While it isn’t extremely common, you may find yourself on a project that is using construction loan fund control. If you aren’t familiar with it, it can seem a bit foreign at first. It is a way for lenders to manage the funds during a construction project that ensures that all parties to a project get paid. Sounds like a dream come true, right? Well, let’s see about that.
What is construction loan fund control?
Fund control is a process where a third-party (not the bank, owner, or construction manager) manages the payments to the GC and all subcontractors and suppliers on a project. The fund control company writes the checks that pay subs and suppliers. Then the owner or lender reimburses the fund controller those expenses, plus their fee. Their goal is to manage the funds on the project and make sure they are spent wisely and not prematurely.
Fund control companies may also provide additional services such as construction budget review and work progress inspections. These services often go hand-in-hand with the primary purpose of the company.
How fund control works on a construction project
Different companies may have slightly different means and methods, but here is the fund control process in a nutshell:
- When the project is handed to the fund controller, they review the construction documents, the proposal from the contractor, and contract terms to make sure that the budget seems fair and is in line with the requirements for the project. They may request additional documents from the GC to help them review costs and make sure they are appropriate.
- The GC submits a draw application, usually to the bank, owner, and fund controller. Back-up documents are required and usually include copies of subcontractor and supplier invoices, conditional lien releases, and other documents to help substantiate the costs on the project.
- The fund controller sends an inspector out to the site to confirm that material has been installed or is on site, according to the amounts shown on the payment application. If the inspector has any questions, the GC will be asked to provide more information. The inspector can adjust the payment application based on their observations in the field and the back-up provided by the GC.
- Once the draw is approved, the fund controller writes joint checks to the GC and their first-tier subcontractors and suppliers. The checks are sent to the GC for endorsement, and then are sent to the vendors for cashing.
How fund control affects the draw and payment process
One of the first things you will notice about a project using fund control is that it can require a lot more documentation.
GCs shouldn’t be surprised when the fund control company requests detailed estimates, copies of subcontractor proposals and supplier estimates, labor reports, timecards, you name it. The fund control company provides value to the project owner by scrutinizing costs and getting the owner the best value for their money. With this in mind, they provide a heavy dose of oversight on a project.
Your payment applications and draw requests on a fund control project must be accurate and complete. Overbilling is generally a bad idea. This is because the fund control company is reviewing invoices and quantities on-site. Anything that gets billed above the actual work complete is likely to get cut from the draw. It’s best to bill for just the work that’s completed to avoid delays due to draw negotiations and revisions.
Document everything
Because of the amount of paperwork on these projects, any delays in turning in documents could result in a delay in payment. Contractors and material suppliers should maintain records of documents with as much detail as possible. If one sub doesn’t return a lien waiver because they’re on vacation, everyone has to wait for that document to get paid. It is important for GCs to follow up with their subs and suppliers to return documents as soon as possible.
Fund control doesn’t affect mechanics lien rights
One thing that is not affected by the addition of a fund control company to a project is what you do if you don’t get paid. If you are having trouble getting paid on any fund controlled project, a mechanics lien is still the most powerful tool in your payment arsenal.
Contractors should still send preliminary notices or pre-liens to improve communication on the job and protect their payment. If your payment is late (or doesn’t arrive at all), you can still file a mechanics lien or file a claim on the GC’s bond, if one is present on the project.
While fund control companies are hired to improve the distribution of funds on a project, they do not guarantee payment. There are a lot of things that can interrupt payment on a construction project, and a fund control company can’t prevent all of them. You still need to be proactive in protecting your right to payment.
When sending notices, demand letters, or liens, the fund control company does not necessarily need to be included. They are not a party to the project. However, if you are having trouble getting paid on a project, it wouldn’t hurt to notify the GC, the owner, and the fund control company so you can work together to resolve the issue.
What GCs need to know about fund control
Not to beat a dead horse, but…expect more paperwork. You will be asked to show how you priced the project and what your actual costs and mark-up really are. It’s like taking off a band aid – it’s best to just get it over with.
Accounting for the joint checks to your subs and suppliers can be a nightmare. Consult with an expert to see how to set up your construction accounting software to handle these payments. Basically, you’ll have to set up a clearing account to receive all the joint checks, and then issue those same checks out of that account to pay your vendors. Be prepared for lots of confusion.
It is best to not overbill on these projects. The fund controller and inspector will be expecting you to bill for work that is complete, not for work to be completed. Make sure your back-up documents and the ones from your subs are up to snuff so you don’t have to waste time coming up with information you don’t have.
What subcontractors need to know about fund control
Your number one priority is to get the GC the documents they need in order to satisfy the fund controller. Your estimate and time records may also be under scrutiny, so be prepared. You will also have to substantiate your invoices and any additional costs, just like the GC. Make sure you turn documents in promptly, or else you risk holding up everyone else’s payment. No one wants to be that guy.
Fund control projects are great if you are concerned about getting paid. Due to the structure of the payments, as a first-tier sub or supplier you know you will get paid eventually. Joint checks ensure that the GC can’t spend the money they received for your work to fund some other sub or project. And if there is a problem and the GC is holding your checks, you can appeal to the fund controller for help. Don’t let this prevent you from protecting your payment rights by filing a preliminary notice or any other documents that are required in your state.
Fund control doesn’t always make payment faster
Payment will probably not be any faster with these projects. By the time the draw is turned in, the inspection is completed, revisions made, and the checks cut, it could be up to 30 days or more. Expect to wait, even if you turn in everything like you’re supposed to.
While fund control projects benefit the owner and the bank and help ensure that everyone gets paid, the amount of paperwork and the accounting nightmare it creates are not fun for the GC and subcontractors. Unfortunately, contractors are rarely in control of these decisions. So, if you know that this payment process will be used on a project before you bid it, you may want to build in some additional administrative time. And make sure your documentation is spot-on, so you don’t have to lose time or money in the end.