My Contractor Didnt Pay the Subcontractor!

General contractors often use the money from the current job to pay for the last job. And, the current jobs completion is often tied to the contractors ability to get a future job. If the contractor has a slow month, then it is possible that subcontractors may try to enforce mechanics and materialman liens against the house. And, to many unsuspecting homeowners, these liens are often valid.

If a homeowner receives a notice of the intention to enforce a lien against her house, then the homeowner should immediately contact an attorney. Time is of the essence. Further, the Texas Property Code maintains fairly severe penalties against general contractors in these situations. The applicable law is called the Construction Trust Fund Act. Under the law, both subcontractors and homeowners are beneficiaries of the construction trust funds. If a subcontractor does not get paid even though the homeowner has paid for that part of the contract, then the general contractor can face criminal prosecution, even a felony. This places added pressure on the general contractor to make things right. Additionally, the homeowners attorney may pursue certain civil actions against the general contractor. And, it will be absolutely necessary to try to stave off any unrelenting subcontractors that try to foreclose on the home.

Part of the problem arises because, in Texas, general contractors neither have to be licensed nor bonded. Therefore, anyone that can afford a magnetic sign to place on his truck becomes a contractor, especially after a hail storm. However, steps can be taken to mitigate the risks.

First, homeowners are advised to do some research. The research should expand beyond asking a couple of friends. The City of Frisco maintains a blacklist, so to speak, of contractors that are not currently allowed to obtain permits. It would be wise to check that list before making a down payment on a job.

Second, try to find a bonded contractor. Bonded contractors are rare in Texas because of the cost of bonding. Further, they can be more expensive. However, it does not hurt to ask.

Third, if the contractor is not bonded (again, most are not), the homeowner should maintain as much control over the checkbook as possible. In fact, it is recommended that the homeowner writes the checks to the subcontractors to make sure that they get paid.

Fourth, it does not hurt to have an attorney either draft or review the contract.

Finally, for contracts over $5,000, the Construction Trust Fund Act requires the general contractor to place construction funds into an operating account and provide the homeowner accountings. The homeowner should demand compliance with this statute.

If the homeowner does not take these steps (and sometimes even if s/he does), then the homeowner could find herself having to make the uncomfortable position of having to pay twice for the same work. Again, if it happens to you, hire a local attorney to assist you.

Robert Newton is an attorney based in Frisco, Texas, that practices real estate law, business law, and estate planning. This post is meant for informational purposes only and does not constitute legal advice.