Performance Bonds: How To Avoid Funds Control

Funds Control, Escrow, Funds Administration – are all the same thing, and can be part of the process when a Performance and Payment Bond is needed.

What is it, and how can you avoid it?

Funds Control is an underwriting device used by some bonding companies. The procedure is specifically intended to reduce the risk associated with the Payment Bond aspect of the surety’s exposure. The surety is guaranteeing that suppliers of labor and material will be paid. If they are not, the creditor is entitled to make a claim on the Payment Bond for recovery.

The funds administrator acts as the paymaster on the contract. They pay everyone, including the contractor. Under this arrangement, the contractor is not handling money or disbursing funds. This makes the surety confident that folks will be paid appropriately (thus preventing payment bond claims,) and it also assures that none of the money for our bonded contract is shifted over to support other unbonded projects (an illegal action.)

Now the paymaster doesn’t work for free. They perform monthly checking on the contract status including the billings, they gather lien releases from the vendors, they keep the books on the project and write all the checks on behalf of the contractor. The cost if this may be.5 – 1% of the contract amount, paid by the contractor. Normally it comes out of their profits.

Contractors may be unhappy with the fee, and they always worry about the turn around time to get checks issued by the administrator each month. They need to keep the project moving.

So let’s look at an alternative procedure that doesn’t cost the contractor any money, prevents any possible delay in turn around time… and still protects the surety on the payment bond.

The alternative is to have Joint Checks issued by the obligee. What does this mean?

Joint Checks are issued by the obligee / project owner in the name of the bonded contractor and their vendor. For example, if the contractor owes the lumber yard $20,000, a check is written payable to the contractor and the lumber yard specifically for $20,000. This procedure assures that funds sent to the contractor must end up in the hands of the supplier. Under the normal method of payment, a lump sum check for multiple vendors is sent to the contractor, and everyone hopes the funds will be used appropriately / promptly to pay bills related to the bonded work. Please note: That doesn’t always happen. And when money is mis-directed, a payment bond claim can result.

Conclusion: Compared to Performance Bonds, Payment Bonds are the most frequent area of surety bond claims. When the bonding company needs an extra cushion to assure the proper handling of money, Joint Checking is an alternative to Funds Control that is fast and free for the contractor – and helpful to the surety.

Want this expertise and creativity on your next Bid or Performance Bond? FIA Surety is a NJ based bonding company that can help!  We have specialized in Bid, Performance, Site and Subdivision Bonds since 1979.

Steve Golia is Marketing Manager for FIA Surety.  Call Steve now: 856-304-7348

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