As property values soar in super-prime London and the surrounding counties, we have seen a huge surge in the number of construction projects being commissioned, particularly by sophisticated clients 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 clients are high. On a multi-million pound project let with industry-standard JCT payment terms, the client (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 project, this can amount to the Contractor granting several hundred thousand pounds of credit at any one time.
In the event that the client cannot pay 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 clients 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 account for the project.
What is a Construction Escrow Agreement?
A Construction Escrow Agreement is, simply, an agreement that provides that the Employer will place a certain amount of funds for the project 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 pay.
How do I set a construction escrow account up?
To set up an escrow account to hold funds for a project is very straightforward. There is a small number of escrow agents in the UK that are well-versed in construction escrow accounts for high-value works, and we are one of them.
The steps to establishing an escrow account are:
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Contact us for a no-obligation quote;
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Agree who will pay (generally, it makes the most sense for the Employer to pay, so that they don't end up paying overheads and profit on the amount if they ask the Contractor to pay);
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Add our standard precedent amendment to your JCT (or ask us to let your solicitors have it), so that each party agrees that you will use an escrow account for your works;
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Agree the terms of the escrow agreement (our fee includes a precedent escrow agreement, tailored specifically for use in high-value construction projects with offshore/trust clients and complex requirements);
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Provide the necessary compliance information; and
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The Employer can then place the agreed funds in escrow.
In the delivery of our escrow service, we will hold the Employer's funds in a segregated, ring-fenced account (held apart from our own operational funds and everybody else's escrow/retentions funds 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.
Pitfalls to avoid in selecting a construction escrow provider for your super-prime project
Being a high-value construction escrow company is a fairly unique proposition. For diligent parties, they will look to ensure that:
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the escrow company understands the operation of JCT agreements (as extensively amended by London's leading private client construction lawyers!);
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the escrow company is regulated by the Financial Conduct Authority for the carrying out of payment operations; and
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the escrow company has facilities in place to ensure that the funds can be held in a ring-fenced, segregated account (in the UK), away from their own funds.
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 projects.
How are the fees calculated?
Managing your payments through an escrow account does not need to be a costly exercise. The pricing models on offer from the different providers differs:
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some offer a fixed fee;
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others act as 'feeders' to law firms, who charge for the negotiation of the contract but offer low-cost payment services; and
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others, like us, operate a flexible fee base which ties directly to the complexity of the trust/offshore structure, the cost of delivering the service, the value of the construction project and the amount of funds in escrow.
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 set up) and, where the Employer contemplates multiple projects in future, we are able to offer discounts on future projects owing to the fact that we will already have carried out the majority of our compliance checks.
Does a construction escrow work for retentions?
Yes, absolutely. The payment of retentions is another hot topic with high-value construction projects, 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 project payments, but the parties have agreed that we will receive and hold their retentions as funds in escrow).
If the parties choose to use our escrow service to manage the payments for 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).
How do I close my escrow account?
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.
What are the alternatives to a construction escrow account?
The primary alternatives to using a construction escrow account are:
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The Employer using a UK-based entity (with a strong payment covenant) to enter into the construction contract;
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The Employer pre-funding the works (so that the Contractor does not need to extend a large amount of credit);
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The Employer giving a payment guarantee from a UK-based entity with a strong payment covenant (often, the UK-based entity that owns the property on which the works are being carried out); or
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The Employer securing some sort of payment guarantee bond (though, increasingly, the bondsman (if they will even grant such a bond) will insist on a cash deposit in the UK as security for their bond obligations, which means that the Employer ends up in a very similar place to if it had negotiated a low escrow sum).
