One of the quickest and most common ways a contractor or subcontractor can get into big trouble is by not being careful with their money. We not referring to how they pay their personal bills or perhaps set up their pension funds. What we are talking about is the money they are paid for specific projects or jobs. It is easy to get into a “borrow from Peter to pay Paul” mindset. The lines can become very blurry as it relates to which money is for which project. Unfortunately, and much like a game of musical chairs, if and when the music stops there is going there is going to be quite a crash. Any contractor can experience cash-flow problems, but the cash they receive from customers and homeowners must receive their highest priority of care.

Specifically, our laws here in the State of Michigan provide that any fund paid by any person to a contractor or subcontractor:

“. . . shall be considered . . . to be a trust fund, for the benefit of the person making the payment, contractors, laborers, subcontractors or material men, and a contractor or subcontractor shall be considered the trustee of all funds so paid to him for building construction purposes.” (MCLA 570.151)

Now, it seems simple enough that if a contractor gets paid for one project, he will cut checks to his various subcontractors and/or materialmen. The difficulties arise when he has multiple jobs going or when cash flow is squeezed. The temptation is to merely pay the bills that present themselves and leave others for later, figuring that the money will come in at some point. However, if a contractor uses “Project 1” funds to pay for anything other than a “Project 1” expense, he could be committing a felony. MCLA 570.152 provides, in part, that it is a felony to appropriate “such funds to [the builder’s] own use while any amount for which he may be liable or become liable under the terms of his contract for such labor or material remains unpaid[.]” Penalties for violation of this act are up to $5,000 in fines and three (3) years in state prison.

The importance of discipline when a contractor is handling his money cannot be overstated. One other item worth noting is that a corporate employee or official can be personally liable for criminal acts although the act was on behalf of the corporation. Even if a builder has taken the time to incorporate, they are not immune from prosecution or civil suit even though they may only move the money around in the name of the corporation.

Most of us have heard of a builder who we think might be a little fast and loose with their money. We all know a builder who has some leftover bills from a project and who is also temporarily short of cash but knows the next job is coming. Try not to be one of those builders, because it could mean big trouble for you or your company.

If you are interested in these services, please contact Smith & Johnson.