It’s true… money makes the world go ‘round. And in the construction world, money is vital to keeping a project moving forward. Since the vast majority of defaulted construction projects are due to payment-related issues, it’s no wonder that so many construction loans use Funds Control. For those unfamiliar, Funds Control is a proactive approach to funding a construction project to help mitigate the risk of liens. It includes the management of a project’s schedule and paperwork (including lien waivers, invoices, change orders, etc.) and tracks when and how funds are allocated to principals, contractors, subcontractors, and suppliers so that payments are never missed.
Funds Control is used to protect all the parties involved in a construction project. In addition to managing the project’s schedule and paperwork, it ensures (1) that loan proceeds are not diverted to other line items in the construction schedule without proper authorization, (2) that the General Contractor (GC) does not use project funds for a different project, (3) that payments are not made ahead of progress and deliverables of scheduled milestones, and (4) that errors or duplicate requests are prevented. It also minimizes the risk of work stoppages due to nonpayment or depletion of loan funds.
In order to assure that payments are not made ahead of progress, Funds Control is typically done in conjunction with a monthly progress inspection. These “boots on the ground” inspections help to verify line item percent complete and overall project percent complete. Together, these services work to detect issues early on in a construction project so that they can be addressed and mitigated.
Although some lenders have a separate internal department to conduct Funds Control, many lenders hire this service out to experienced third-party consultants who can work as the lender’s eyes and ears both in the field and on the project’s cashflow. For SBA loans, Funds Control also works as a bond alternative, which benefits both the lender and borrower because it is less costly and more proactive than a bond.
When it comes to Funds Control, however, nothing is more important than clear communication so that all parties understand their role and what is expected of them. Since Funds Control on a construction project contains a lot of moving parts, one of the best ways to ensure clear communication is via two short 10- to 30-minute kick-off calls prior to commencing the project. One call should be between the consultant and lender to discuss any special requirements the lending institution may have. The other call should include the lender, borrower, general contractor, and third-party consultant to discuss what is needed, when it is needed, and how it needs to be done so that the project can have a smooth Funds Control experience.
Prior to starting any construction project, it is important to discuss any lender-specific documents and protocols that need to be implemented. The checklist below includes many of the items to be reviewed on this call. (Mark the checkbox when “yes”)
Title Company: ________________________________________________
File Number: ________________________________________________
Once the lender-required protocols are addressed, the consultant will send an introductory email to all the parties involved (GC, lender, and borrower) that contains the Funds Control procedures and forms for the project as well as a sample draw package. The consultant will also request a kick-off call so everyone can come together to review the documents, answer questions, and discuss expectations from each party. There are four main topics for discussion:
Funds Control ultimately gives the lender real-time information on cost and how it is affecting the construction budget, all while providing a variety of risk mitigation measures. It not only protects the lender, but also protects the project, borrower, and GC since the kick-off call offers everyone transparency into the process and assures that funding is streamlined.
To ensure sound Funds Control and risk management on a construction project, it is important to engage with an experienced firm that has a diverse portfolio of previous construction projects, has in-depth industry and market knowledge, and has key personnel managing the project from start to finish. Since everyone involved in the project has the same goal – to get the project completed on time, on budget, and lien free – it’s important to start the construction Funds Control project on the right foot with a proper kick-off and understanding of what is expected.