Construction Escrow

Construction Escrow is a way of holding project money safely with an independent third party. The money is placed into a separate account and is only released when agreed conditions are met.

The escrow account is governed by an escrow agreement. This agreement explains why the money is being held, when it can be released and what happens if there is a disagreement.

Construction Escrow sits alongside the building contract. It does not replace it. The building contract still decides what work is done, how it is valued and who is entitled to payment. The escrow arrangement simply controls the movement of money, based on what the parties have already agreed.

Construction Escrow is suitable for parties involved in construction or development projects where payment is staged, conditional or commercially sensitive, and where neutrality and certainty are important.

It is commonly used by Employers and developers seeking assurance that funds will be applied only for their intended purpose ("my money, my project"), and by Contractors who want confidence that payment will be available when contractual conditions are met. Sub-contractors may also benefit indirectly where escrow supports reliable upstream payment practices.

Professional advisors, including solicitors, contract administrators and project managers, often recommend Construction Escrow in situations where payment risk, insolvency risk or trust between the parties could otherwise delay or complicate delivery.

Construction Escrow is usually set up before work starts, or very early in the project. This allows payment arrangements to be clear from the outset.

It is often used where an employer is required to provide payment security, where large interim payments will be made over time, or where retention money needs to be protected during the works and afterwards.

It is also common on higher-value projects, longer programmes or where insolvency risk is a concern. By agreeing escrow arrangements early, the parties can reduce disputes later and focus on delivering the project.

Construction projects often involve large sums of money, paid over time and subject to conditions. This can create tension and risk for everyone involved.

Employers may worry about paying too much, too early, or losing control of funds. Contractors may worry about late payment, non-payment or the employer’s financial position. Advisors may be concerned about disputes, insolvency risk and unclear payment arrangements.

Construction Escrow addresses these issues by separating control of the money from the parties themselves. Funds are held by an independent third party and released only when agreed conditions are met. This reduces uncertainty, limits arguments about payment and helps projects run more smoothly.

The primary benefit of Construction Escrow is certainty. Everyone knows where the money is, why it is there and when it can be released.

By holding funds in escrow, the parties reduce reliance on trust or credit checks. Payment arrangements are clear from the start, which can speed up negotiations and avoid difficult conversations later.

Construction Escrow also reduces the risk of disputes about payment timing and entitlement. Where issues do arise, the escrow arrangement provides a clear framework for holding funds safely while those issues are resolved.

Benefits for Employers

For employers, Construction Escrow provides comfort that funds will only be released in line with the agreed building contract and escrow agreement.

It allows employers to demonstrate that money is available for the project, without handing over control of those funds upfront. This can improve contractor confidence and reduce the need for guarantees, bonds or intrusive financial disclosures.

Employers also benefit from greater transparency. Escrow statements provide a clear record of funds held and released, which can be helpful for internal reporting and for discussions with advisors and funders.

Benefits for Contractors

For contractors, Construction Escrow provides confidence that payment funds are already set aside and cannot be diverted for other purposes.

This reduces the risk of late payment and helps contractors plan cashflow more effectively. It can also reduce the need to investigate the employer’s financial position or to rely on assurances that are difficult to verify.

Knowing that funds are held independently can allow contractors to focus on delivering the works, rather than managing payment risk or chasing overdue sums.

Benefits for Sub-Contractors & Wider Supply Chain

While sub-contractors are not usually parties to the escrow agreement, they may benefit indirectly from improved payment discipline higher up the chain.

Where Construction Escrow supports reliable interim payments to the main contractor, this can reduce pressure on cashflow and improve the likelihood of timely downstream payments.

Advisors and project managers often view escrow as a way to support healthier payment practices across the project, without changing the contractual structure of the supply chain.

Construction Escrow can be structured in different ways, depending on how payments are intended to work on the project. The escrow arrangement should match the commercial reality of the works, rather than forcing the project into a fixed model.

The most common arrangements are set out below.

