the extent that the contractor has received payment from the employer" — which reads as pay if paid but is sometimes argued to operate as pay when paid. The drafting matters, and ambiguity rarely resolves in the subcontractor's favour.

The Legal Position Under the Construction Act 1996

The Housing Grants, Construction and Regeneration Act 1996 — usually called the Construction Act — fundamentally changed the enforceability of these clauses in UK construction.

Section 113 of the Act provides that a provision making payment under a construction contract conditional on the payer receiving payment from a third party has no effect. In plain English: pay when paid and pay if paid clauses are generally unenforceable in UK construction contracts.

This is a significant protection. It means that even if your subcontract contains a pay when paid or pay if paid clause, that clause cannot be used to delay or extinguish your right to payment simply because the main contractor hasn't been paid upstream. Your entitlement exists independently of the contractor's own cash flow position.

The Act applies to construction contracts in England, Wales, and Scotland (Northern Ireland has equivalent legislation). It covers the vast majority of subcontracts for construction operations — though there are exclusions, including certain residential occupier contracts and some contracts outside the scope of "construction operations" as defined by the Act.

Where a clause falls foul of section 113, the Scheme for Construction Contracts steps in to provide a replacement payment mechanism. The Scheme sets out default payment terms and procedures that apply when a contract fails to comply with the Act.

The Insolvency Exception

Section 113 contains a significant carve-out that every subcontractor should understand: the prohibition on pay when paid clauses does not apply where the third party — the employer — is insolvent.

This means that if the employer becomes insolvent and payment to the main contractor is genuinely at risk, the main contractor can rely on a pay when paid clause to defer or reduce payment to subcontractors. The definition of insolvency for this purpose includes administration, liquidation, receivership, voluntary arrangement, and similar processes.

In practice, this exception can have serious consequences. If the employer collapses mid-project, subcontractors who are owed money for completed work may find their payment frozen while the main contractor's own exposure to the upstream insolvency is assessed. This is not a theoretical risk — employer insolvency happens, particularly in downturns or on distressed projects.

This is one of the strongest arguments for monitoring financial health across the project chain. If you have concerns about an employer's solvency — unusually slow payments to the contractor, rumours of funding difficulties, drawn-out disputes — those are signals worth taking seriously before you commit further resource to the project. LazyQS contract review analyses contract documents to flag payment risk clauses including insolvency carve-outs, so you understand your exposure from the outset.

How to Spot These Clauses in a Subcontract

Pay when paid and pay if paid provisions are not always labelled as such. Some are explicit; others are embedded in payment clauses using language that achieves the same commercial effect. Here are the patterns to look for.

Direct conditional language — phrases such as "payment shall only be made when the contractor has received payment from the employer" or "the contractor's obligation to pay is conditional upon receipt of payment from the employer" are the clearest indicators.

Receipt-linked payment dates — instead of specifying a fixed payment interval (such as 28 days from application), the clause ties the payment date to the date the contractor receives their own payment. This delays but arguably doesn't extinguish your entitlement — though in practice the effect can be similar.

Retention release conditions — a clause stating that retention will only be released when the contractor receives their own retention from the employer is effectively a pay when paid arrangement applied to the retention sum. This is more common than it should be. Our construction retention guide covers this in more detail.

Back-to-back payment terms — clauses stating that payment terms in the subcontract "mirror" or are "back-to-back with" the main contract may incorporate pay when paid provisions by reference. Always ask to see the relevant payment provisions of the main contract before agreeing to back-to-back terms.

The safest approach is to read every payment clause with the question: does my right to payment depend on anything other than the work I've done and the application I've submitted? If the answer is yes, find out why.

What to Do If You Find One

If your subcontract contains a pay when paid or pay if paid clause, you have several options — and which one makes sense depends on how important the project is, how much leverage you have, and whether the clause is actually enforceable in its current form.

Seek legal confirmation. If the clause is a straightforward pay when paid provision covering a contract that falls within the scope of the Construction Act, it is likely unenforceable under section 113. Having that confirmed in writing before you sign puts you in a stronger position. Do not simply assume the clause is void — the insolvency exception still applies, and not all contracts are automatically caught by the Act.

Negotiate it out. If you have leverage — particularly on a project where you are a specialist subcontractor or where your programme is tight — push to have the clause deleted or replaced with a fixed payment interval. Document the negotiation in writing. If the clause is removed by agreement, confirm this in correspondence before mobilising.

Seek an amendment. If deletion is refused, an amendment limiting the clause to the insolvency exception only (aligning it with the statutory carve-out) is a reasonable ask. This removes the contractor's ability to use the clause for routine cash flow purposes while preserving the protection they are entitled to under the Act.

Price the risk. If none of the above is achievable, factor the payment risk into your commercial position. A subcontract where payment could be deferred for weeks or months due to upstream cash flow issues is a different commercial proposition to one with a clean 28-day payment cycle. If you proceed without amendment, at minimum ensure you are monitoring the project closely and raising applications promptly.

Also check the notice provisions. Under the Construction Act, a main contractor who wants to pay less than the notified sum — whether relying on a pay when paid clause or otherwise — must issue a pay less notice before the final date for payment. Understanding how that process works is essential. Our pay less notice guide explains the mechanics in full.

A Note on Related Clauses

Pay when paid and pay if paid are rarely the only payment risk in a subcontract. They often appear alongside set-off provisions, contra-charge clauses, and vaguely drafted payment application procedures that compound the cash flow risk. A contract may be structured so that even where the pay when paid clause is void, a separate right to set-off achieves a similar effect in practice.

The cleaner approach is to review the payment section of any subcontract as a whole — looking at the interval, the application process, the pay less notice provisions, the set-off rights, and the retention terms together rather than clause by clause in isolation. That gives you an accurate picture of how cash will actually flow on the project, rather than how the contract reads in its best light.

LazyQS contract review reviews all of these provisions together, flagging where payment clauses interact in ways that create disproportionate risk — including pay when paid language, short application windows, and retention tied to upstream release. Understanding your payment position fully before you sign is always cheaper than unpicking it later.