Construction Retentions Escrow

Construction Retentions Escrow is an arrangement used to hold retention monies securely during a construction project.

Instead of retention being withheld by the employer or held in a contractor’s account, the retention amount is paid into an independent escrow account. The funds are held there and released only when the agreed conditions are met.

Construction Retentions Escrow is designed to protect retention funds while ensuring they remain available for release at the appropriate stages of the project.

Construction Retentions Escrow is an arrangement used to hold retention monies securely during a construction project.

Instead of retention being withheld by the employer or held in a contractor’s account, the retention amount is paid into an independent escrow account. The funds are held there and released only when the agreed conditions are met.

Construction Retentions Escrow is designed to protect retention funds while ensuring they remain available for release at the appropriate stages of the project.

Construction Retentions Escrow is typically used once retention provisions are agreed under the building contract and retention amounts begin to accrue.

It may be used throughout the life of the project, with retention sums paid into escrow as they arise, rather than being withheld from interim payments.

Escrow is also used where parties want to ensure that retention funds remain protected during the defects liability or rectification period.

Retention is intended to protect the employer against defects or incomplete works. In practice, retention monies are often withheld for long periods and become exposed to cashflow and insolvency risk.

Contractors and subcontractors may have difficulty recovering retention once works are complete, particularly if the employer becomes insolvent or if projects change hands. Employers, meanwhile, may face disputes about whether retention has been properly protected or accounted for.

Construction Retentions Escrow addresses these issues by separating retention funds from the day-to-day finances of the parties and holding them independently until release conditions are met.

The primary benefit of Construction Retentions Escrow is protection. Retention monies are set aside for their intended purpose and cannot be used as working capital by either party.

Escrow provides clarity around how much retention is held, where it is held and when it will be released. This reduces disputes and avoids retention becoming a bargaining tool at the end of a project.

It also supports better project governance by ensuring that retention is treated as security, not as cashflow.

Benefits for employers and developers

For employers and developers, Construction Retentions Escrow preserves the protection that retention is meant to provide.

Funds remain available if defects arise during the rectification period, without needing to chase a contractor or rely on other security. At the same time, employers avoid holding retention on their own balance sheet or being accused of using retention funds improperly.

Escrow can also improve relationships by demonstrating fair and transparent handling of retention.

Benefits for contractors and subcontractors

For contractors and subcontractors, Construction Retentions Escrow significantly reduces the risk of non-payment.

Retention monies are held independently and are not exposed to the employer’s insolvency or cashflow pressures. Once the agreed conditions are met, funds can be released without delay or negotiation.

This improves certainty and can support better cashflow planning, particularly on long-running projects.

Benefits for advisors and project teams

For contract administrators, project managers and advisors, escrow provides a clear and auditable mechanism for handling retention.

It reduces the need for informal tracking of withheld sums and supports clean certification and release processes.

Escrow can also align well with emerging industry practices aimed at improving transparency and fairness in the treatment of retention monies.

Construction Retentions Escrow can be structured in different ways, depending on how retention is handled under the building contract. There is no single standard model.

Most commonly, retention sums are paid into a dedicated retention escrow account as they arise, rather than being withheld from interim payments. The escrow account holds the accumulated retention until release conditions are met.

Retention escrow may also be used alongside a wider payment or passthrough escrow, with retention amounts separated and ring-fenced from day-to-day project payments.

Construction Retentions Escrow can be structured in different ways, depending on how retention is handled under the building contract. There is no single standard model.

Most commonly, retention sums are paid into a dedicated retention escrow account as they arise, rather than being withheld from interim payments. The escrow account holds the accumulated retention until release conditions are met.

Retention escrow may also be used alongside a wider payment or passthrough escrow, with retention amounts separated and ring-fenced from day-to-day project payments.

In practice, Construction Retentions Escrow works by setting aside retention monies independently as they accrue.

Instead of being withheld by the employer, the retention portion of each payment is paid into escrow. The funds remain held and cannot be accessed by either party until the agreed release conditions are met.

Once the relevant certification is issued, funds are released from escrow in line with the contract. If defects arise, funds remain available to be applied in accordance with the agreed process.

