Funds Control: Is This The Key to Bigger Jobs?

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ℹ ABOUT THIS EPISODE

Struggling to get bonded for bigger jobs? Funds control might be your ticket to landing contracts you never thought possible.

Wade and Stephen break down how this third-party payment system works, when it's required, and how to make it work FOR your business instead of against it. 

Learn the difference between good and bad funds control companies, how it can open doors with SBA bonding, and why smart contractors see it as a stepping stone to bigger opportunities.

⌚️ Key moments in this episode:

• 00:00 Why Funds Control Matters
• 00:40 Funds Control Explained
• 02:18 Costs and Key Benefits
• 03:07 Choosing the Right Provider
• 06:11 Set Expectations Upfront
• 08:12 Cash Flow and Turnaround
• 09:55 Accounting and Job Costing
• 11:24 SBA and Bigger Bonds
• 12:49 Getting Bond Ready
• 16:11 Future Uses and Wrap Up

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

Wade Carpenter: [00:00:00] You wanna bond a job. Maybe it's bigger than anything you've ever done. Maybe you're new to this type of work. Maybe your balance sheet just isn't there yet, and the surety looks at everything and says, we can make this work, but we need funds control. That requirement just became the reason you got the job at all.

Today we're talking about what to do when funds control is the key to the lock. 

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs, alongside Stephen Brown with McDaniel Whitley Bonding and Insurance. And Stephen, I know this is a concept many people may not know about, and I'm glad you brought it up.

Can you start off with giving us an overview of what Funds Control is and put it in context for us?

Stephen Brown: Yeah. Thanks Wade. Funds control, to a lot of contractors it just sounds like a dirty word. It's like somebody doesn't trust me. Why do I need to throw an extra person in the mix here? I can handle this, I can do this. But I like to talk about the pros and cons of it, and there are a lot of pros to it, interestingly [00:01:00] enough.

A lot of it has to do with what is funds control? What does it mean, what are they asking? Maybe we could talk about that a little bit, and then we could also talk about what makes a funds control company a good one and a bad one, how to get it set up properly, and how it can actually help give a incredible amount of comfort because they're tracking and getting all the lien waivers for you as well, from everyone that they're getting paid.

So there is some benefit to it.

Funds Control is a third party that comes in and they take the payment from the owners, and they disperse it to you as the contractor and to all the subcontractors, materials, suppliers.

And they make sure that the work has been completed before they pay everyone, that the materials have been delivered and installed. Once they do that, you get your check for your part of it. The owner knows that there's some control over the payment issues, and a lot of times, a owner developer will [00:02:00] waive a bond requirement by putting funds control in place with the right funds control company.

And other times surety will, will say, look we know they can do this job that's right up their alley, but we don't feel like they have enough cash to cash flow this job. So if funds control is in place, we're okay with it. We say go.

So the cost to get funds control from a independent funds control party is anywhere from a half to 1% of the contract amount in that range. And most of the good companies, they don't charge that upfront. It's built in as you start billing and working the project. And all the checks are dispersed in your company's name, not the funds control company. So, there's no embarrassment there, as a contractor, but at the same time, they are tracking in an organized way, all of those job costs, billings, payments lien waivers and verifying that the work's been done. And that just brings a lot of peace to a lot of owners [00:03:00] and also to some contractors that say, hey, I had a great experience with them. I don't mind funds control. They were very helpful.

And so you say, what's the difference between a good funds control and not a good funds control company? And to me, the good funds control company they make all their background stuff almost seem effortless. They do it very quickly. They respond to your phone calls personally, you don't get a call center. You always get a person to talk to that understands you and the situation of the job, and they understand construction. There's so many moving parts to a construction project. To a good funds control company that specializes in construction, you don't have to explain to them as if you were doing business with a bank that knew nothing about the construction process.

Wade Carpenter: Yeah, I think you probably unpacked a whole lot of the concepts in that one thing, but basically what you said is sometimes it's the owner, sometimes it's the bonding company says, we're just not gonna bond you, you're [00:04:00] just not strong enough.

