Written by: Hailey Benton-Thomas, President, Bison Payments
The cleanest-looking invoice in the portfolio
Over the past two years, many construction contractors have watched a new account debtor climb to the top of their reports: the general contractor on a hyperscale data center campus. The invoices are large. The GCs are familiar names. Electrical, mechanical and concrete crews stay busy on a single site for eighteen months or longer. On paper, few receivables look better.
There’s a problem though and it is there and waiting. The problem usually lives in one paragraph of the subcontract, filed under a heading like "Progress Payments," that ties the subcontractor's right to payment to the GC's receipt of funds from the owner. When the owner is a hyperscaler with a fortress balance sheet, nobody reads that paragraph twice. When the owner is a single-purpose development LLC still waiting on permanent financing, an anchor lease or a utility interconnection agreement, the same language can turn a receivable from a creditworthy GC into a claim against a project that may stall halfway up.
The calendar gives this a fresh edge. Data centers have moved off the business pages and onto the campaign trail, and the November midterms will put several of the assumptions behind these projects in front of voters.
Timing device or risk transfer
Contractors use "pay-when-paid" loosely, but courts draw a sharp line between two kinds of clauses. A pay-when-paid provision, read the way most courts read it since Thos. J. Dyer Co. v. Bishop International Engineering (6th Cir. 1962), only sets the timing of payment. If the owner never pays, the GC still owes the sub within a reasonable time. A pay-if-paid provision makes the owner's payment an express condition precedent. If the owner fails, the subcontractor absorbs the loss, and so does anyone who advanced against the invoice.
Which one you have depends on drafting and on the state. Language stating that receipt of owner funds is a "condition precedent" and that the sub "assumes the risk of owner nonpayment" will usually be enforced where no statute intervenes. New York and California courts have refused to enforce pay-if-paid terms on public policy grounds in many settings.
Virginia, home to the country's densest data center corridor, went further. For construction contracts entered on or after January 1, 2023, Va. Code § 11-4.6 voids pay-if-paid clauses and requires a contractor to pay its subs within 7 days of receiving owner funds or 60 days after satisfactory completion of the invoiced work, whichever comes first. Texas took a middle path in Chapter 56 of the Business and Commerce Code. A GC may rely on a contingent payment clause only if it disclosed the owner's financial condition and funding to the sub before signing and then pursued collection or offered to assign its claim. A sub can also send a written objection 45 days after an unpaid invoice and cut off enforcement for later work.
Even a plain timing clause is not harmless. "Reasonable time" is a question of fact. On a paused project, settling it can take a year of litigation while the invoice ages out of eligibility.
Why a ballot can stop a draw request
A year ago, most candidates spoke about data centers as job creators. That has changed. A Washington Post review of candidate posts from 2024 through 2026 found the tone had shifted sharply negative in both parties. In a 2026 Reuters/Ipsos poll, 77% of respondents said they worried data centers would raise their electric rates. In Ohio's Senate race, Sherrod Brown is running ads calling Sen. Jon Husted the "face of data centers."
Governments have already acted. New York launched a statewide moratorium on new hyperscale facilities. Pennsylvania Gov. Josh Shapiro signed an executive order on August 18 tightening the approval process. In Texas, Gov. Greg Abbott endorsed an audit of data center growth in August. Local fights are moving faster still. Heatmap counted at least 20 projects canceled after local pushback in the first quarter of 2026 alone, representing more than $41.7 billion of planned investment, and about $85 billion canceled over three years.
Many times, the cancellations matter less than the pauses. Most campuses depend on public decisions that can be reopened: rezonings, property tax abatements, sales tax exemptions on servers and switchgear, and special utility tariffs. A new county commission seated in January, a turned-over legislature, or a utility commission revisiting large-load rates can force an owner to re-underwrite. While it does, the owner stops approving pay applications. The GC stops paying subs. Under a pay-if-paid clause, the GC is within its rights. Nobody calls to say this is happening. The first sign is an invoice drifting past 60, then 90 days.
What the clause does to the collateral
A notice of assignment does not fix any of this. Under UCC § 9-404, an assignee takes subject to the account debtor's defenses under the underlying contract. If the subcontract says the GC owes nothing until the owner pays, the lender who bought or financed the invoice holds exactly that: a right to be paid when, and if, the owner pays. The GC can honor the notice under § 9-406 and still send nothing.
That raises a fair eligibility question. Many credit agreements define an eligible account as one where performance is complete and payment is not conditioned on anything beyond the passage of time. An invoice subject to a true pay-if-paid clause arguably fails that test the day it is issued, however strong the GC looks. Borrowing bases built on these invoices can be overstated without anyone breaking a covenant.
The subcontractor's best backstop is usually its mechanic's lien or a claim on the payment bond. Neither belongs to the lender. Lien rights depend on notices the borrower must serve on statutory deadlines measured in weeks, and they are often waived piece by piece through the lien releases signed with each pay application. Payment bonds are routine on public jobs and far from universal on private campuses. Retainage, often 5% to 10% of contract value, sits at the end of the line and is the first casualty of a stalled project.
Underwriting before the votes are counted
None of this argues for walking away from data center work. The volume is real, and good contractors on these jobs deserve financing. It argues for underwriting the owner and the paper, not just the GC's name. A few practices have earned their place:
Read the subcontract, not the summary. Pull the payment article and any flow-down from the prime contract. Know whether you are looking at a timing clause or a condition precedent before the first advance.
Identify the real owner. Find out whether the counterparty is the hyperscaler or a development entity, and whether construction debt has closed and is in balance.
Use the statute where it exists. On Texas projects, ask the borrower for the Chapter 56 owner disclosures and make sure 45-day objection notices go out when invoices age. On Virginia jobs signed after 2022, enforce the payment deadlines.
Set project-level limits. Cap exposure per campus as well as per GC, and shorten eligibility for contingent-pay invoices.
Calendar lien and bond notices. Require proof of service, and review the lien waivers your borrower signs.
Get GC estoppels. Confirm amounts approved, owner payment status and any setoff before funding large invoices.
Watch the local agenda. Abatement renewals, rezoning appeals and large-load tariff dockets deserve the same attention as a customer's financial statements.
After November, some of these projects will look stronger and some will not. The lenders who come through it well will be the ones who knew, before the returns came in, which of their receivables depended on someone else getting paid first.
Sources
• Heatmap: local opposition and data center cancellations
• Brookings: why data centers are a top issue in the 2026 midterms
• S&P Global: data center backlash shapes midterm ballots
• Tex. Bus. & Com. Code § 56.054
• Peckar & Abramson: are pay-if-paid clauses really enforceable?
• Cozen O'Connor: pay-if-paid no longer enforceable in Virginia
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.