Funds control can be used in various scenarios in the Architecture, Engineering, and Construction (AEC) industry. Below we outline some examples of the different ways that funds control can be used and its benefits. All of these instances demonstrate that having an experienced funds control consulting firm along with proper assignment and disbursement agreements is essential to prevent any misunderstandings or if, after the fact, achieving successful resolution of any issues regarding fund assignments and disbursement.
Funds Control for Sureties
Wants to Expand Bonding Capacity
Often a surety has a good contractor that is growing, and the surety wants to expand their bonding capacity. At the same, the surety wants some extra protection against potential payment claims.
Using funds control provides the surety an added layer of protection for payments to vendors, such as subcontractors, suppliers and laborers as all contract funds are collected by the funds control administrator and paid first to vendors. Profit and overhead are only paid to the contractor when all payment obligations are satisfied. Under this use of funds control, the need for the extra control is usually temporary until the surety gains a greater comfort level with the contractor’s ability to handle additional bonding capacity. Very often, the process of submitting payment requests to the funds control agent is helpful to the contractor as a way to match cash flow from owner payments to job payment obligations.
Has Bond Claims against the Contractor
In some circumstances, it makes sense for a surety to finance a distressed contractor that has numerous bond claims filed against them. Funds control can be used to collect remaining job funds from each obligee and used to pay direct job costs for each bonded job. Under this scenario, since the contractor has required help from the surety, the surety usually supplements the funds control account for estimated costs over funds remaining in the jobs.
It is very important that documents directing the obligee to make payments directly to the funds control account are irrevocable. In one matter, we were brought in to work with a surety that had issued letters of direction for the obligee to send funds to a control account without making it clear that the direction was irrevocable. The very first time that the contractor had a conflict with the surety, the contractor sent follow-up letters to the obligee directing them to make payments directly to the contractor. The funds were recovered, but not until time and legal fees were expended.
Funds Control for Contractors
Wants to Have Better Control Over Subcontractors
Another use of funds control is by contractors that want to limit potential cash issues with new or existing subcontractors. This can also be a helpful tool for the contractor to manage its own cash flow. Sometimes it can help the contractor get better credit terms from vendors because the vendors know contract funds are set aside to ensure timely payment.
Under this use, contract funds from each job are placed in a funds control account and all job payments are made from this account. Again, the contractor does not take its profit and overhead until all vendors are paid. We have also seen some contractors put subcontractor payments into a funds control account and then have the funds control administrator pay all the subcontractors’ direct job costs from the account. As with all funds control accounts, the subcontractor will not receive profit and overhead until the direct job costs are paid. This protects the contractor from claims made by second-tier subcontractors and suppliers to the subcontractor. This is typically used when the contractor has no experience working with the subcontractor and is looking for a mechanism to reduce risk.
Funds Control for Lenders
Wants a Higher Comfort Level with the Borrower’s Repayment Ability
Some banks and other financial institutions will require funds control in order to provide a construction loan or to increase credit limits. Having the loan proceeds and job payments in funds control allows the lender to ensure the funds are expended as required in the loan agreement. It also helps with the lender’s comfort level – offering assurance that the job proceeds designated to repay the loan are available to do so. Oftentimes bankers do not have an in-depth understanding of construction and the process; therefore, it is important for the lending agency to have a funds control agent who fully understands both the banking aspects of the agreements and construction completion requirements.
How Can VERTEX Help?
As these examples show, funds control can be used in a variety of ways and a key to success is a well-qualified funds control agent, experienced in the issues that might arise. This is where VERTEX fits in: our experts bring years of experience in controlling funds for numerous clients and client types. Whether an issue arises from contractor disputes with obligees, subcontractors not performing, owners paying slowly, or any number of challenges, we’ve worked with our clients to resolve the issues and bring about a successful conclusion.
If you have any questions about funds control, forensic accounting and how we can help, please contact us today!
Article written by Ron Boyle