I've seen it multiple times where, you know when you got a really bad funds control company, it can wreck some accounting number one, but it also can wreck some cash flow in contractors. That's where I sort of see this.

When it's done well, if the funds control people are very responsive and get the checks turned in, as long as you do your paperwork. It shouldn't be that big of a hiccup.

Stephen Brown: Also, it might allow you to get some better terms and conditions with a supplier, particularly on a job, you don't have a relationship with that supplier, knowing that they'll be paid directly from the owner. It sounds crazy, but I have seen that help people before.

It's like a lot of times they'll require you to give a copy of your performance and payment bond to the supplier to guarantee that they'll get paid. It's the same with funds control.

Wade Carpenter: Yeah, I know I've seen several of them that probably couldn't otherwise get bonded. Sometimes being able to go through this type of thing with SBA, and you probably know a lot of that better.

[00:05:00] But just going back what I was talking about, when funds control really goes wrong. If you've got slow disbursements or unresponsive team over there if they're overly demanding on the documentation, the communication upfront.

Do you wanna talk about some of the things that make a good funds control company as well as, some things we should think about doing up front?

Stephen Brown: A lot of times if it's a surety requirement, they'll recommend a funds control company that they like and trust, but you need to talk to them on the phone before the process starts and see if you like them before you agree to it.

I've heard it become a nightmare for people when the expectations involved on both parties are not clearly communicated.

And you remember, Wade, we did that podcast once on getting jobs started off on the right foot, and what the best contractors do to do that. I was thinking that we need to give all our podcasts a number, so I can just go, that was podcast number 3 12 or whatever.

Wade Carpenter: We do have those actually.

Stephen Brown: Okay. Well, I'm gonna keep that chart handy for [00:06:00] future podcasts. But, is there a way our listeners can look that up on our website and--

Wade Carpenter: I am sure we can probably put that in the show notes.

Stephen Brown: Yeah. Okay. Okay. Well, anyway, expectations.

So a lot of times if there's funds control required and the owner likes it, or the contractor likes it and they waive the bond, then the funds control will sit down at a meeting before anyone even signs a contract to get expectations squared away. Talk about how payment's gonna be done, how the contract backs up, the kind of payment that funds controller and the contractor and the owner all agree to. Everyone's clear on that.

That way when the request is made for the owner to make the payment, there's no slowdown. They don't have to verify anything or wait for their architects or engineers to sign off on it. The funds control has done the inspection. Some funds control companies do inspections and actually send people out there.

[00:07:00] Another thing that they'll say is it helps keep the job on schedule because everything started off on the right foot and moving forward it's continuing to operate on the right foot. Does that make sense?

Wade Carpenter: Yeah, absolutely. And I guess some of my experience, I thought the bonding company always pretty much forced you to use a specific company. But if you are able to pick, do they usually have a couple of funds control companies to choose from? How would you evaluate a funds control company? 

Stephen Brown: Yeah, the bonding company and the surety agent have got no skin in the game. They don't make any money off funds control. So if you're a surety company and they hear anything bad about the funds control process from the contractor they listen very hard about that because they don't wanna recommend someone that's not doing a good job for them.

On the other hand, we talk about cash flow all the time. Not understanding the expectations, the billing process, just sitting down and having funds control be a third party in [00:08:00] disputes with the between the owners and the contractors is always very clear because they make sure that all these expectations are in place before it starts.

Wade Carpenter: I think about it like, you know, the draws, and understanding upfront how fast you turn around. I've had some where they're, we're gonna mail a check in 10 days after they receive the money. And that contractor needs that money. Versus a funds control that will ACH same day if they can.

We've had funds control companies that have, okay, well we can only bill once a month, but they're turning in payroll every week. And it's a hundred thousand dollars payroll every week.

Stephen Brown: Yeah.

Wade Carpenter: We had one that, it didn't work on one, so we found this other one that was like, okay, as soon as we turn in our payroll, we could turn that in and they would go ahead and release that pay application.

