Virginia Has Banned Pay-if-Paid Clauses in All Construction Contracts

May 2022

Contingent payment clauses are now unenforceable in both private and public construction contracts in the Commonwealth of Virginia. VA SB 550 adds new sections under Va. Code § 2.2-4354 (Payment Clauses to be Included in Contracts) and Va. Code §11-4.6 (Liability of Contractor for Wages of Subcontractor’s Employees) regarding payment clauses in construction contracts in general and the timing of payment on private projects, effectively shifting the risk of nonpayment from the subcontractor to the higher-tiered contractor or general contractor.

Under §2.2-4352 payment by the party contracting with the contractor can no longer “be a condition precedent to payment of any lower-tier subcontractor, regardless of that contractor receiving payment for amounts owed.” Nonetheless, a general contractor in a private project may still have a pay if paid subcontract clause in the event the owner is “insolvent or a debtor in bankruptcy.”  Under Va. Code §11-4.6: (1) “the owner is required to pay the general contractor within 60 days of receipt of an invoice following satisfactory completion” of the invoiced work; and (2); a higher-tier contractor must pay its subcontractor either within (i) “60 days of the satisfactory completion of the portion” of the invoiced work or (ii) “7 days after receipt of amounts paid by the owner to the general contractor or by the higher-tier contractor to the lower-tier contractor for work performed by a subcontractor”, whichever is earlier. “Failure of a contractor to make timely payment as provided in this subsection shall result in interest penalties consistent with §2.2-4355.”

Lastly, the bill provides that the Department of General Services shall convene the Public Body Procurement Workgroup to review whether the issue of nonpayment between general contractors and subcontractors necessitates legislative corrective action. The bill has a delayed effective date of January 1, 2023, and shall apply to construction contracts executed on or after January 1, 2023.