Security Escrow

Security Escrow is used where the employer needs to demonstrate that funds are available, without making payments in advance.

At the start of the project, the employer deposits an agreed sum into the escrow account. This amount is usually linked to expected interim payments. Often it is calculated as several months of forecast valuations.

The funds sit in the escrow account as a standing security balance. They are not paid out unless specific conditions are met. For example, if the employer fails to make a payment by the final date for payment under the building contract, the contractor may be entitled to request payment from the escrow account.

If funds are released in this way, the employer is usually required to top the escrow account back up. This keeps the agreed level of security in place for the remainder of the project.

Payment (or “Passthrough”) Escrow

Payment Escrow, sometimes called Passthrough Escrow, is used where payments are intended to flow through the escrow account during the project.

The employer deposits an agreed escrow sum into the account at the outset. When an interim valuation or certificate is issued, the contractor submits the required information in line with the escrow agreement. The payment is then released from the escrow account.

After each payment, the employer tops the account back up to the agreed level. This allows the next payment cycle to proceed without delay.

This structure can improve payment speed and cashflow certainty, while still giving the employer comfort that funds are only released when agreed conditions are met.

Construction Retentions

Retentions can be handled separately from interim payments, or alongside them.

Retentions may be held in a dedicated retention escrow account, where retention sums are paid in as they arise and held until the agreed release points, such as practical completion or the end of the rectification period.

Alternatively, retentions can be paid into the UK Retention Deposit Scheme. This is a statutory scheme designed specifically to protect retention money and is free to use.

Where a Payment or Passthrough Escrow is already in place, retention sums can be paid directly into the UK Retention Deposit Scheme each month as part of the payment cycle. This allows parties to benefit from structured payment flows while placing retention money into a scheme designed for that purpose.

Yes. Construction Escrow arrangements are commonly tailored to reflect the specific needs of a project.

For example, a project may use a Security Escrow at the outset to provide payment comfort, then operate a Payment or Passthrough Escrow during the works. Retentions may be handled separately, either through a retention escrow account or via the UK Retention Deposit Scheme.

Escrow arrangements can also be adjusted to reflect changes during the project, such as variations in programme, value or risk profile, provided the parties agree the changes and document them appropriately.

Advisors often view this flexibility as one of the main advantages of escrow, as it allows payment protection to be aligned closely with how the project actually operates.

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All escrow arrangements are administered through the dospay digital escrow portal.

The portal provides a single place where authorised parties can view account balances, payment history and escrow status. It also supports the submission and tracking of information required for payments or releases, in line with the escrow agreement.

Using a digital portal reduces reliance on email chains and manual reconciliation. It improves transparency and creates a clear audit trail for payments and releases. Advisors often find this helpful when reviewing payment history or responding to queries during the life of the project.

Construction Escrow works by separating the handling of money from the delivery of the works. Funds are placed into a dedicated escrow account and held by an independent escrow agent.

The escrow agent does not decide when money should be paid. Instead, it follows the escrow agreement, which sets out clear conditions for holding and releasing funds.

In practice, this means that once the agreed conditions are met, funds can be released quickly and without further negotiation. If the conditions are not met, or if there is uncertainty, the funds remain safely held until the position is clarified.

The building contract continues to govern the project. It deals with matters such as valuation, certification, entitlement to payment and dispute resolution.

The escrow agreement does not replace the building contract. It works alongside it. The escrow agreement focuses only on what happens to the money once those contractual steps have taken place.

For example, the building contract may require an interim certificate to be issued. The escrow agreement then uses that certificate as the trigger for releasing funds. The escrow agent does not review the quality of the works or interpret the contract. It relies on the agreed contractual outputs.

Only parties authorised under the escrow agreement can give instructions to the escrow agent. This is agreed at the outset and documented clearly.

Instructions are usually tied to specific events, such as the issue of a certificate, confirmation of a milestone or the occurrence of a payment default. The escrow agent checks that the instruction matches the agreed conditions before acting.

