Each construction project presents numerous risk factors to a contractor.
When contract terms require performance and payment bonds these risks are often shared by their surety. A significant risk factor that will quickly sideline any project is non-payment issues due to cash flow shortfalls on the contractor's part.
According to the 2020 National Construction Payments Report by Levelset.com, fewer than 1 in 3 contractors (28%) report always finishing projects on time and within budget. Additionally, only 59% of contractors say they work from a set budget and timeline in advance of every project. For contractors and sureties looking to mitigate this risk the use of funds control called escrow can provide added protection to a project owner and surety partner.
While funds control is first looked at negatively by the contractor, it is often later considered a helpful resource that provides back-office support and benefits they would not usually have on a project. This support can ensure a jobs planning, processing, and payments are on-time and tracked according to the scope of the project.
Below are the top six hurdles escrow can help contractors overcome:
- Declined surety support due to poor financial presentation.
- The appearance of inadequate financial strength is required for the surety program.
- Larger than usual project size or an expanded work program backlog
- A project which requires multiple suppliers and subcontractors beyond normal experience.
- No prior surety history
- Prior credit history/payment issues
Using escrow to overcome these types of obstacles allows the contractor to potentially qualify for a project they may not usually be able to pursue. This gives them the ability to gain additional experience, reach higher revenue levels, and possibly speed their business growth. Contractors should not look at funds control as an encumbrance but more as an avenue to help meet the development needs of their company.