The Real Reason Sureties Require Fund Control (And Why It Matters)

Author, Josh Hill, Surety Account Executive, Rancho Mesa Insurance Services, Inc.

When a surety company issues a bond, the main goal is simple, to make sure the job gets finished and no one loses money. Even if a company has deep experience and strong finances, that does not always mean project money will be handled the right way. Because of this, a surety may ask for fund control when there is more risk.

One major reason projects run into trouble is poor cash flow management. Contractors often work on several jobs at once and must pay for labor, materials, and everyday business expenses. Without controls, money from one job may be used on another. This can leave a project short of cash and cause delays or failure. Fund control helps prevent the comingling of funds by ensuring that  funds are only used exclusively for their designated project.

Another concern a surety wants to avoid is money being used in the wrong way, especially on private jobs where there is much less oversight than on a public project. Fund control helps by placing money into a special account, requiring proof before payments are made, and making sure work is done before money is released. This helps ensure funds go toward the right things, like workers and materials.

Sometimes there is no lender or outside party tracking how money is spent. In these cases, fund control acts like a financial checkpoint. It tracks spending, requires documentation, and adds structure. This helps everyone stay organized and reduces mistakes.

Sureties also use fund control to support higher-risk companies, such as newer contractors, companies with less cash, or businesses taking on bigger jobs. Instead of turning the work down, the surety can approve the bond with controls in place. This gives companies a chance to grow while lowering risk.

Even though fund control may seem strict, it can help the business. It keeps finances organized, helps ensure subcontractors get paid on time, reduces disputes, and can make it easier to get bonds in the future.

Fund control is not meant to make things harder. It helps projects succeed by making sure money is used the right way at the right time. In the end, it protects the surety, supports the contractor, and helps the job get done successfully.

Rancho Mesa is happy to assist you with any questions regarding your bonding needs. Please content me with your questions at jhill@ranchomesa.com or (619) 798-2819.

2026 Legal Updates Reshaping California’s Private Construction Sector

Author, Josh Hill, Account Executive, Rancho Mesa Insurance Services, Inc.

California’s private construction industry has entered 2026 with two major legal changes that will significantly impact how contractors and subcontractors manage cash flow, negotiate contracts, and process change order work. Beginning January 1, 2026, California Senate Bill 61 Private works of improvement: retention payments (SB 61) and Senate Bill 440 Private Works Change Order Fair Payment Act (SB 440) took effect, reshaping longstanding practices around retention and change order payments. These laws apply only to new private works contracts signed on or after that date, leaving existing agreements untouched.

These updates aim to correct chronic pain points for contractors who have long shouldered the financial burden of excessive retention and slow moving change order approvals.

A New Era for Retention: SB 61 Sets a 5% Cap

For decades, retention practices in California’s private works sector varied widely, with some upstream parties imposing retention rates higher than those seen in public projects. SB 61 changes that landscape by capping retention at 5%, aligning private contracting with the standards already established for public works.

This shift is intended to create more predictable cash flow throughout the contracting chain. Contractors and subcontractors may need to revise their contract templates and ensure that the new cap flows consistently through all tiers of subcontracts. The responsibility now falls on every party to verify that contract language mirrors the law, preventing scenarios where a subcontractor is held to a higher retention percentage simply because an outdated template was used.

The statute also carries financial consequences for disputes where a prevailing party seeking to enforce the retention cap may recover reasonable attorney’s fees.

There are, however, some exceptions to the new law. Purely residential projects of four stories or fewer are excluded unless it is part of a mixed use development. Additionally, if a higher tier contractor gives written notice before bidding that payment and performance bonds are required and the subcontractor chooses not to furnish them the retention cap does not apply.

SB 440: Bringing Fairness and Timeliness to Change Order Payments

Equally impactful is SB 440, which tackles one of the industry’s most persistent friction points, the slow approval and payment of extra work. Many contractors have grown accustomed to performing additional work promptly while waiting weeks or months for owners to process and compensate approved change orders.

SB 440 introduces firm deadlines designed to eliminate that delay. Once a contractor or subcontractor submits a change order claim via registered or certified mail, the project owner has 30 days to issue a written response identifying approved and disputed items. Any undisputed portion must be paid within 60 days of that response.

Failure to respond triggers a powerful remedy where the contractor or subcontractor may have the right to suspend work without penalty.

The intent behind SB 440 is straightforward accelerate reviews, encourage timely resolution of disagreements, reduce the financial strain created by float funding extra work, and ultimately keep projects on schedule. By establishing clear accountability, the law aims to ensure that contractors are no longer forced to operate as involuntary lenders on privately funded construction projects.

