Payment & Escrow Blog

Construction Escrow as an alternative to Adjudication

Escrow accounts offer 'pay first, argue later', but better: Pay first, and possibly don't need to argue at all.

Pay Now, Argue Later

In early 1996, Robert Fenwick Elliott advised Lord Howie on the statutory adjudication process for the Construction Act 1996, coining the term 'pay now, argue later'. This concept was born out of the need for swift dispute resolution in construction, where projects can span months or years, margins are slim, and disputes are costly and time-consuming.

Key Points of 'Pay Now, Argue Later'

  1. Lengthy Projects and Disputes: Construction projects and their related disputes can extend over long periods.
  2. Limited Cash Flow: The construction industry operates on small margins, leaving little 'free cash' for unforeseen issues.
  3. Dispute Impact: Disputes can quickly derail a project by tying up limited funds.

The proposed solution was an expedited dispute resolution process, binding yet subject to later court arguments if necessary. This would keep funds flowing in the project.

Construction Adjudication and Its Process

Adjudication in construction involves a strict 28-day period, extendable by two weeks or more with mutual consent. If the losing party fails to comply with the adjudicator's decision, an expedited enforcement process in the Technology and Construction Court (TCC) can enforce payment within about 28 days.

However, the time frame from the start of a payment cycle to eventual payment could span 10 weeks to 3 months. This includes the adjudication process and potential court enforcement, which could add another 4-6 weeks if the employer resists payment.

State of Adjudication in 2023-24

A 2023 report from Kings College London highlighted several concerns:

  1. Cost of Adjudication: The total cost ranged between £20,001 to £30,000, excluding legal fees and management time.
  2. Value of Disputes: Most disputes were valued between £500,000 to £2 million.
  3. Duration of Settlement: Only 12% of adjudications were resolved within 28 days.

This indicates a shift towards a 'pay late, argue even later' scenario, potentially jeopardising project completion and viability.

Role of Construction Escrow Accounts

Construction escrow accounts offer a solution:

  1. Initial Employer Deposit: An amount (usually three months' forecast valuations) is placed in a segregated, ring-fenced bank account.
  2. Payment Mechanism: If the Employer fails to pay on time, the Contractor can access funds from the escrow account.
  3. Adjudication Option: Parties may still choose adjudication, but with less financial urgency.
  4. Employer Obligations: The employer must replenish the escrow account to maintain the agreed level.

Benefits of Construction Escrow Accounts

Construction escrow accounts offer clear benefits:

  1. Cost Efficiency: The cost of maintaining an escrow account is considerably lower than that of adjudication.
  2. Commercial Benefits: Contractors can reduce risk factors in their tenders, as the likelihood of payment delinquency is minimised.
  3. Risk Management: An escrow account provides a safety net against payment delays or disputes.

Opening Construction Escrow Accounts

Companies like us provide escrow accounts in the UK for various project sizes and complexities, including those involving trusts and offshore structures. We offer fast free quotes.

In conclusion, while 'pay now, argue later' was a groundbreaking concept in the 90s, the evolving complexities and financial constraints of modern construction projects have made it less effective.

Construction escrow accounts emerge as a viable solution, ensuring financial stability and minimising dispute-related delays. Their implementation could revolutionise financial management in construction, aligning with the industry's evolving needs and challenges.

Would you like further information?

Request a no-obligation quote for your account. We generally reply within 24 hours and can open accounts in as little as 48 hours.

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.  

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