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Wisconsin’s theft by a contractor: An overview

by | Mar 26, 2021 | Construction Law

In every construction project, it’s important that all parties receive their benefit of the bargain. For contractors, this means that they need to get paid for the work they’ve done. When it’s a large project involving a prime contractor, subcontractors, and/or suppliers, the contractor must be diligent to ensure that enough funds are available to pay every party accurately and timely. When a prime contractor is in charge of the money paid by the owner to compensate the parties involved, it is essential for that money to be handled correctly. If the funds are mishandled, it may be considered theft by a contractor.

Theft by a contractor involves the missapropriation of funds by the prime contractor

What is theft by a contractor?

When a contract is established between an owner and a contractor, and subcontractors, suppliers, and/or vendors are involved, an obligation (known as a trust) is created for the contractor to use the money paid by the owner to pay the subcontractors and/or suppliers for the work they’ve performed. This obligation is located in the Wisconsin Statutes, Section 779.02(5).

The trust fund that is established is to be used to cover the costs incurred by the contractors, subcontractors, and suppliers for the work performed and material provided on the project. Theft by a contractor involves the misappropriation of those funds by the prime contractor that are needed for the project to pay suppliers and subcontractors. Essentially, the funds that were supposed to be used to pay the subcontractors and suppliers were used for a different purpose. This law ensures that owners are not having to pay twice for the suppliers and subcontractors.

Common forms of theft by a contractor

A commonly seen form of theft by a contractor is when a contractor uses the money that was designated to be used for “Project A” to fund other projects or debts. By using the money that was supposed to be for one project on another project, that contractor is essentially stealing from a trust that they do not own or completely control.

For example, think of a construction company (“CC”) that is acting as the prime contractor on a major project. The owner paid CC the money that would act as the trust fund to pay other contractors and suppliers. CC has debts they owe for their last construction project, so they think it would be okay to use some of the money they just received for this project on that debt. That would be considered theft by a contractor.

Difficulties in theft by contractor cases

The primary difficulty in pursuing a theft of contractor claim is proving that the “theft” actually occurred. This means the person/entity making the claim must be able to prove that the funds that were supposed to be used for “Project A” were not used on that project, but instead were used for some purpose unrelated to the project. There needs to be more than speculation that this occurred. While a person/entity may believe that a contractor is committing “theft by  contractor,” there must be evidence to pursue a claim.

What to do as an owner/subcontractor?

As an owner/subcontractor asserting a theft by contractor claim, it is crucial to have evidence supporting the claim. This means that you need to keep track of the money paid to the contractor that is intended to be used in the trust fund for the construction project. It may also be a good idea to ask for the contractors involved in the project to sign lien waivers. This will help ensure you are not paying twice for a particular part of the project. The funds to pay the contractors and subcontractors has already been put into the trust fund, from which the prime contractor will pay the suppliers/subcontractors.

As an owner, you should also be reviewing all invoices sent by each subcontractor and supplier. As a subcontractor, it’s more difficult to obtain information as to whether the owner has paid the general contractor for your work. It’s in your best interest to make inquiries to the relevant parties if you believe the general contractor is misappropriating the funds. Lastly, owners can ask for an accounting of funds to see how funds are being applied on the project. This will help to determine whether the general contractor has misappropriated any funds.

What to do as a contractor?

As a contractor, it is important to maintain accurate records of the source of funds as well as to whom funds are paid. It is critical to keep projects and funds for those projects separated. By keeping a close eye on your bookkeeping, you can avoid the misuse of funds. It is also important to pay subcontractors and suppliers from the trust fund in a timely and efficient manner. It may be wise to use one account specifically for that trust fund. This can help assure you are keeping track of and using the funds correctly.

How our construction lawyers can help you

If you are bringing a claim alleging theft by a contractor, the attorneys at McDonald & Kloth, LLC can help you. We understand the importance of transparent and honest business. If you are looking to schedule a legal consultation, please call 262-252-9122 or use our contact form.