Funds Trapping

First of all, there is no statutory document called a “Funds Trapping Notice.”
While there are notices that do trap funds, they are known as “Notice of Nonpayment” or “Notice of Unpaid Balance.” The term “funds trapping” is jargon used by those in the construction industry. The bottom line is that these notices, when properly used, can act the same way as a preliminary notice acts to secure your unpaid, job-related accounts receivables. Although, at least from a standpoint of getting paid faster, they are actually somewhat more effective than a preliminary notice.

Those who must send two funds trapping notices end up sending the first one to the general contractor only. While thMoney Trapis must be done to enforce your lien rights, it also acts as a dunning notice. This tells the general that you have not been paid and that you will be forced to send a second notice if the invoice you are referencing remains unpaid next month at the same time. Only this time, the second notice will be served on both the general contractor and the general contractor’s customer (the property owner). The beauty of the notice is that it is required by law in order for you to secure your lien rights. If you don’t send these notices to those who must receive them and if you don’t send them within the time limitations imposed by state statutes, you will lose your lien rights. The general contractor surely understands that losing lien rights is something he is not prepared to do. So, why should he expect you to forfeit yours?

The “Funds Trapping Notice” schedules tend to be somewhat confusing. Here is an example of how it could impact a material supplier:

In this example, we use a material supplier who is providing materials to a plumbing contractor who is working for a general contractor on a private project owned by XYZ Developers.

The material supplier is given an order for $20,000 to provide concrete pipe, fittings, and materials on January 22, 2014. On February 20, 2014, he receives a second order for $8,000 in additional concrete pipe. Both orders are delivered to the job site within 5 days of receipt of the order.

  • On January 31, 2014, the material supplier will send an invoice to the plumbing contractor for $20,000, which will be due in 30 days.
  • On February 28, 2014, the material supplier will send an invoice to the Plumbing Contractor for $8,000, which is due in 30 days.
  • On March 1, 2014, both invoices are open and unpaid. The first invoice is past due while the second invoice is not due until March 28, 2014.
  • On or before March 15, 2014, the material supplier must send their first “Notice of Unpaid Balance” for the $20,000, which became due on March 2, 2014, to the general contractor.
  • On April 1, 2014, both invoices remain open and unpaid. Both invoices are now past due.
  • On or before April 15, 2014, the plumbing contractor must serve a second “Notice of Unpaid Balance” for the $20,000, which remains open since January 31, 2014. This notice will be served on the general contractor and also on the property owner.
  • Also, on or before April 15, 2014, the material supplier must serve a first notice of unpaid balance for $8,000, which was invoiced on February 28, 2014, to the general contractor.

The failure of the material supplier to serve either of these notices could jeopardize the material supplier’s lien rights for the total amount of the notice, which was not properly served.

 

Invoice Date Invoice Amt 1st NUB 2nd NUB
January 31 $20K N/A N/A
February 28 $8K N/A N/A
March 31 $0 $20K before 3/15 N/A
April 30 $0 $8K before 4/15 $20K before 4/15

The state of Texas requires that these “Notices of Unpaid Balances” be served by anyone not in direct contract with the property owner. If you are owed money on a construction project, you must serve the first “Notice of Unpaid Balance” on the general contractor on or before the 15th day of the second month from the date of your invoice if it remains unpaid.

Don’t let this complicated notice schedule wreck havoc with your accounts receivable department. CRM has been preparing and serving these notices, in addition to Stop Notices, Intent to Lien, Mechanics Liens, and Construction Liens for over 27 years. If you want to make sure your notice is served accurately and within the restrictive time frames, choose CRM to be your notice preparation partner.