Stephen Brown: Well, and there are some conditions ahead of time before you present that bill to the owner that you've already communicated with payroll, and that money's just a fast turnaround. That's great service. So, are they holding your money for a month or [00:09:00] anything? No, not unless you're not doing the project. You hadn't performed the work. I've never heard of a situation like that.

But again, that's why funds control, they say that it doesn't limit good contractors, but it proves them out to be rock solid in what they do. Think about it, when you're doing a job that's two or three times the amount you normally do, the fears the surety company have.

Maybe not on the scope of the project. It may be what you do all the time, but you're just doing a whole lot more of it. But the size of it. And the size of it creates all sorts of cash and payment issues.

Remember, surety bond includes the performance and the payment bond. And it guarantees the owner, there'll be no liens on the project from material suppliers or subcontractors or anyone else.

So, there's a lot of power in that. Funds control just really beefs this up. And I guess the most important thing is to understand the contract and the payment terms in the contract. That's the key [00:10:00] element as far as I'm concerned.

Wade Carpenter: From the accounting standpoint there's two things I would say. My experience with it is number one, you've gotta stay up to date on your job costing. That's something we preach all the time, but if you got that invoice came in, you need to get it to them really quickly. A lot of our contractors, especially when we pick them up, they have a very slow accounts payable process, and getting that in to your own job costing so you can bill it.

As well as on the other side. Get it in and get it over to the funds control company. But the funds control company has to communicate with the accountant too, because when they pay things, you don't know what they paid. Especially if the invoices are going straight to the funds control company.

So, from my perspective, it can be an accounting mess, but if it's handled properly and you've got responsive people, it doesn't have to be that way.

Stephen Brown: Right. And that pay request that you're making to the owner, it's also in a form that the owner and the funds control company agree [00:11:00] provides each with the appropriate information they need to pay you.

Wade Carpenter: Yeah. I didn't know if you wanted to sort of address the thought of, funds control can open up some doors. I know I have seen some where they didn't require a bond if they did that. So it's like, okay, one or 2% here or there.

Can you talk about opening up doors like SBA and how some of this works?

Stephen Brown: Yeah. You would think with the SBA guaranteeing 90% of the bond and funds control in place, that there would be 0% chance of loss to a surety company and that every single one of them would rubber stamp it. and even though they may be on the hook only for 10% of the amount of the risk , they still gotta know you can do the job. Because the SBA's gonna depend on the bonding company's claim department to settle the claim for them. And so even though they do that, it still is a claim. It hurts the SBA bonding program. It hurts you as a contractor because you've had a bond claim and you can't ever get over that.

But this can take something that really makes [00:12:00] sense that a contractor's kind of stretched thin and they say, okay, I've got enough profit in this job that I can do this job and still pay the three to 4% bond premium from SBA plus funds control and get this job approved.

It's certainly worth a shot. Because once you've done that job and once you've bonded it, then you bonded a job for that amount. So they can't ever take that away from you. It helps your bonding going forward. You wanna do another job that size at in with SBA and you can prove that you've already done one to a bonding company, that's gold.

Wade Carpenter: Yeah. Well, that's where exactly I was thinking. It opened up doors that maybe a project you've never done that big, or you just simply don't have that balance sheet.

We have contractors come to us all the time. It's like, I'd like to get bonded. I don't know what the process is. I don't know if I even qualify or could qualify. If a contractor has never been bonded or they, all of a sudden they wanna start doing bonded [00:13:00] work, or sometimes I see people like, okay, I just got a $4 million bond. I've never bonded anything before. What's the process? It's like, okay, I gotta sign this project in two weeks.

Stephen Brown: And there's so many times that folks are negotiating jobs with general contractors as subcontractor, and then they require the bond. They say, you've been awarded the job and we're requiring a bond and they hadn't been set up for a bond before they bid it, and there's that frustration.

