Construction projects and contract surety come bundled with an assortment of risks, ranging from inability to meet deadlines to poor workmanship to workplace injuries. But one of the biggest risks of a construction project isn’t any of those: it’s non-payment.
That’s where funds control comes in. Funds control, a way to ensure money earmarked for construction is actually used for job-related expenses, functions as an escrow agreement between the company and the contractor where it is agreed that all earned contract funds will be sent to National Escrow. The company and its contractor will work to determine when the funds will be distributed.
Placing the funds in an escrow account provides another overseer of the distribution of the funds, reducing risk associated with construction projects. Funds control helps to ensure that suppliers, subcontractors, vendors, and others downstream from the contractor and company receive the money they are entitled to receive. This is because, with funds control, money flows from the obligee (the company) to the funds control company and then to the subs, suppliers, vendors, and others, with the balance sent to the bonded principal. The money isn’t funneled through the contractor; it’s sent directly to their subcontractors through the funds control company, ensuring there is no malfeasance with the funds from the contractor.
These kinds of controls may be in place even if a contractor has years of experience in the construction industry. Factors such as a large amount of bonded work in a backlog help determine whether to use funds control to ensure that proceeds are being paid instead of diverted to other projects in that backlog. Payment downstream, therefore, isn’t contingent on the funds required for other projects.
It also protects other projects of the company obligee. If there wasn’t adequate payment, the subcontractor, for example, could place a lien on a different project until paid.
Funds control can provide benefits to a contractor, however. Funds control can help a contractor qualify where they normally wouldn’t be able to as funds control helps to mitigate risk against failure to complete payment. This can help expedite the growth of a contractor as they may be able to take on more or larger individual jobs with funds control in place.
Ultimately, with funds control, the surety is protected, the company has greater protection on their project and from a potential lien on another project, and the contractor is able to qualify for more projects because of funds control. But most importantly, it helps ensure that subcontractors, vendors, and suppliers get the payment they’re entitled to. Click here to learn more about funds control in contract surety.
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