The building contract continues to govern how retention is calculated, when it accrues and when it should be released. None of that changes.

The escrow agreement sits alongside the contract and deals only with how retention funds are held and released. Release conditions usually mirror contractual certification events, such as practical completion or expiry of the rectification period.

The escrow agent does not assess defects or interpret the contract. It acts only on the agreed certifications.

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

Instructions are typically linked to clear contractual events, such as issue of a certificate of practical completion or confirmation that the rectification period has expired.

The escrow agent checks that the instruction matches the agreed conditions before releasing funds. Informal or unilateral requests are not accepted.

Below is a practical view of the steps that parties typically follow when using Construction Retentions Escrow.

1. ‍Retention accrues with each payment
   As interim payments are certified, the retention portion is identified.‍
2. Retention paid into escrow
   Instead of being withheld, the retention amount is paid into the escrow account.‍
3. Funds held during the project and rectification period
   Retention funds remain held independently while works are completed and defects are addressed.‍
4. Release at practical completion
   Where the contract provides for partial release at practical completion, the relevant amount is released from escrow.‍
5. Final release after rectification period
   Once the rectification period has expired and certification is issued, the balance of the retention is released.‍
6. Hold funds if issues arise
   If defects remain unresolved, funds stay in escrow until the agreed process is followed.

We start by confirming how retention is calculated under the building contract and when it is due to be released. We also confirm who the parties are and who will certify practical completion and the end of the rectification period.

An escrow agreement is then prepared. This document sits alongside the building contract and sets out how retention funds are paid into escrow and when they may be released.

At the same time, we begin onboarding and account opening so the escrow account is ready before the first retention payment is due.

The time needed depends mainly on how quickly parties provide onboarding information and finalise the escrow agreement.

For straightforward projects, account opening can usually be completed within a short period once the required information is provided. Projects with complex ownership structures or multiple contracting parties may take longer.

Most delays are caused by missing information rather than the escrow process itself.

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

This usually includes confirming the identity of the parties, ownership and control of any corporate entities, and the source of funds for the retention amounts.

We also need basic information about the contract and how retentions will be calculated and certified.

The following information is typically required:

• Details of the employer and contractor
• Identification information for authorised individuals
• Corporate documents showing ownership and control, where applicable
• Source of funds information for retention payments
• Summary of the retention provisions in the building contract
• Confirmation of who will certify practical completion and the end of the rectification period
• Expected project timetable and retention release dates

Providing this information clearly and early helps ensure the account can be opened without unnecessary delay.

Construction Retentions Escrow is funded by the retention amounts as they arise.

In practice, the retention portion of each certified payment is paid into escrow instead of being withheld and held by the employer. This creates a running retention balance over the life of the project.

The funding approach is agreed in advance and set out clearly in the escrow agreement.

Releases are managed strictly in line with the escrow agreement and the building contract’s retention provisions.

Typically, there are two release points. An initial release at practical completion, and a final release at the end of the rectification period. The escrow agreement will specify what evidence is required for each release, such as the relevant certificate or written confirmation from the contract administrator.

Once the required evidence is provided and the agreed conditions are met, funds are released from escrow to the party entitled to receive them.

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Almost every account we open is built and tailored to the arrangement, so an accurate price depends on what the arrangement actually requires. A quote is free, and we typically return one within 24 hours.

A quote is made up of the same parts each time:

• Compliance fees, covering know-your-client checks, source-of-funds verification and our ongoing monitoring obligations
• Escrow agreement fees, covering either proposing escrow terms or reviewing a client's draft and proposing amendments
• A monthly management fee, a time-related charge covering account manager access and the online portal
• Additional party fees, being administration charges where an account has further payees
• An escrow agent fee, a value-based percentage for managing the arrangement; on the largest transactions this tends towards around 1% of the value of the funds we hold

Who carries the cost is a matter for the parties. In most cases the buyer covers the fees, since escrow is often taken out to protect the buyer's position. Where both sides benefit equally, as in construction contracts, M&A transactions and yacht or jet sales, a shared split is common. Agreeing this at the outset avoids an argument about cost later.

Our minimum overall fee is £5,000 plus VAT. The full breakdown, and the current position on each component, is on our pricing page.