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April 12, 2022

Setting Up for a Smooth Funds Control Process

By Ali Schaal


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.

The Lender Requirements Call

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”)

☐  Application for Payment with Architect’s Signature Required
☐  Executed Change Orders with Architect’s Signature Required
☐  Allow for Material Deposits
☐  Is there a dollar threshold? If yes, how much: ______________ (percentage)
☐  Supporting documents needed?
☐  Vendor Invoice
☐  Lien Waiver
☐  Timeframe when material will be on site: ______________
☐  Other: ______________
☐  Allow for Materials Stored Offsite
☐  Documentation required?
☐  Inspection with Photos of Material
☐  Evidence of Insurance (that location is secured and insured)
☐  Bank to be named as additional insured
☐  Other: ______________
☐  Date Down Title Endorsement to be Ordered by Third Party Vendor
☐  If yes, provide the following Title Company contact information:

Title Company: ________________________________________________

Name: ________________________________________________

E-mail: ________________________________________________

Phone: ________________________________________________

File Number: ________________________________________________

☐  Is it required for every draw?
☐  Slab / Foundation Survey / Endorsement Required
☐  As-Built Survey Required
☐  Final Notice of Completion Required
☐  Does it need to be recorded?
☐  Other Requirements: ______________________________________________________


The Kick-Off Call

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:

  1. Questions – The consultant should ask everyone if they have reviewed the paperwork and if they have any questions. In addition, it’s important to know if they have ever used Funds Control before.
  2. Payment Applications – Find out if the General Contractor (GC) uses an application for payment (aka pay app) similar to the AIA G702 Application & Certification for Payment and AIA G703 Continuation Sheet. If they have not used a pay app before, the consultant will schedule a separate call with the GC and/or assistant to instruct them on how to complete it.
  3. Preliminary Process – Although the borrower does have to complete the Borrower Certification & Authorization for Disbursement form, most of the forms to be filled out will be executed by the GC. Discussing the process of what documents are needed and how to submit them is crucial to ensure timely payments, as a site inspection can’t be performed until a complete and accurate package is submitted. This would include the AIA G702 and G703 forms, as well as invoices and conditional lien waivers from everyone who is to be paid. In addition, unconditional lien waivers from the prior draw will be required beginning at the second draw. Once submitted, a check will typically be in hand within 7-10 business days.
  4. Review of Requirements for a Complete and Accurate Submission
    1. Payment Application:
      1. Detailed AIA G702 / G703 forms (or something similar)
    2. Invoice Requirements:
      1. Name, address, and phone number of vendor
      2. Project name
      3. Gross amount
      4. Net amount
      5. Retention percentage
    3. Conditional & Unconditional Lien Waiver Requirements:
      1. Project name
      2. Net amount
      3. Vendor name
      4. Date through (aka work completion dates)
      5. Signature [Some states require notarized lien waivers and/or have any state specific waivers, which would need to be addressed.]
      6. Title (position)
      7. Date

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.

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