All About Escrow-Funds Administration
Escrow-Funds Administration is a tool used by bonding companies to mitigate the risk on Performance and Payment Bonds. This risk mitigation tool allows bonding companies to write bonds that Contractors might not otherwise qualify for.
WHAT ARE THE REASONS YOU MIGHT NOT QUALIFY FOR A BOND WITHOUT ESCROW-FUNDS ADMINISTRATION? The reasons may be:
1. Your financial statement results, and financial capacity might be below required levels.
2. The type of financial statement you present may not be ideal for the size of the bond.
3. The job you are requesting may be larger than the largest prior job you have completed, the job may be outside of your normal territory or may be different in scope from your normal type of job.
HOW DOES ESCROW-FUNDS ADMINISTRATION WORK? Under an Escrow-Funds administration arrangement, the owner will be required to send all progress payments to an Escrow Agent designated by the bonding company. Contract funds will be disbursed by the Escrow Agent at the direction of the contractor, subject to guidelines in the Escrow Agreement.
HOW DOES ESCROW PROTECT THE BONDING COMPANY? Escrow Funds-Administration helps ensure that only job specific suppliers and sub-contractors are paid from the contract funds. This reduces the possibility of Payment Bond Claims from unpaid suppliers or sub-contractors. Escrow-Funds Administration also ensures that profit and overhead are earned by the contractor based upon the percentage the job is complete Escrow also alerts the Surety if any progress payments are refused or delayed because of disputes, back charges or problems with completion of the work. This process also serves to mitigate the risk of Performance Bond claims.
HOW DOES ESCROW BENEFIT THE CONTRACTOR? Escrow allows you to obtain bonds you may not otherwise qualify for. Profits earned on escrow jobs can help you grow your Balance Sheet to increase your bonding capacity and help you eventually qualify for jobs without escrow. Having your suppliers and subs paid by the escrow agent means one less task for your accounting staff to worry about. And you will have the confidence that vendors are being paid the right amount at the right time, at your direction. And, by reducing the risk of Payment Bond and Performance Bond claims, Escrow-Funds Administration protects you since the Indemnity Agreement you sign makes you responsible for any bond claims.
WHAT DOES ESCROW COST? The cost of escrow is usually between .75% and 1.0% of the contract amount, depending upon the size of the bond and length of the contract. This fee is charged in addition to the bond premium.
WHAT ESCROW AGENT WILL HANDLE MY JOB? The bonding company will designate an escrow firm they are most comfortable with for your job. All Escrow firms utilized by The Bond Agency have been thoroughly vetted by the bonding companies we represent.
WHAT DOCUMENTS WILL BE REQUIRED? You will be asked to sign an Escrow Disbursement Agreement which stipulates how the process works, how vendors are paid, and when you can collect profit and overhead. The Owner / GC will be asked to sign a Directive agreeing to send all progress payments to the escrow agent. The Escrow agent will need a copy of your contract, copies of your estimates, schedule of values, subcontractor quotes and other similar documentation.
WILL MY SUBS AND SUPPLIERS KNOW THEY ARE BEING PAID BY AN ESCROW AGENT? No. The escrow process is transparent to your vendors. They will receive checks with your name on them or they will receive electronic payments from an account in your name.
For more information visit the website of one of our favorite Escrow firms, Great Horn Financial Services and read about the Escrow process https://www.greathornfinancial.com/process.
Or call 800-683-9399 and we would be happy to discuss this further.
NOTICE: Nothing contained herein is intended to supersede the language and requirements of the Escrow Agreement including how funds are disbursed. If you are asked to enter into an escrow agreement, please review all terms and conditions carefully. Nothing herein is meant to imply that escrow-funds administration guarantees that no losses can or will be incurred on a contract or bond controlled by this process. Escrow Funds-Administration mitigates the risk of losses under a bond but does not guarantee that losses will not occur.