Author, Andy Roberts, Account Executive, Surety, Rancho Mesa Insurance Services, Inc.
As surety brokers, we initiate bond programs for our construction clients. Single and aggregate limits are determined in large part by their financials and experience. Often, there are jobs that exceed the single limit we have in place, or are larger than any job that our client had previously completed. When it is a job that makes sense for the contractor, it is our job to work with the bond company and find a solution so the contractor can bid the job or take on the contract. One available solution is a process referred to as funds control.
Funds control is a service that bond companies use to ensure funds involved in the project will be used for appropriate work-related expenses. This arrangement involves a third party company engaged to handle the disbursement of the funds to the different sub-contractors and suppliers on that specific project. In order for this to be set up, the contractor is required to execute two documents, a Disbursement Agreement and an Irrevocable Direction of Funds.
The Disbursement Agreement addresses the specific terms agreed upon by the contractor and the third party company and also details the responsibilities of both the contractor and the funds control company. The second document, the Irrevocable Direction of Funds, is a one-page document that requires the project owner, or the general contractor, to send all payments directly to funds control. Once the funds are received, they are placed into a project specific bank account that is set up in the contractor’s name. The payments are then disbursed to the sub-contractors and suppliers based on the pay applications that the contractor submit to funds control. And, while this adds some additional steps and work to the process, there are benefits to funds control and good reasons why the bond company will require it on certain projects.
For the bond company, with a third party taking control of the distribution of funds, there is a much lower risk of financial mismanagement, and subcontractors, suppliers and vendors can expect to be paid for the work that they do, which leads to a lower risk of payment bond claims being filed against the contractor’s bond.
While adding funds control to a project adds some additional work and steps to the job, it can be a valuable alternative route and one that contractors should gain familiarity. In many cases, funds control can be the solution that helps get a surety underwriter comfortable with supporting a bond for a particular job that otherwise would not be approved.
For more information or for any questions regarding your surety needs, please contact me at (619) 937-0166 or aroberts@ranchomesa.com.