The following is adapted from Quit Getting Screwed.
The money on a construction project has to move through many hands, so how can you be sure that everyone will be paid?
The answer is through the law regarding construction trust funds. Everyone who receives funds on a construction project has the legal obligation to use those funds to pay everyone they owe money to for work on that project. That means if a general contractor owes you payment, you have legal recourse to ensure that they pay you.
Trust funds help you get paid—but as you’ll see, they also set rules that you must follow. In either case, it pays to understand how they work and how you can use them to your advantage.
Construction Trust Funds Protect Workers
The money received for a construction project is in the form of trust funds, which must be used to pay workers and material suppliers for the work they did on the project, not to buy a new car and fancy trips.
When an owner, general contractor, or subcontractor receives payment on a construction project and there are outstanding amounts due for labor or material on that project, those funds are considered held in trust for those workers or material suppliers. By law, those funds are considered trust funds. That means once you are paid on a project, you need to pay your bills for that project, or you are breaking the law.
This also applies to the owner and general contractor. If they owe you money for a job, they’re legally required to pay.
Trust Funds Go Both Ways to Protect You and Constrain You
Construction trust funds can protect you and help ensure you get paid, but they also set guidelines that you must follow.
To get paid, trust funds give you a pathway to sue an owner directly. Generally, as a subcontractor, you have no grounds to sue an owner. However, you could sue the owner for a trust fund violation if you believe the owner spent the construction funds on things other than construction. If it can be proven that the owner misapplied the construction funds, the owner can be held personally responsible for the funds that were misapplied.
This also means that if subcontractors misapply construction funds, the company and the individual owners could be held liable for those funds. Where many subcontractors make a mistake is when something goes wrong on Project A, and they are not paid on time. However, they are paid on Project B, and instead of using the funds to pay the bills for Project B, they use the funds to pay for Project A.
This is a misapplication of construction funds and is against the law—do not do it.
Negotiate better subcontracts
The Cromeens Law Firm is here to protect you and your business. We can help you negotiate your subcontracts to protect you against losing your money and your assets. Our hope is that you never sign a subcontract that puts you out of business. Work with us to equip yourself with the ability to properly evaluate your risks and negotiate your next subcontract with greater confidence and ease.
Trust Funds Can Bring Criminal Charges
If a general contractor or subcontractor misapplies construction trust funds, the consequences can be expensive. Trust fund violations can even bring criminal charges for the funds that are misapplied.
The charges range from a Class A misdemeanor to a felony of the third degree. It is a defense to a trust fund claim that you spent all of the funds that you received for a construction project on that project. Having the records to prove that you spent all of the funds on the project is essential. You must keep accurate records at all costs.
If you’re sued for a trust fund violation, you can expect that your personal and business accounts and credit card statements will be subpoenaed.
Manage Your Funds Properly
As you can see, trust funds help ensure that you get paid by general contractors and owners, but you also must follow their laws yourself.
Remember, everyone who receives funds on a construction project has the legal obligation to use those funds to pay everyone they owe money to for work on that project. That means not using funds from one project to pay for your debts on a different project. That is breaking the law, and you could be personally liable for any misapplication of construction funds.
Also keep in mind that whether or not you are paid by the general contractor, you still have the obligation to pay your workers and material suppliers. Subcontractors and material suppliers appreciate your business and are willing to work with you through difficult projects, but you have to let them know what is going on so that they can protect their money too.
For more advice on negotiating better subcontracts, you can find Quit Getting Screwed on Amazon.
About Karalynn Cromeens
Amazing wife, outstanding mother to three super-talented daughters, small business owner, and committed leader to more than twenty employees, Karalynn has been a licensed attorney for more than fifteen years. She has spent her entire legal career in construction litigation, advising countless clients on how to stay out of litigation in the construction industry. Karalynn has reviewed thousands of subcontracts, breaking them down to help her clients understand exactly what they were signing, and giving those clients tips and advice on how to negotiate the best subcontract possible. Now she’s offering that same advice to you in Quit Getting Screwed. For materials referenced in the book, visit subcontractorinstitute.com.