Texas Payment Terms Guide & FAQs

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Texas Payment Terms Overview

Texas Payment Terms Overview


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Pay when Paid valid Icon
Pay When Paid is Valid

Text allows pay when paid clauses to be enforceable with respect to time and manner of payment, but not payment itself. Sheldon L. Pollack Corp. v. Falcon Industries, Inc., 794 S.W.2d 380, 383 (Tex. App. Corpus Christi 1990).


Pay If Paid is Valid

Pay if paid clauses can be valid and enforceable in Texas, provided that the clause sets forth unequivocal and express agreement that the clause create a "condition precedent" to payment.


Trust Fund Statute Applies

The Texas construction trust fund act, is found at Tex. Prop. Code Chapter 162, and is complex and full of requirements. The detail to which Texas provides specific requirements related to the construction trust fund is far beyond those found in most states.


Retainage 10% Icon
Retainage Specifically Regulated

Texas strictly regulates retainage, including both limiting (and setting) the amount that may be withheld, and specifying strict rules and requirements regarding providing notice and making a claim for retained funds.


7
DAYS
Payment Due to Subs/Suppliers in 7 Days

For Subs & Suppliers, payment required within 7 days after payment received from above; unless otherwise agreed. Payment to GCs is required within 35 days from invoice.


lien waivers regulated
Lien Waivers Are Regulated

The forms and process for exchanging lien waivers are very specific in Texas, and are strictly regulated - waivers in Texas must even be notarized. It's important to follow the state's rules.

Pay when Paid valid Icon
Pay When Paid Valid

In Texas, pay when paid clauses work as timing mechanisms for payment, but does not control payment itself unless the clause is explicitly clear it intends to shift risk and create condition precedent for payment, and the contractual language will not possibly allow it to be otherwise interpreted.


Pay If Paid Valid

In Texas, pay if paid clauses are enforceable if explicitly clear, and with unequivocal and express agreement by the parties.


Trust Fund Statute Applies

The Texas construction trust fund act, is found at Tex. Prop. Code Chapter 162, and is complex and full of requirements. The detail to which Texas provides specific requirements related to the construction trust fund is far beyond those found in most states.


Retainage Unregulated Icon
Retainage Generally Unregulated

For most public projects in Texas, no specific maximum rate is set out. Tex. Prop. Code Ann. § 2252.032 and§ 2252.03


10
DAYS
Payment Due to Subs/Suppliers in 10 Days

For Subs & Suppliers, payment is required within 10 days after payment received from above; unless otherwise agreed. Payment to GCs is required by the later of 31 days of invoice or receipt of services.

Construction payment is highly regulated across the United States, and nowhere more so than Texas. Texas has some of the most complex, strict, confusing, and specific rules and regulations surrounding construction payment of any state.

No matter what the construction contract may say with respect to certain payment requirements, there are some legal rules that are more powerful than those contracts. This means that no party has complete control over the rules governing the payment terms on a project.

There are some key laws that regulate the construction payment process in Texas, which include:

There are also very specific rules controlling how construction funds must be treated even prior to payment! Texas has a construction trust fund statute that requires parties to take specific steps with respect to the funds that will become owed to parties lower on the payment chain – and serious consequences can occur if these requirements are violated. Treating construction funds in a manner other than allowed by Texas law can result in criminal penalties and civil liability.

Texas has strong public policy in protecting the rights on construction participants to get paid – but both pay when paid and pay if paid provisions are allowable and enforceable in Texas provided that specific and explicit language is included. This means that it is critical for construction participants in Texas to read their contracts carefully, and make sure they understand what it is they say. AIA standard contract documents, for example, contain pay if paid clauses – so a party in Texas who signs a “standard” document may be at risk of losing payment rights if they don’t understand the Texas payment terms rules.

It’s important for everyone on a construction project to treat one another fairly. But, when it comes to signing construction contracts in Texas, exchanging payment applications, holding construction funds, and and eventually, making or receiving payment…it’s important to know the rules of the game.  This page provides a resource to you to really understand those rules.

Payment Applications & Payment Terms FAQs in Texas

The construction payment process is highly regulated in Texas. It can be confusing to figure out when payments must be made, how to make them, and how to best protect your company from expensive problems. Here are some frequently asked questions that come up with the payment application and payment process on Texas jobs.

Texas Payment Terms & Payment Applications FAQs

Do I Need to Treat Construction Funds a Specific Way in Texas?

Yes. Texas has a construction trust fund statute that requires “construction payments” to be treated as trust funds. This means that“a contractor, subcontractor, or owner or an officer, director, or agent of a contractor, subcontractor, or owner” who receives construction payments or who has control or direction of money to be used as construction payment, has an obligation to hold these funds in trust to prevent their misallocation.

Do the Rules Change for Residential Projects?

Yes. There are additional requirements related to certain residential projects in Texas. On residential projects exceeding $5,000 the contractor is required to deposit the trust funds into a “construction account.” A construction account is:

1) an account in a financial institution;

2) named/referred to as a “construction account;”

3) an account into which only trust funds may be maintained; and,

4) managed in accordance with Sec. 162.007 of the trust fund act – which imposes the maintenance of certain specific records.

Are there Penalties if Trust Fund Obligations are Not Met?

Yes, potential penalties for violation, like everything else in Texas, can be big, so participants want to make sure they take the steps required to comply with these obligations. While a civil cause of action for beneficiaries related to a trustees misapplication of funds is not specifically contemplated by the Act, such suits are allowed by Texas court decisions. Additionally, there can be significant criminal penalties for the breach of construction trust fund duties.

The potentially applicable criminal penalties are set out below:

  • Misapplication of trust funds amounting to $500 or more is a Class A Misdemeanor with a potential fine up to $4,000 and up to one year in jail.
  • Misapplication of trust funds amounting to $500 or more with intent to defraud is a Third Degree Felony with a potential fine up to $10,000 and jail confinement for no less than 2 years and no more than 10 years.
  • On residential construction projects, failing to establish or maintain a construction account or failing to establish or maintain the proper account record for the construction account is a Class A Misdemeanor with a potential fine up to $4,000 and up to one year in jail.

The above penalties are especially powerful as the Act provides for personal liability. This means that the owner/officer/director of a company may be personally liable for the breach of the imposed duties even if the construction participant was a corporation or LLC if a beneficiary establishes that the individual party “directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all current and past due obligations.”

What Language is Required in Order for a Pay if Paid Clause to be Enforceable?

Texas allows pay if paid clauses to be enforceable only if the clause is unequivocal and sets forth an express agreement that the cause is to be considered a condition precedent to payment. Accordingly the words “condition precedent” and a specific acknowledgment that the clause is intended to shift the risk of nonpayment between the contracting parties seems to be required.

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How to file a lien in Texas

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Free Texas Payment Documents

Getting paid and making payment on Texas construction projects requires a lot of details…and a lot of documents. You may need specific payment application forms, notices, demand letters, sworn statements, certified payroll records, and more. Levelset’s payment application forms and other payment documents are prepared and curated by construction attorneys and payment experts, and available to you for free.

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