But yeah, I would say, maybe starting off with the credits credit scoring program on some smaller jobs that get your feet in the door and get your track record set. That's in an ideal world. Then building up some working capital and net worth in your company and getting a CPA prepared review that shows Balance Sheet, Income Statement, and Work In Progress report.

That's ideally what every bond agent wants to work with. But so many times, you'll see the credit scores program is just maxed out by the size jobs that you want to do. It [00:14:00] used to be credit scoring was limited to a hundred thousand dollars jobs and less, and now it's a million.

A $5 million job now is worth a million and a half dollar job years ago. That's how much construction pricing is escalated. Credit scoring programs have to go with the flow on that, considering their risk involved. But strangely enough, the credit scoring programs have been very profitable for a lot of the bonding companies right now.

So anyway don't think of this funds control as a necessary evil, but it's a way to get to the next step. And in my mind as your surety agent, I wanna get you to that next step. I'm always thinking about pushing your capability in size. Not the bond rate, but just getting the bond size approved.

Does it make sense? How can you do it? Because that's the stress I get as an agent, is when you come to me and you wanna bid a job that's four times bigger than you've ever done and it bids next week. And you say, can I bid it? That just breaks my heart if I have to say no, I don't [00:15:00] want to. I have to tell them that, well, look, I'm not saying you can't bid it, but this is what I have to have to do my job, and it's not there.

Wade Carpenter: Yeah. Well unfortunately we both seen, it was like, okay, I got the job. Now what do I do? It's like, okay, well then we might have a problem. I don't know.

Stephen Brown: Well look, our job is to work fast and good funds control company's job is to work fast and communicate. They go out of business. If they didn't. If I don't get your bond approved, I don't get paid. I just don't get paid at all. So, I have a vested interest in that. Funds control gets us a bad rap by the owners, the surety companies, then they're out of business.

But people that know what they're doing in construction lending that have gotten into funds control, I see the people that run these companies. The background they have is they know their stuff and you just gotta be a little bit better to do it. It's not like you can set up funds control on autopilot and let AI run it for you. It's not the type of business that works that way.

Wade Carpenter: It'd be nice if it would, but I think we're a long way [00:16:00] from it being able to do that. But well, did we hit all the thoughts you had on this?

Stephen Brown: We did. If anybody has any particular questions or problems with any particular companies or process, or they're currently involved in funds control and they hate it, feel free to reach out to me. I'd love to talk to you about it. See what's going on. See who's involved.

I don't know all the funds control companies, who they are or all the players, but I know that a lot of them are extremely active in surety associations out there because that's a key source of business for them.

But there's so much more that funds control can do. There's a funds control company that can do funds control for you and the builder and a bank to build your house on the lot of your dreams. That's fantastic service for residential use for funds control, because you don't have architects making sure the work's being done before the payments are made. And you also as the homeowner, you can't worry about making sure there's no liens on that [00:17:00] project and that everything's been paid for. So, to me that's a huge use of funds control.

There's a lot of funds control that's also tied into some financing on projects too. So, as we get into that, I see some surety companies that offer a hybrid of financing funds control and surety. And I see that kind of as a wave of the future of getting some things done. So it's all, it's all very exciting. I think all these headaches you have as a Contractor getting the bond approved, there's more and more options as a surety agent that I have now than I've ever had before to offer you.

Wade Carpenter: Yeah. Well, if our listeners had any questions how can they contact you? Can we put your information in the show notes?

Stephen Brown: Absolutely. Email me, give me a ring, comment and let us know if we're not getting back to you because we want to engage you and we wanna hear what you have to say and we wanna try to help you. Our job by this podcast as new listeners may not know, is just to get the information out there. And we do it because we wanna help contractors. That's all.

Wade Carpenter: Yep. I agree. I [00:18:00] think that was always our mission and just trying to get some great education out there and hope our listeners do find that. And if you've been listening for five years or for five minutes, we'd appreciate it if you'd like, share, subscribe, comment put your questions down below and we'll try to answer them as best we can.

We do this every single week. Hadn't missed a week in over five years now, and we will look forward to seeing you on the next show.