Pay-When-Paid Squeeze on an Occupied Municipal Renovation
You are the CM-at-risk on a $6.4M, ten-month renovation of an occupied municipal library. Terms: 5% retainage on every billing, pay applications due the 25th, payment within 30 days of approval, and a pay-when-paid clause with a 60-day outer limit. It is month 6. You have billed $3.85M and been paid through month 4. The month 5 application - $780,000 gross, $39,000 of it retainage - has sat unapproved for 41 days; the owner calls it internal review. Your electrical subcontractor ($1.1M contract, $610,000 earned, paid only $180,000 because you have been rationing cash) has issued written notice that it will stop work in ten days. The owner's project manager asks you to keep everybody working and verbally offers to release the month 5 retainage if you sign a no-damages-for-delay acknowledgement. You have a 12-day owner-caused delay pending, carried at $2,900 per day in extended general conditions.
1. Quantify your cash exposure and decide whether to direct the electrical subcontractor to keep working while the owner's application sits unapproved.
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Cash position. Owed to you: month 5 app $780,000 gross, $39,000 retainage, net $741,000, unpaid 41 days. Owed by you: $430,000 to the electrical sub ($610,000 earned less $180,000 paid).
Is pay-when-paid a defense? It is a timing mechanism, not a permanent bar to payment in most jurisdictions, and prompt-payment statutes often push payment down the chain within a fixed period regardless of the upstream language. Verify both the statute and the contract's 60-day outer limit before you lean on it - and note it protects you from neither the sub's lien rights nor a payment bond claim.
Cost of advancing the money. $430,000 at roughly 9% for 60 days is about $6,400. Your fee on that sub's work at 6% markup on $430,000 is about $25,800. You would spend roughly a quarter of the fee to protect all of it.
Cost of not advancing it. The electrician has a written stop-work notice, which is a clean record. A stoppage hits electrical rough-in on the critical path, plus remobilization, plus a mechanics lien against an occupied municipal facility - a political problem for the owner and a reference problem for you. Add bond exposure and the conversation with your surety.
Decision. Direct the electrician in writing to continue, with a defined payment date, and find the cash: a partial payment with an escrowed remainder, a joint-check arrangement, or your own line of credit. Withholding is a false economy of about $6,400 against a five-figure fee and a schedule you cannot recover.
2. Evaluate the owner's offer: release the $39,000 retainage in exchange for a signed no-damages-for-delay acknowledgement and waiver of your pending delay claim.
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Run the numbers first. The pending delay is 12 days at $2,900 per day = $34,800 of extended general conditions. The owner is offering $39,000 - roughly the value of the claim, but with strings.
Three problems:
- The $39,000 is not a concession. Retainage is billed, earned, and contractually owed. The owner cannot use money you already have as consideration for a release.
- The acknowledgement is prospective as well as retroactive. It does not just close out $34,800; it forecloses recovery over the remaining four months, where your owner-caused delay exposure is largest.
- The trigger is a 41-day payment failure, not a negotiated settlement. Signing a release to get paid tells the owner you will accept late payment in exchange for nothing.
Counter: accept the retainage release as a separate, unconditional payment, and offer a mutual, dated release of claims accruing through the date of the agreement only, expressly reserving claims for owner-caused delay arising afterward. If the owner will not release earned retainage without a broad waiver, that is information about the second half of the job - escalate to a formal demand and start preserving rights instead of negotiating.
3. List the notices and documentation you would issue in the next five business days, with the reasoning for each.
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- Written demand to the owner under the payment clause: application date, approval period, day count, and the contract's stated remedy for nonpayment, with a cure period.
- Notice of potential claim and delay, with a reservation of rights and a running cost record. Do not let a notice deadline pass while you are still negotiating.
- Calendar every statutory deadline - preliminary notice, lien or stop-notice filing, bond claim, notice of intent to suspend. Missing one converts a strong position into a gift.
- Written notice to your surety that the owner has not funded month 5 and that a subcontractor has issued a stop-work notice. Sureties forgive problems; they do not forgive surprises.
- Written directive to the electrician: continue work, payment schedule, reservation of both parties' rights, acknowledged in writing.
- Daily documentation - manpower by trade, deliveries, idle equipment - and a same-day confirming email summarizing any verbal owner statement. A verbal offer of retainage for a release should be in writing before it changes.
- If the cure period runs, exercise the suspension remedy exactly as written, after notice. Do not quietly slow down.