Using Funds Administration for Bonded Projects
Funds Administration, or “funds control,” is a tool often used by bonding companies help to mitigate risk on construction projects. It is a common tool for sureties to place on contractors with credit issues, claims history, contractors involved in development or other business interests, or simply when an underwriter cannot make perfect sense of the contractor’s financials. This can be because of a lack of quality internal financials, or other times because the contractor does not have a CPA prepare reviewed financial statements. Whatever the reason, funds control serves some basic purposes:
Ensures All Parties are Paid – The bonding of public projects requires both a performance and payment bond. The payment bond guaranties all 1st and 2nd tier subcontractors and suppliers are paid. Funds administration verifies certain criteria is being met for each draw including certified payroll, invoices, supporting documentation, line item in project budget, lien waivers or releases, etc., to ensure every party entitled to payment is being paid.
Helps to Prevent Front End Loading – As the saying goes, rob Peter to pay Paul. Contractors often “front end load” a contract which increases cash flow at the beginning of the project to help finance other projects. If a surety is bonding a specific contract, the last thing the underwriter wants are the funds leaving the job to finance other projects. Funds control prevents this because as part of the disbursement agreement, it will only pay a maximum profit on draws with any excess saved in retention. So if the contractor really did make 50%, good for them but they won’t see most of that profit when the contract is complete.
Can Reduce or Eliminate Collateral Requirements – If a contractor is required to enter into funds control to secure the bond, there is a good chance they were given the option to post collateral instead. While collateral requirements are different for each contractor and surety, it is always difficult to tie up cash that could be used as working capital for jobs. Funds control offers this alternative.
Costs of Funds Administration
Ranges from .5% – 1% depending on size and complexity of the contract, number of draw requests, and frequency of the contractor’s needs for other fund controlled projects.
For the most part, the consensus is that most contractors would rather not have to agree to funds control; it’s an extra party involved in managing the flow of funds on a project. However, funds administration is also the solution for a contractor that was declined by a surety.
Surety 1 utilizes funds control often for those contractors faced with a collateral option. Feel free to contact us at firstname.lastname@example.org for more information or questions regarding funds administration.