What exactly is a Construction Escrow Account?
A construction escrow account is a third-party, segregated bank account into which the Employer under a construction contract deposits some or all of the Contract Sum as funds in escrow to be overseen by an escrow agent and, in case of non-payment by the Employer, called upon by the Contractor.
This enables the Contractor to extend a line of credit to the Employer and proceed proactively with the Works for the construction project without being concerned about the possibility of non-payment of its interim payment applications. Ultimately, construction projects work better (and faster!) if the Contractor can be comfortable it will get paid.
How do I open a Construction Escrow Account?
Creating an escrow account for a construction project is straightforward:
Request a quote
Decide on who will bear the costs;
Incorporate our standard amendment into your JCT or have us collaborate with your legal team;
Agree any particular requirements in respect of the underlying deposit bank where the funds in escrow will be held;
Finalise the escrow agreement terms;
Submit the required compliance details; and
The Employer funds the escrow account by depositing the agreed amount.
We ensure that the client’s funds are maintained in a dedicated account, distinct from our operational funds and accessible for verification through our online platform.
What does a Construction Escrow Agreement look like?
The Parties in a Construction Escrow Account
The parties to a Construction Escrow Agreement are generally the Employer, the Contractor and the Escrow Agent.
The Operative Provisions for a Construction Escrow Account
Under the Construction Escrow Agreement, the parties will jointly appoint the Escrow Agent to open a bank account to hold the escrow sum in a segregated account separately from its own operational funds, on the terms of the escrow agreement.
Amendments to the Construction Contract to accommodate an escrow
Often, the construction contract will be amended to provide that if the Contractor has recourse to the Construction Escrow Account to get paid during the course of the Works, the Employer must 'top up' the account and bring it back to the agreed balance, else the Contractor will be entitled to suspend Works as if the Employer had failed to pay a sum due under the Construction Contract.
Selecting a construction escrow service provider
For those handling high-value construction escrow services, it’s critical to ensure the provider:
Is knowledgeable about JCT contracts and their complexities, particularly for the type of project you are doing (Super-Prime Residential vs Infrastructure vs Commercial etc);
Operates under Financial Conduct Authority regulations; and
Guarantees a segregated, secure account for the funds.
Our services are tailored to meet these needs, especially for luxury residential and super-prime residential projects.
How are Construction Escrow fees calculated?
Escrow service fees vary:
Some charge a fixed fee;
Others act as 'feeders' to law firms, who charge for the negotiation of the escrow agreement or the construction contract/amendments but offer low-cost payment services; and
Providers like us offer a variable fee related to the project's complexity and value.
Typically, escrow costs are lower than bonding or insurance alternatives, and repeat clients benefit from compliance-related discounts, as we are only required to 'refresh' our compliance efforts, rather than undertaking them from scratch.
Do Construction Escrow Accounts pay interest?
This generally depends on the provider, the duration of the escrow and the negotiation of the escrow fee. Some escrow agents apply the anticipated interest to their fee basis in order to charge a lower fee, whereas others charge upfront for their escrow services and pass on the interest (if any) to the Employer.
Can Construction Escrow Accounts be used for Retentions?
Yes, our escrow services accommodate retention payments as well. We can manage these through a Retentions Trust Account, releasing funds to the Contractor as per the agreement terms.
Closing your escrow account
The escrow account is designed to close automatically once its purpose is fulfilled. Sometimes, the parties will agree that the funds in the account will be released to the Contractor to discharge the final few payment applications, other times, the parties will agree that the Retention post practical completion be held in escrow, and others will simply wind the escrow up at practical completion.
Alternatives to construction escrow accounts
Options besides escrow accounts include:
The Employer using a UK-based entity with a strong payment profile, significant assets and high credit rating for the construction contract;
The Employer pre-funding the construction directly with the Contractor;
The Employer providing a payment guarantee from a robust UK entity; or
a payment guarantee bond, which may still necessitate a UK cash deposit.
Our escrow service is specially designed for high-value construction projects, simplifying the management of complex payments and financial obligations.