A Fresh Look at Funds Administration
Funds administration, historically referred to as funds control, is often viewed negatively by contractors who bristle at the perception of someone else ‘controlling’ their business. But it can actually be a very effective solution that brings a number of benefits to the table. By delegating the administration of financial tasks to a specialized third-party, the process allows contractors to focus on what they do best.
How Does Funds Administration Work?
Funds administration relies on a third-party administrator to ensure the proper allocation and disbursement of project funds. They manage payments dependent upon the satisfactory completion of work, and act as the intermediary amongst project owners, contractors, and subcontractors.
When is Funds Administration Used?
Funds administration is a tool most often used to enhance a small and emerging contractor’s ability to obtain surety bonds. Sureties see funds administration as a way to mitigate risks associated with less experienced contractors. Implementing funds administration allows the contractors to obtain surety credit, to increase their bonding capacity, or to grow their business by pursuing contracts for which they might not otherwise have qualified for surety credit.
How Does Funds Administration Help Contractors?
Funds administration can be an effective way to alleviate one of contractors’ consistent pain points, cash flow. A variety of factors affect cash flow, and many are out of contractors’ control like delayed payments, supply chain issues, and retainage requirements. And some of the cash flow management strategies common to the construction industry can put negative pressure on a business. Funds administration can relieve some of that pressure. Implementing a reliable payment system can help keep projects moving, get crews paid, avoid unnecessary delays, and allows the contractor to wear one less hat.
Because funds administration is a transparent process, it reduces the likelihood of disputes over payments. These time-consuming disputes are all too common for contractors and are almost always counter-productive. When all parties agree on the premise, that payments are made on a reliable schedule once work is completed satisfactorily, funds administration can build trust and support long-lasting business relationships.
Contractors may also find it easier to obtain loans with funds administration in place. Funds administration is often seen as a positive by lenders, making them more willing to extend credit since they have confidence that loan funds are being used only for the intended project.
How Does Funds Administration Help Sureties?
For sureties, funds administration is seen as an important risk mitigation tool. The reduced risk of payment disputes or even non-payment, means a reduced risk of claims. Expert money management supports positive cash flow, which means a reduced risk of a surety needing to implement financial measures to shore up a project.
4 Ways Funds Administration Improves Cash Flow Management
1. Timely Payments: Funds are disbursed according to project milestones and work completion. This helps contractors avoid the financial strain of delayed payments, ensuring they have the cash available when needed to pay for labor, materials, and other costs.
2. Predictable Cash Flow: Because funds are released based on predefined conditions, contractors can better predict when they will receive payments. This predictability helps in planning expenses and avoiding cash shortages.
3. Risk Mitigation: By managing payments through a third-party, funds administration reduces the risk of payment disputes or the chance of non-payment. This lowers the financial uncertainty that can disrupt cash flow.
4. Efficient Project Management: With a more controlled cash flow, contractors can focus on their work without the added worry of financial bottlenecks, which can otherwise cause project delays or increase costs.
Conclusion
An objective assessment of funds administration shows that far from being a tool to ‘control’ contractors, it can create a structured, reliable payment process, which supports the smooth operation of construction projects.