Construction Funds Administration
Ever needed a way to stay proactive on mitigating risks involved with projects?
Construction funds administration is a financial risk management tool for contractors, lenders, surety companies, municipalities and project owners. With this, people can survey actual costs vs. budgeted costs and can warn stakeholders of any potential financial issues and possible claim disputes.
That’s not all it does, however. A funds administration can be used to benefit several types of construction companies and institutions in various ways. How so?
Surety Companies Benefit
A high percentage of failed construction projects can trace their roots back to cash flow problems and mismanagement. By using a funds administration program, this solves both of the major issues that are typically associated with these projects.
With a funds administration program, bonding companies can minimize their exposure to a claim against the payment bond. This third party fund’s administrator will be the one who provides the surety with a record of progress reports and lien releases throughout the entire project. In the event of a claims dispute, using a funds administrator will ultimately save a bonding company and the claimant time and money.
The fund’s administration program can also work with the surety to provide Invoice Receivable Financing to provide working capital for the contractor to improve creditworthiness to the surety and lenders.
Financial Institutions Benefits
Lenders, such as banks, joint ventures and private individuals can obtain benefits by using a funds control administrator instead of taking on the necessary functions themselves.
This means the lender won’t need to monitor all the invoices, verify payments to subcontractors and suppliers, or obtain lien release with all payments, but instead will go through a third party.
This helps keep claim disputes to a minimum and allows the construction loan to be converted to permanent financing, since there are no outstanding liens or bond claims.
Aside from benefitting surety companies and financial institutions, funds administration programs can greatly benefit contractors, especially emerging ones. Here are some of the things that an administration program can help with:
- Construction companies can increase their bonding capacity and pursue contracts they wouldn’t ordinarily qualify for.
- Contractors with little to no back office support can focus on their work while learning how to manage cash flow on a project.
- Provide working capital through Invoice Receivable Financing.
- Different types of contractor responsibilities, such as a drywall contractor wanting to bid as a general contractor.
- The use of funds administration may also allow contractors to negotiate better credit terms or discounts from subcontractors and suppliers.
- Banks are more willing to extend a contractor financial credit when a funds administration service is used on a project.
- The fund’s administrator also provides protection to the contractor, the project owner, the lender, the project, and the surety.
As you can see, there’s a lot to benefit from when using a fund’s administration program. If you ever feel like a certain project may be high-risk, look into using one of these programs so that your construction company can be protected and save you money and time down the road.