The Texas Construction Trust Fund Act is relatively confusing. The purpose is to treat payments made to a GC (parts of which must then be paid to the lower-tiered project participants that sit “downstream” from the general contractor) as trusts for the benefit of these lower-tiered parties. This makes sure identifiable, “untouchable” money exists to pay the lower-tiered parties on the project.
While there can be significant consequences for failing to comply with the requirements of the Act or mishandling the funds or accounts, there is very little practical guidance related to the “front end” of compliance.
There are many requirements and exceptions in the statute, and while placing the funds into a “construction account” (with certain requirements) is required on residential homestead projects, not much guidance is given to the practical setup of the account.
What is Required for a Construction Account?
As mentioned above, there is no statutory guidance for how a construction account must be set up. There is no specific requirement that the “construction account” be set up by a lawyer, or a CPA, or any other specific finance professional.
The rules for a construction account in the state of Texas are simply:
- 1. The account must be in a financial institution;
- 2. The statements from the financial institution must refer to the account as a “construction account”;
- 3. Only trust funds can be placed into or maintained within the account;
- 4. The contractor must maintain an account record that tracks:
- a. information relating to the source and amount of the funds in the account;
- b. the date the funds were deposited;
- c. the date and amount of each disbursement;
- d. the person to whom the funds were disbursed; and,
- e. the current balance of the account.
While there are a lot of specific requirements, the practical method of creation of the account does not appear to be one. Provided the account is in a financial institution, is noted on statements as a “construction account,” an account record is kept, and only appropriate funds are contained therein, the account itself would appear to meet the requirements.
What is Required for a Project Account Record?
Along with the construction account record, the contractor must comply with requirements for maintaining a project account record for all of the contractor’s projects. The project account record must keep track of each project with respect to the project costs, invoices, and supporting information related to the project funds.
The rules for a project account record are:
- 1. It must specify the direct costs and indirect costs charged to the owner.
(Direct and Indirect costs are defined by the Texas Property code)
- 2. The contractor must retain all invoices and other supporting documentation received relating to funds that were disbursed from the construction account.
- 3. The contractor must ensure that all deposit and disbursement documentation include the construction account number or information that provides a direct connection between the documentation and the account.
- 4. The contractor is required to keep the above information for at least one year from the date of completion of the improvement.
While there are a lot of requirements and potentially tough penalties for non-compliance, as a practical matter the requirements are good accounting procedures anyway. Ideally, construction companies on a project should always have a separate account dedicated to that project alone. That way, it will be easier to make sure the deposits and disbursements from each separate project are kept track of, and doing that will go a long way towards everybody on the project getting paid what they are owed.