My surety wants to use funds control to provide my bonds… why?

The added security on a construction project is a win-win for all parties involved, says expert

Construction projects can be risk-filled propositions as contractors work to meet strict deadlines while trying to avoid poor workmanship and workplace injuries. However, a major risk facing these projects isn’t any of the above. According to National Escrow, a division of Allstar Financial Group; it is non-payment.

Funds control is a way to ensure that money set aside for construction will actually be used for the intended job-related expenses. First, the contractor will enter into an escrow agreement where it agrees that all earned contract funds will be sent to National Escrow, after which the company works with the contractor to distribute payments when necessary.

The extra set of eyes overseeing distribution of money reduces the top risk associated with a construction project.

“It would protect the surety from payment bond-related claims,” said Jeff Booth, senior vice president and chief underwriting officer at Allstar Surety. “Funds control ensures that the suppliers and subcontractors or vendors on a particular project are paid because the money flows from the obligee to the funds control company to suppliers, subcontractors, and vendors, and then the balance would be sent to the bonded principal.”

Even if a contractor has years of construction experience, some projects still call for an escrow account and, in turn, funds control.

“If the contractor has a particularly large backlog of work, funds control ensures that the contract proceeds are allocated to our job, as opposed to being allocated to other jobs,” explained Booth. “It also provides additional protection and security for the obligee because typically, if a subcontractor, supplier, or vendor isn’t paid on a bonded job, it could lien a project which could have all sorts of repercussions for the owner or the obligee,” said Booth.

There are other benefits for the contractor as well, especially if they want to take on a bigger construction job or they do not qualify for bonds on larger projects in the standard surety market.

“It is a great tool for a contractor to qualify where it normally wouldn’t be able to qualify,” said Booth. “It can perhaps expedite the process of a contractor growing, with regards to its sales volume or the size of the projects.”

Booth stated that in the past Allstar had a lot of success with funds control, calling it a “win-win” for everybody involved.

“It helps protect the surety; it gives the obligee additional protection on its construction project; and if the contractor would not otherwise qualify for a bond on that particular project, it gives it the opportunity to recognize the revenue and profit associated with that project,” he said. “We don’t try to make it an encumbrance or a barrier; we try to make it something that is beneficial to all the three parties under the surety bond.”

Author: Alicja Grzadkowska as originally published on Insurance Business America online, insurancebusinessmag.com.

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