As property prices soar in super-prime London and the surrounding counties, we have seen a huge surge in the number of construction contracts being commissioned, particularly by sophisticated clients ('Employers') whose wealth and/or property is structured in trusts, or through offshore entities.
The risks to a Contractor of entering into a building contract with such Employers are high. On a multi-million pound contract let with industry-standard JCT payment terms, the Employer is generally asking the Contractor to grant as much as a rolling 7-8 weeks' of credit before getting paid. On a significant construction contract, this can amount to the Contractor granting several hundred thousand pounds of credit at any one time.
In the event that the Employer cannot transfer money to the Contractor, owing to difficulties in transferring money to the UK; international sanctions, or simply a temporary lack of liquidity, such a failure can leave the Contractor extremely exposed.
The simplest solution, particularly for wealthy Employers with access to cash or who are able to borrow at reasonable rates, is for the Contractor and the Employer to agree to use a construction escrow for the project.
A Construction Escrow Agreement is, simply, an agreement that provides that the Employer will place a certain sum for the contract in escrow, held by an escrow agent for the purposes of discharging their payment obligations for the project under the construction agreement. This might take the form of a deposit of the whole Contract Sum; a deposit of a rolling 3 months of forecast valuations for the project; or simply of an arbitrary sum that the parties agree will cover the Contractor's likely exposure on the project in the event that the Employer is temporarily unable to settle their account.
To open an escrow to deposit security for a project is very straightforward. There is a small number of escrow agents in the UK that are well-versed in opening these for high-value works, and we are one of them.
The steps to opening an account are:
In the delivery of our escrow product, we will hold the Employer's money in a segregated, ring-fenced account (segregated apart from our own operational accounts and everybody else's escrow/retentions money that we hold), and all parties and their advisors will get access to our online platform to verify the balance and any transactions made on the account.
Being a high-value construction escrow company is a fairly unique proposition. For diligent parties, they will look to ensure that:
We do, of course, meet all of those requirements. Indeed, our escrow service has specifically been developed to support those carrying out high-value works on super-prime residential contracts.
Managing your monthly payment cycle through an escrow account does not need to be a costly exercise. The pricing models on offer from the different providers differs:
Generally speaking, the cost of escrow is significantly less than of going out to the bond/insurance market (as well as being significantly easier to open) and, where the Employer contemplates multiple projects in future, we are able to offer discounts on future contracts owing to the fact that we will already have carried out the majority of our compliance checks. Find out more on our pricing page.
Yes, absolutely. The return of retentions is another hot topic with big construction contracts, and something that our escrow service is well set up to support. We also offer standalone Retentions Trust Accounts (where no escrow is required for the ongoing monthly valuations, but the parties have agreed that we will receive and deposit their retentions as funds in escrow).
If the parties choose to use our escrow service for monthly valuations under the construction contract, we can (at no additional cost) also provide a Retentions Trust Account into which we will transfer the retentions each month, in order that they may be released to the Contractor as stipulated in the construction contract (generally, half at practical completion and the balance at the end of the rectification period).
The account will be set up to close automatically once it is no longer required - eg, once the Contractor has been paid; the retentions have been released to the Contractor and whatever funds are still being held have been released back to the Employer.
The primary alternatives to using an escrow account are:
dospay is a trading name of DOS & Co. Ltd, a company registered in England and Wales with company number 08294966.
DOS & Co. Ltd. is registered with the Financial Conduct Authority under the Payment Services Regulations 2017 (FRN: 833374) for the provision of payment services.
All of our escrow and third-party managed accounts are segregated and safeguarded at the Bank of England.
