Underwriters / Agents
Imagine this…A contractor walks into your office and requests a million dollar performance/payment bond. Their financials are strong, they have the work experience, good references… Everything looks great on paper… If only we had a crystal ball to use when evaluating the risk a contractor presents to its surety. If so, many conversations would end this way: “Sorry; We see a large, very costly default in your future causing the surety a multi-million dollar loss, exorbitant legal fees and ultimately you will end up in a “No Asset Chapter 13 bankruptcy” rendering the General Indemnity Agreement you have signed basically useless.” Obviously, not all contractors would succumb to the same fate; but even one million dollar loss may be more than enough to cause significant pain to a surety.
So what can be done to minimize this risk?
Typically contractors know their trade. They know how to swing a hammer, dig a ditch, etc. – but the real problems occur beyond the project site. How strong is their back office support? How can we be sure that funds earned in this project will stay in this project? This is where National Escrow can help. By utilizing funds control, National Escrow provides the necessary back office support and enforces payment integrity by protecting and fully accounting for the contract funds.
Fund control can be a very effective underwriting tool in theses cases:
- New client
- Thin financials/past payment problems
- Larger than normal project
- Small contractor with little or no back-office support
- Numerous subcontractors/suppliers
- Specialty work (cost to find/hire a replacement contractor may be prohibitive)
- Different type of work (i.e. a HVAC contractor now working as a General Contractor)
The success of any surety program is based upon not only the premium dollars earned but on the corresponding loss ratio. Since most surety losses are based on payment issues NOT performance, requiring fund control is a very effective way to minimize a surety’s payment bond risk. Better yet, the surety does not pay for the added security; the cost is passed down to the contractor.
Obligees / Owners
In the public sector, construction projects are subject to public bids and the contracts are usually awarded to the lowest bidder (meeting all other criteria). Local statutes then require the contractor to provide performance and payment bonds to provide some assurance that 1.) the contractor will perform under the terms of the contract and 2.) the contractor will pay all subcontractors, suppliers, etc. (the costs of completing the contract). Unfortunately, simply requiring the bonds does not stop problems from occurring on the project - much like requiring drivers to wear seatbelts does not reduce the number of car accidents. A seatbelt will (in theory) reduce accident related injuries but will not prevent the accidents from happening. A payment bond can reduce additional monetary loss to an Owner/Obligee but does nothing to make sure that the money paid by the Owner/Obligee to the General Contractor for work performed ever trickles down to the persons actually performing the labor or supplying the materials. Obligees/Owners answer numerous calls and spend countless hours responding to complaints about NON-PAYMENT. “I was hired by so-and-so to provide materials to your project. Said materials were delivered and have been incorporated into your project; however we have not been paid.”
National Escrow can help! We work with the contractor to understand their budget/specific job costs upfront and then compare budgeted costs to what has been approved by and paid for by the Owner/Obligee. As contract funds are earned, they are deposited with National Escrow and then are used ONLY for job related costs.
Statutorily required payment bonds are out there “IF” a problem arises. However, by having your contract funds controlled through National Escrow, you can actually be pro-active in preventing payment problems.
On any construction project, a contractor has to be focused on performance, meeting and/or beating construction deadlines, buying out all line items at the best cost, scheduling deliveries, ordering necessary supplies, negotiating subcontracts, managing a work-force, daily work logs, attending project meetings, etc. – this does not leave a lot of time for supervising all back-office functions. In most cases it would be cost-prohibitive for a small to mid-sized contractor to hire a project-specific accountant for each and every job. This is where National Escrow can help. We can be your back office on a given project as we work with you to account for all project funds in order to maintain a lien free/claim free project.
Here are some of the benefits of fund control with National Escrow:
- The main purpose of the Escrow is to prevent claims against the Contractor’s payment bond, which invariably entail excessive legal costs and a loss of the ability to receive additional bonding until the claims are resolved.
- The Escrow provides a review of the Contractors payment procedures and insures that the proper project documentation is maintained in the event of a dispute arising between the Owner and the Contractor (undocumented Change Orders, Back Charges…etc), or between the Contractor and his vendors.
- The Escrow will track the contract funds to insure that all said funds are applied to project costs and not co-mingled with funds from other projects.
- The Escrow will provide project specific and invoice specific lien waives with each vendor payment, thereby insuring that a vendor providing materials or labor to the Contractor on multiple projects on an open account cannot apply a balance from a different project to perfect a claim on the bonded project.
- In the event of a dispute between the Contractor and a vendor, the fact that the disputed funds are being held in escrow will often enhance the possibility of a swift resolution, and may be required by statute.
- Escrow is a useful tool that can be applied by an underwriter to help a contractor obtain a bond who may not be able to obtain bonding by traditional means.
Here is a list of situations where escrow may be applied:
- A new client to the surety
- A larger than usual project or a project outside of the contractor’s usual specialty (i.e. – a HVAC Contractor looking for a bond as a General Contractor)
- Thin financials
- Past payment problems/disputes with vendors
- Contractor is spread too thin/several projects being performed at the same time
- A contract where the majority of the work is being performed by subcontractors
- A contract with an Owner/Obligee that is known to be slow to pay