Virginia’s construction industry has entered a new regulatory era with the enactment of a law that limits the long-standing use of “pay-when-paid” clauses, shifting financial risk away from subcontractors and promoting quicker payments.

For years, general contractors in Virginia often used pay-when-paid—or pay-if-paid—clauses to delay payment to subcontractors until the owner paid them. These clauses, common in contracts for large-scale developments like shopping centers, office buildings, and warehouses, effectively passed on the financial burden of slow or non-payment from owners down to subcontractors.

Under a pay-when-paid clause, "general contractors are not obligated to pay their lower-tier subcontractors until such time as the project owner pays the general contractor for the work of each respective subcontractor." This could result in significant delays for subcontractors, even when they had completed their work on time and correctly.

But as of January 1, 2023, that legal structure has changed. Following years of advocacy from construction trade groups and industry stakeholders, the Virginia General Assembly passed legislation that renders such clauses largely unenforceable in both public and private contracts entered into from that date forward.

The law, which represents a major victory for subcontractors, aims to "ensure that subcontractors who perform their work properly get paid for their work in a reasonable time period," while still allowing general contractors to protect themselves against poor workmanship or nonperformance.

Public Sector Impact

In government construction contracts, general contractors must now pay properly-performing subcontractors within 60 days of receiving an invoice—even if they haven’t been paid by the agency. However, contractors may withhold payment for nonperformance if they notify the subcontractor within 50 days of invoicing and specify the amount and reason for withholding.

Additionally, once the contractor does receive payment from the agency, they must disburse the appropriate funds to subcontractors within 7 days, ensuring prompt cash flow down the construction chain.

Private Sector Contracts

The rules for private construction contracts mirror the public side in many ways. General contractors must pay subcontractors within 60 days of billing, regardless of whether the project owner has paid them. If the owner has made payment, then subcontractors must be paid within 7 days of the contractor receiving those funds.

There’s still room for general contractors to withhold payment for valid performance issues. As with public contracts, they must issue written notice within 50 days of the invoice, citing the reason and the withheld amount.

An important distinction in private contracts involves owner insolvency or bankruptcy. In such cases, if the subcontract permits it, general contractors may withhold payment indefinitely, adding a layer of protection for GCs facing potential financial losses.

New Era of Risk Allocation

The law rebalances a system that once left subcontractors financially exposed. By mandating timely payments and reducing reliance on owner-related delays, Virginia is creating a more stable and equitable environment for construction professionals at all levels.

For those navigating these new requirements, legal guidance and contract review are recommended. As the law now states:
"General contractors are now required to pay a properly performing subcontractor within the timeframes set by law, even if the owner hasn’t paid yet."

This legislative shift is expected to improve trust, reduce litigation, and stabilize financial planning across projects in the state. It encourages transparency and accountability while protecting those who perform work in good faith.

Originally reported by JD Supra.