This approach ensures that payments are controlled, predictable and not dependent on informal requests or unilateral decisions by one party.

At a high level, the Construction Escrow process follows a clear sequence.

1. The Employer deposits the escrow sum with us, and we store it, segregated and safeguarded, liquid and unencumbered at the Bank of England;
2. The Contractor begins the works and makes the usual monthly applications for payment;
3. If the Employer makes the payment, we do nothing.  If, however, the Employer does not make the payment (either by design or otherwise), we will pay the Contractor against the payment certificate.
4. The project proceeds as normal under the building contract.
5. Once the Works are complete (or as otherwise agreed) the escrow sum is either returned to the Employer or used to pay down the final payments / Employer's retention obligations.
6. Any residue is returned to the Employer.

If there is a dispute or uncertainty at any stage, the funds remain held in escrow until the agreed process for dealing with that situation has been followed. This creates a stable framework that supports the project from start to finish.

Setting up a Construction Escrow account starts with understanding the project and how payments are intended to work. This includes the type of escrow arrangement, the expected payment flow and the parties involved.

Once the structure is agreed in principle, an escrow agreement is prepared. This document sets out how the account will operate, when funds can be released and who can give instructions.

At the same time, we begin the account opening and onboarding process. These steps run in parallel so that the account can be opened as efficiently as possible once the agreement is finalised.

The time needed to open a Construction Escrow account depends on the complexity of the project and the parties involved.

For straightforward arrangements, account opening can often be completed within a short period once the required information has been provided and the escrow agreement is agreed. More complex structures, or projects involving multiple entities or trusts, may take longer.

Most delays arise from missing information rather than from the escrow process itself. Early engagement and complete information help keep things moving.

To open a Construction Escrow account, we need to carry out standard onboarding checks on the parties involved. These are similar to the checks required when opening a bank account or instructing a law firm.

This usually includes confirming identity, ownership and control of any companies or trusts involved. Where funds are being deposited, we may also need information about the source of the funds and how they were obtained.

These checks are required so that funds can be held and administered properly and in line with applicable requirements.

The following information is typically required to open a Construction Escrow account:

• Details of the parties to the escrow agreement
• Identification information for individuals involved
• Corporate documents for any companies, including ownership and control details
• Trust information, where a trust is involved
• Bank account details for the party funding the escrow
• Information about the source of the escrow funds
• Confirmation of the agreed escrow structure and payment mechanics

Providing this information clearly and early helps avoid delays and allows the account to be opened smoothly.

A Construction Escrow account is funded by the party responsible for providing the payment security. This is usually the Employer.

The amount paid into escrow depends on the agreed escrow structure. For example, it may be a standing security sum, a payment buffer for interim payments, or amounts relating to retentions. The required funding level is agreed upfront and set out clearly in the escrow agreement.

Funds are paid into the escrow account from an agreed bank account, in the name of the funding party. Once received, the funds are held separately and can only be used in accordance with the escrow agreement.

Payments and releases from the escrow account are authorised strictly in line with the escrow agreement.

The escrow agreement sets out the events that allow a payment or release to take place. These events are usually linked to outputs from the building contract, such as interim certificates, milestone confirmations or payment defaults.

When an authorised instruction is received, the escrow agent checks that it matches the agreed conditions. If it does, the payment or release is processed. We do not exercise discretion or make judgement calls beyond what the agreement allows.

If instructions are disputed or unclear, we will not release the funds.

Instead, the funds remain held safely in the escrow account while the parties follow the process set out in the escrow agreement. This may involve clarification, confirmation from an agreed third party, or the use of the dispute resolution process under the underlying contract.

This approach protects both parties. It ensures that money is not released prematurely and that funds remain available once the position is resolved.

If a party to the underyling contract becomes insolvent, we continue to operate under the escrow agreement.

