Secrets of Bonding 130: Borrow From Peter to Pay Paul

January 6, 2022 by davidkowalski.nl

It’s human nature. There’s a problem, and you have a need. An issue with finances has arisen, and the time isn’t convenient. If you simply shift things around, you’ll be able to solve the problem and then backfill when you need to.

For companies in the construction industry that manage multiple projects, not all work runs smoothly. Construction projects are complicated due to numerous variables and inexplicably uncontrollable elements. Sometimes the only way to solve the problem is to spend money on the issue. If cash flow for projects is “temporarily” inadequate, it is natural to feel the desire to borrow money from a better contract with the intent of repaying it in the future. Does this sound like a problem?

Trust Funds

From a legal perspective From a legal point of view, the money that a general contractor (GC) holds, which is intended to be paid by the subcontractors (plumber electrician, plumber HVAC, etc.) that he has hired for this project is kept “in trust” to the benefit of the subcontractors. The law states that it is their money which means that the GC must secure the trust fund. Thus, money that falls into the trust fund category can’t be “loaned” to any other project of the company.

Bonded Contracts

If the Performance and Payment Bond covers an agreement, the payment portion of the bond ensures that those who provide labor and materials are paid. This includes subcontractors who were employed by the GC. The bonding company promises that trust funds will go to the subcontractors.

If funds have been transferred to a different initiative by GC and the subs are in the process of being paid, they have the right to assert a claim against the bond for payment. The sureties are cautious and try to stay clear of all bond claims. Underwriters are fully aware of the “Peter Payment Paul” scenario in which the funds are not returned, and a claim for payment is the result.

Protection Measures

The bonding company may adopt steps to stop this misapplication of funds. One of them is Joint Checking. This procedure is where the project’s owner (paying to complete the task) issues joint checks that are signed by the GC as well as the sub-vendor. It is now certain that the money will be sent to the sub precisely as they were the plan was.

The procedure is not expensive to implement. Any money to implement (aside from the administrative costs), however, depends on the commitment and ongoing participation of the project’s owner.

Another method of protection is to use of Funds Control, also called the Funds Administration. Imagine the fund administrator as a pro payment master who pays all the people involved in the project, which includes the GC. The money flows between the owner and the administrator of funds, who is then able to issue all the checks, avoiding the GC’s handling of the funds and avoiding the possibility of the funds moving to another contract.

The administrator of funds charges fees, which are to be paid out by the GC. In order for this process to be successful, the owner must formally be in agreement to pay the administrator of funds in lieu of GC.

Conclusion

In the case of money handling for construction projects, many are involved in playing. The responsibility of the GC is more than just completing the job. They have a fiduciary obligation to properly manage the funds and ensure that worthy parties are compensated. This is precisely what the bonding firm demands, and it’s the best way to go about it.

Steve Golia is an experienced supplier of bid and performance bonds to contractors. For over 30 years, his expertise has been in the field of solving issues with bonds for contractors and helping them out when others did not succeed.

The specialists of Bonding Pros have the underwriting ability and market access that you require. It’s all backed by exceptional service and easy access.

Secrets of Bonding 130: Borrow From Peter to Pay Paul

Trust Funds

Bonded Contracts

Protection Measures

Conclusion

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