January 1st, 2026 and Beyond

Owners, contractors, and subcontractors should update their internal processes to comply with SB 41 and SB 61. Contract language, administrative workflows, and change order procedures should be reviewed to ensure they align with the new requirements. Subcontractors, in particular, should make it routine practice to obtain and review the prime contract to verify proper flow down provisions for both retention and change order rules. Understanding these new laws and adjusting practices accordingly will help protect your margins, avoid disputes, and ensure compliance as the industry transitions into this new regulatory landscape.

Rancho Mesa is happy to assist with any questions you may have regarding SB 41 and SB 61. Please direct your questions to me at jhill@ranchomesa.com or (619) 798-2819.

Elevating Your Surety Program with Reviewed Financials

Author, Josh Hill, Account Executive, Rancho Mesa Insurance Services, Inc.

Over the last several years, contractors have been challenged to manage rising costs, especially those companies operating in the steel and concrete industries. These rising costs in the private sector can be mitigated through escalation clauses and other price adjustment features which offers some level of protection from inflation; however, in the public sector where bonds are necessary, fixed price contracts are a more common practice which creates additional pressure on surety underwriters in their evaluation of risk.

The surety industry, while still very healthy and seeking more opportunities to support their clients with bond approvals, has seen an uptick in scrutiny evaluating contractor financials, particularly when seeking increased capacity limits 2 or 3 times greater than what the contractor may have needed in the past. Larger contracts resulting from increased costs have created the need for larger bonding capacity for many contractors. Surety markets understand this and remain supportive when provided with reliable financial information.

Providing reviewed quality year-end statements will go a long way with your surety partner to improve the terms of their support (i.e. greater single and aggregate limits or more aggressive premium rate). In fact, the cost benefit can be substantial. For example, if Contractor ABC spends $10,000 to obtain reviewed financials, they might think it is just an unnecessary expense. However, investing in reviewed financials could move them out of a 3% flat premium expense into what is often referred to as the “25 slide or standard” (a widely used rate but there are even more competitive programs available depending on credit worthiness). Let’s use a $1,000,000 project size to demonstrate this. At a flat 3.0% premium, the cost for that bond is $30,000, but if this same job were on the 25 slide, the premium would only be $13,500. The cost benefit practically speaks for itself and your surety will appreciate the higher level of reporting as well.

If you are a contractor who has a revenue concentration stemming from public work, it is important to have a well-established relationship with your surety carrier through your broker. Investments in financial reporting like this might seem unnecessary at first, but a proactive agent broker will show you the benefits that decisions like these can create.

If you would like me to review your current bonding program, I can be reached at jhill@ranchomesa.com or (619)798-2819.

Maintaining Strong Banking Relationships Supports Surety Bonding Capacity

Author, Josh Hill, Account Executive, Rancho Mesa Insurance Services, Inc.

Having a good relationship with your bank can pay dividends for your business when obtaining bonds from your surety. Managing that line of credit appropriately can be a resource of available working capital which surety carriers likes to see, but when it is not utilized as expected by your bank, it could become a substantial detriment to your operations and ability to secure bonds.

Many established businesses are well versed in what their bank expects from them and what they need to provide in order to keep their line of credit in place, which surety companies like to see. However, many smaller companies who have been in business only a handful of years have not necessarily thought about what they need to do to keep their line of credit in good standing and renewable for the foreseeable future.

Not keeping a line of credit in good standing often happens when banks are focused upstream on middle market companies where their seasoned bankers are dedicated to that space. Newer companies or smaller revenue businesses (i.e., $10MM or less) are often serviced by less experienced bankers that may not coach their clients on bank expectations as outlined in their loan documents to keep that line of credit in good standing.

A common pitfall I have noticed among less experienced bankers in my previous 18-year career as a commercial loan officer was that smaller businesses often did not understand that their revolving line of credit needs to actually, revolve. The line is designed to support short term working capital but when your business is in growth mode, that will deplete working capital and often the line of credit gets utilized to help alleviate cash constraints.

The problem, the line of credit gets maxed out and it stays there becoming, permanent working capital. If this occurs, when the line of credit comes up for renewal, banks will typically look at two solutions; the first is to term out balance on the line of credit over a 3 or 4-year period creating a hefty P&I payment to retire the debt in full; or, if the company is lacking collateral and/or cash flow, they may decide to turn the client over to their special assets division where they will work out a less favorable repayment plan possibly looking at the assets of the business owner(s) for repayment.

No one wants to find themselves in a situation where they need to worry about their ability to obtain bonds from their surety. That is why it is important to have a dedicated banker who understands your business and proactively communicates bank expectations so that as a business owner, you can renew that line of credit at each maturity date. This keeps the surety happy and it will keep you, as a business owner, focused on your business and not a potential workout with your bank. 

If you are a business owner who feels they could benefit from a good relationship banker or has questions about how to build your bonding program, I can be reached at jhill@ranchomesa.com or (619) 798-2819.