A construction contractor often receives a demand for information--under New York Lien Law §76 -- for a verified statement of entries of job costs and expenses. What is this about? How should a contractor respond?

Article 3A, Lien Law §§70-79-a, makes the contractor a statutory trustee. Article 3A requires a contractor maintain bookkeeping that a construction job’s income was used to pay the job’s costs. The contractor must be able to separately list job payments received from the owner (trust funds received) and job payments made to others (trust payments made with trust assets). The contractor must also separately list money not yet received on the job (trust assets receivable), and moneys owing to others for the job (trust accounts payable).

Article 3A treats owner payments to a contractor as part of a special trust. The money received cannot be used for another purpose not dealing with the job until every claim by subcontractors, suppliers, laborers, etc. arising at any time prior to the completion have been paid or discharged, or until all trust assets have been applied for the purposes of the trust. 

The money received from the owner for work on the job is to be used exclusively for the job until there are no other job costs now or in the future. Money received for the job stays on the job and pays for the job. Diverting money from one job to temporarily finance another is a prohibited diversion. The contractor (and a person knowingly participating in) misusing job money is civilly and/or criminally liable. Inability to supply the bookkeeping details is presumptive evidence (in a criminal prosecution) that the money was misused.

A contractor’s accrual accounting is not robust enough to provide this detail. Under accrual accounting, revenues are recorded when earned, not when received: expenses are recorded when incurred, not when paid. Article 3A bookkeeping has some aspects of cash accounting. Under cash accounting, revenue is recognized when received; expenses are recognized when paid.

Article 3A bookkeeping requires more details than cash accounting does. For example, trust payments made with trust assets bookkeeping involves payments to job subcontractors, suppliers, workers, job taxes, job insurance, and for other job costs. Bookkeeping must describe the name of the person to whom a payment is made, the payment date, the amount, and a statement whether in cash or by check. Bookkeeping must detail the nature of the claim sufficient to identify the payment as one for a job purpose; and whether it was for labor, materials, taxes, insurance, and/or performance under a contract or subcontract. If payment was made under a contract, the contract must be dated and identified as oral or in writing. If payment is for materials or labor other than daily or weekly labor, the item must be described. 

Details as to trust assets receivable — moneys owed by the owner — must be described. The contractor must detail owner unpaid: requisitions, change orders, retainage, and other claims. Details, as to trust assets payable, include moneys owed subcontractors/suppliers/workers for the job.

A contractor receiving a Lien Law §76 demand should therefore turn to a professional to assemble the required details.