agchouston.org Summer 2025 Cornerstone 17 to seek alternate financing methods to bridge cash flow gaps while they await payment. This includes selling unpaid invoices to factoring companies or enlisting collection agencies to recover funds on aged invoices. For general con- tractors, receiving a notice from such a third party often signals financial distress among the subcontractor base. Factoring companies and debt collec- tion agencies are third parties that take a percentage of the payment in exchange for accelerating cash flow by collecting payments on outstanding invoices, which means that downstream subcontractors engaging these third parties must work at a discount. Factoring, in particular, can seem attractive: a subcontractor sells a pend- ing invoice, receives a percentage of the face value up front and is paid the balance (minus fees) when the invoice is settled; this allows the subcontractor to collect most of their invoices early, which helps keep the cash flowing. This is an “assignment” under Chapter 9 of the Uniform Commercial Code, and fac- toring companies typically secure their interest by filing a financing statement with the Secretary of State. The Problem While this practice may seem like a win-win, it quickly becomes problem- atic. Subcontractors bypass the very construction laws meant to protect them by using third parties to manage cash flow. Texas’s Prompt Payment Act, Construction Trust Fund Act and mechanic’s lien statutes exist to ensure timely payment and prevent diversion of funds away from laborers and suppliers. One judge explained the purpose of lien laws as “an attempt to create a workable balance among various and often antagonistic interests, protecting not only contractors and suppliers, but also lenders and property owners.” Similarly, the Prompt Payment Act was designed to “increase the cash flow on construction projects by requiring monthly billings,” and authorizes con- tractors and subcontractors to suspend performance if unpaid within 10 days after notice. The Construction Trust Fund Act further protects trades by giving “protection to materialmen in addition to that provided by the mate- rialman’s liens statutes.” By passing these laws, Texas lawmak- ers sought to protect general contractors, subcontractors, trades and suppliers by mandating that owners, lenders and builders fund approved work on an appropriate timeline. Downstream par- ties’ use of these statutes provides an early warning mechanism to upstream parties that something is impacting cash flow and putting the project at risk. These statutes should be used and understood by all parties as laws that benefit con- struction when used as intended. When subcontractors sell invoices to third parties, those invoices exit the statutory construction trust. The Texas Court of Appeals in Corpus Christi ruled that factoring companies are not trustees under the Construction Trust Fund Act, and payments made to them “were not made ‘under a construction contract’ but were instead based on the factoring agreement.” The court acknowledged that “the presence of factoring agreements in construction cases may frustrate the intent of the Act to protect subcontrac- tors and materialmen from the risk of nonpayment,” and emphasized that only the legislature can fix this statutory gap — this gap remains unaddressed. Thus, when slow payment of a project leads subcontractors and suppliers to use third parties to buoy up their cash flow, it increases the risk that construction funds will be diverted from their main purpose: paying the laborers and mate- rial suppliers for the work, supplies and equipment that bring the project to life. This erodes legal protections designed to ensure those performing the work are paid for it. For the owner and general contractor, this can increase the risk of payment disputes in the future. Communication and Documentation Whenever and wherever possible, con- tractors should try to make the project work for the whole team. Where work quality isn’t an issue, contractors should foster open communication regarding payment timeframes and work to ensure that information flows down the entire contract chain. When payment timeframes are missed, owners and contractors should expect to receive prompt pay and lien notices, because these notices are intended to trap and protect the construction trust funds. When work quality or other issues underlie a payment dispute, it’s import- ant to properly document the issue(s) to reduce the risk of third-party inter- ference. As a practical matter, factoring companies and debt collectors compli- cate projects because these third parties aren’t familiar with the nuances of con- struction contracts, lien and bond laws, or the purpose of prompt pay statutes. Ultimately, these third parties’ demands fail to account for the various legal rights at issue when work quality and warran- ties are at play. The battlefield of construction demands strategic coordination — not just on the site but also in how funds are managed and disbursed. Texas law- makers have built legal frameworks that serve the entire construction chain, from owners to laborers. When contractors and subcontractors rely on these stat- utes rather than third-party financiers, they preserve the trust, accountability and financial flow that keep projects moving forward. Factoring companies and collection agencies defeat the purpose of construction lien, prompt payment, and trust fund statutes when they claim construction funds.
