By Roger B. Woodhull, PE, JD, CRT Inc

The use of a disbursement control program can address several objectives which can be of significant benefit to the Owner.  These are:

It Prevents The Prime Contractor From Considering Interest On The Subcontractor’s Payment In His Bidding Strategy

§         If a prime contractor has control of the entire payment from the Owner, and can delay payment(s) to subcontractors and/or vendors for any reason, the prime contractor will be able to use the owner’s funds to generate additional income for themselves, or to cover other cash flow needs.  This practice can severely impact the subcontractors financially, especially the small business and disadvantaged business firm with marginal financial strength

It Gets Payments To The Underlying Tiers Of Contractors, Subcontractors And Vendors More Quickly

§         All contractors and vendors included in the payment request to the Owner get their payments at the same time.  This guaranteed quick payment has at least two direct benefits in addition to preserving the financial health of the small business firms.

·         With such a program in place, the sureties will likely write payment and performance bonds for small business firms they would ordinarily not write in a conventional payment program.  This will increase the number of small business firms that can participate in the project, thus increasing competition and lowering prices

·         Vendors providing material and equipment to small business subcontractors are more willing to deliver expensive material and equipment, knowing that they will receive prompt payment directly from the disbursement control agent after the owner has made payment.  This helps to prevent material and equipment delivery delays which might otherwise occur if payments are delayed by the prime contractor or any subcontractor.

It Forces The Prime Contractor And His Subcontractors To Manage The Progress Of The Work And Only Submit A Payment Request For Work That He Has Verified Is Completed

§         When a prime contractor gets the full payment and disburses it himself, it is to his benefit to have the subcontractor claim payment for more work than is actually completed because he gets the payment from the owner, and can with hold it from the subcontractor claiming the work is not complete or is defective.  Therefore, there is no incentive for him to manage the payment requests made by his subcontractors.   When the approved payment goes directly to the subcontractors and vendors under a disbursement control program, the prime contractor now must be concerned with overpayment to these subcontractors, because he is liable for the completion of the work if a subcontractor fails to complete his portion of the job.  With a disbursement control program in place, potential overpayments to subcontractors become the prime contractor’s problem to manage, and that is where the liability should be.

By using disbursement control the Owner gets:

§         a prime contractor more focused on managing his contracting team than managing the project cash flow,

§         a contracting team with less exposure to financial failure because of cash flow problems created by front loading the invoice

§         a prime contractor with more small business firm participation because the small business will have enhanced bonding capacity provided by the sureties because of the disbursement control program,

§         a lower contract price because of the increased subcontractor competition allowed due to the improved bonding capacity of the small business contractors made possible by the relaxed bond  underwriting criteria

Summary

This additional control the Owner has over how the contractor payments are disbursed, reduces the risk of financial failure of both the prime and his subcontractors.

 

Roger Woodhull is Vice President of Construction Risk Technology in Newport Beach, California.  He can be reached at rwoodhull@crtco.com.