Taking a Closer Look at the “Pay When Paid Clause”

surety bond new jersey

Construction cash flow typically works in a chain-like fashion. When one contractor gets paid, he then pays subcontractors who in turn pay suppliers, employees and other bills. If money gets held up at any point, it can affect several related parties. Your surety bond in New Jersey probably includes a “Pay When Paid” clause in its contract. Here are three questions you can ask yourself about this clause in your surety bond:

  • Is it enforceable? That all depends on the language used to write it. The clause should be written in a straightforward, unambiguous way. If it isn’t clear, it may not hold up in court.
  • Is it compliant with the NJ anti-waiver statute? If you’re used to working in another state, such as New Hampshire or Maine, it would be good to look into how construction liens work in New Jersey.
  • What happens if a subcontractor files for bankruptcy? Without a surety bond in New Jersey, the general contractor would likely be liable for all of the downstream costs. A well-constructed flow-down provision should protect a GC from having to pay those expenses.

Risk shifting helps contractors survive an often cutthroat construction industry. By paying close attention to how a contract is drafted and how such language has been interpreted in past cases, your business can do everything in its power to protect itself.