Because the funds are held in escrow and not in the control of either party, they are protected from being used for other purposes. We will follow the agreed instructions and any applicable insolvency process, as set out in the escrow agreement.

In practice, this can provide greater certainty than relying on funds held directly by one of the parties, particularly where payment timing or entitlement is being considered as part of an insolvency situation.

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What happens if DOS & Co. becomes insolvent?

All escrow funds are segregated (kept separate from our own funds), safeguarded (protected by law from our own creditors) and kept liquid and unencumbered at the Bank of England. In the event of our insolvency, we have set aside regulatory capital that will be used by our administrators to 'unwind' our affairs - this will usually involve working with the parties to agree the identity of a new escrow agent who will 'step in' to carry out our obligations under the escrow agreement.

Funds paid into an escrow account are held separately from the money of the parties and separately from our own funds. They are not mixed with operational accounts.

All of our escrow funds are held liquid and unencumbered at the Bank of England. This means that there is no counterparty risk (the bank does not lend out funds, so a 'run on the bank' is not possible).

The escrow account is set up specifically for the purposes agreed in the escrow agreement. Funds can only be used in line with that agreement and cannot be applied for any other purpose.

This separation helps protect the funds if something goes wrong elsewhere. For example, the funds are not available to the creditors of the Employer, the Contractor, us, or the underlying bank. They remain ring-fenced for the project until they are released in accordance with the agreed conditions.

We are regulated by the Financial Conduct Authority for the provision of payment services. This means we are required to meet regulatory standards around governance, systems, controls and the handling of client funds.

Where escrow arrangements involve regulated payment activity, those activities are carried out within that regulatory framework. Other aspects of escrow are contractual in nature and governed by the escrow agreement between us and the parties.

In practical terms, this combination of regulation and contract provides structure and oversight, while still allowing escrow arrangements to be tailored to the needs of a specific matter or project.

Escrow is designed to hold, protect and release funds in line with agreed conditions. It does not decide who is right or wrong in a dispute.

We do not interpret the underlying contract, assess the quality of anything done or delivered under that underlying contract, or replace the role of a contract administrator, adjudicator or court. If there is a dispute, the funds remain held while the parties follow the agreed dispute resolution process.

The escrow arrangement also does not remove the need for a properly drafted underlying contract. It supports that contract by providing a clear and neutral payment mechanism, but it does not change the parties’ underlying rights or obligations.

Escrow pricing depends on the structure, value and duration of the escrow arrangement. There is no single fixed fee, as projects and payment flows vary.

Pricing usually reflects three main elements. First, the work involved in setting up the escrow arrangement, including compliance, onboarding and preparation of the escrow agreement. Second, the ongoing administration of the escrow account while funds are held. Third, the handling of payments or releases during the life of the project.

What pricing covers is the independent holding of funds, administration of agreed payment mechanics, record-keeping, reporting, all bank fees and support throughout the project. It does not cover legal advice, contract administration or dispute resolution, which remain the responsibility of the parties and their advisors.

If something goes wrong, the escrow arrangement provides a clear framework for dealing with it.

If there is a mistake, delay or disagreement about instructions, funds remain safely held in escrow while the issue is addressed. We follow the process set out in the escrow agreement and do not release funds unless and until the agreed conditions are met.

If a party has a concern about how the escrow account is being operated, we have a formal complaints process. This allows issues to be raised, reviewed and resolved in a structured way, with escalation routes available if needed.

We are a specialist provider focused on escrow and managed payment arrangements. Escrow is not an add-on to another service. It is a core part of what we do.

Escrow funds are held securely and separately, with infrastructure designed specifically for escrow rather than adapted from other uses. Account opening is handled efficiently, and escrow arrangements are administered through a dedicated digital escrow portal, giving authorised parties visibility and a clear audit trail.

Advisors often recommend dospay because we sit independently of the transaction, operate within a regulated framework, have a proven track record and focus on doing one thing well: Holding and administering escrow funds in a clear, neutral and predictable way.