Construction Escrow

Construction Escrow Accounts

What exactly is a Construction Escrow Account?

A construction escrow account is a third-party, segregated bank account into which the Employer of a construction project Works deposits some or all of the expected cost 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. This provides security to both sides; ensuring that the Contractor gets paid on time, but also ensuring performance of the Works before payments are released. The escrow agent acts impartially to discharge the Employer's payment obligations against the certificates issued by the Architect/Contract Administrator.

How do I open a Construction Escrow Account?

Creating an escrow account for a construction project is straightforward:

1. Request a quote from us without obligation;
2. Decide on who will bear the costs;
3. Incorporate our standard amendment into your JCT or have us collaborate with your legal team;
4. Agree any particular requirements in respect of the underlying deposit bank where the funds in escrow will be held and any particular escrow needs;
5. Finalise the escrow terms;
6. Submit the required compliance details; and
7. The Employer funds the escrow account by depositing the required 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 to a the Escrow Agreement

The parties involved in 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.  We hold all of ours at the Bank of England.

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 account to get paid during the course of the project, 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 - escrow agent will pay the Contractor from the escrow.

How to handle disputes

The legal provisions between the parties involved may also include the right for the escrow agent to draw funds from the escrow account to settle any decision of an adjudicator, treating the adjudicator's decision in the dispute as a valid payment request.

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 escrow services are tailored to meet these needs, especially for luxury residential and super-prime residential projects.

How are Construction Escrow fees calculated?

Escrow fees vary:

• Some charge a fixed fee;
• Others act as 'feeders' to law firms, who charge for the negotiation of the escrow or the construction arrangements/amendments; and
• Providers like us offer a variable fee related to the project's complexity and value.

Typically, project 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 and pass on the interest (if any) to the Employer.

Can Construction Escrow Accounts be used for Retentions?

Yes, our escrow offering accommodates retention payments as well. We can manage these through a Retentions Trust Account, releasing funds to the Contractor by using the Architect/CA's certificates as valid legal requests for the draw-down of funds.

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 consider that the Retention post practical completion should be held in escrow, and others will simply wind the escrow up at practical completion.

Alternatives to construction escrow accounts in construction projects

Options besides escrow accounts include:

• The Employer using a UK-based entity with a strong payment profile, significant assets and high credit rating for their Works;
• 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 offering is specially designed for high-value construction projects, simplifying the management of complex payments and financial obligations.

Why use dospay for your escrow needs?

As experienced escrow agents, we can add security and transparency to your project, holding your funds liquid and unencumbered at the Bank of England for the duration of the works, including any rectification period for your retentions, offering both financial security and the assurance to the Contractor that their interim payments and retentions will be released promptly in line with the terms.