Construction escrow is a financial arrangement designed to protect all parties involved in a construction project. At its core, it involves holding funds in a neutral, third-party bank account ("in escrow"), as security for the Employer's payment obligations. This provides assurance that the Contractor will be paid on time and in full, while the Employer retains oversight over payment amounts in the usual way.
In the UK, construction escrow is increasingly seen as a sophisticated alternative to traditional security measures like performance bonds and guarantees. In addition to mitigating the risks of non-payment, they are fantastic at avoiding disputes over the second release of retention as well - facilitating smoother project execution and fostering trust between stakeholders.
It is rare for the Employer to propose an escrow - after all, they will have to tie up funds and not have access to them for the duration of the project. That said, as margins remain so tight and the spectre of non-payment looms large, Contractors are becoming increasingly effective at asking for them. The reasons are many:
Perhaps the most compelling reason for a Contractor to insist on construction escrow is the security of knowing that payment has been ring-fenced. Unlike the bare promises to pay contained within the project, escrow funds are already in place and ready to be paid over. This removes the uncertainty about whether or not payment will be made on the final date for payment.
This is particularly critical for Contractors working with new or untested Employers, or who are being asked to contract with overseas entities or trusts - which are particularly prevalent in the super-prime residential space as wealthy overseas buyers avail themselves of tax-efficient and privacy-shielding corporate holding structures. Escrow introduces a level of financial transparency and mutual commitment from the outset, which significantly reduces risk to the Contractor.
Performance bonds, while long-established, are often expensive and administratively cumbersome. They also depend on strict criteria being met before any claim can be made, and insurers frequently resist payouts. They are expensive, difficult to get, and often bond issuers have reservations about the number that can be 'live' at any one time.
By contrast, construction escrow offers a simple, agile framework, with no limits and much more certainty. Payouts from the escrow are linked to payment certificates, avoiding the complexities of bond enforcement or the opportunity for the escrow agent to 'wiggle out of paying'. Instead, if a Contractor has not been paid by the final date for payment, they can simply present their payment certificate and VAT invoice to the escrow agent to receive funds from the escrow.
Establishing an escrow is typically faster, easier to manage and less costly than securing a bond as well.
Retention, particularly the second half released after the end of the rectification period, is often a source of tension. Employers may delay or dispute final payments, leaving contractors exposed, while in some cultures the second half of the retention is seen as the 'starting point' for the amount that the Employer will be seeking as a discount from the final account.
With an escrow arrangement, retention sums can be securely held and released automatically against the certificate of making good or final certificate. This ensures that once the relevant conditions are met, funds are promptly disbursed to the Contractor without friction, reducing the potential for end-of-project disputes and ensuring that the retention is neither delayed nor held to ransom.
While Contractors will often start with asking for the whole contract sum to be placed in escrow, Employers will generally resist tying up that much money.
Instead, the agreed 'compromise' position is usually tied to the actual credit terms being extended and the credit risk the Contractor is taking:
In total, therefore, the Contractor is exposed to 3-3.5 months' worth of credit risk, plus the value of the retention so we generally recommend that the escrow sum is calculated as 3 x the highest-forecast monthly payment in the cash flow forecast, so that the Contractor is never left exposed.
If the Contractor manages to secure 3-3.5 months' of forecast valuations, we then generally recommend that the last two months of valuations before practical completion are paid to the Contractor directly from the escrow, with the first release of retention also being made from the escrow, and then the second half of retention retained in escrow during the rectification period. Any residue left in the account is returned to the Employer at practical completion.
The earlier escrow is introduced in discussions, the more likely it is to be accepted by the Employer. They get used to hearing about it and have had longer to consider it and plan for the required cash deposit.
Contractors should confidently propose it as a standard part of doing business, as early as the first meeting with the client when they explain how they work, discuss credit arrangements and any guarantees. This is especially so on higher-value projects or those with overseas Employers. By framing it as a professional safeguard for both parties, this avoids appearing overly defensive or mistrustful or souring discussions during the tender process.
Escrow can be positioned as a balanced trade-off in credit terms. For instance, a Contractor might offer more favourable credit terms in return for the assurance of escrowed funds. This approach allows the client to see the proposal as a reciprocal measure rather than a one-sided demand.
The cost of the escrow naturally sits alongside the rows in the tender for insurances, bonds, guarantees and warranties in the preliminaries part of a tender return - the Employer probably won't include it in any draft bill of quantities, but the Contractor should definitely insert the line.
While construction escrow offers distinct advantages, it is not the only method of securing payments.
Performance bonds remain widespread, particularly in public procurement or where institutional lenders require them. However, as noted above, they can be slow and inflexible.
Parent company or other payment guarantees from the Employer are another option, but their enforceability depends on the financial strength of the guarantor and can complicate relationships. Often, clients whose assets are held in trust or through corporate wealth structures will be slow to agree to giving personal guarantees.
Project Bank Accounts ("PBA's") have gained a lot of traction recently, particularly on public sector projects. They aim to ensure prompt payment to all supply chain tiers, but lack the tailored conditions and control escrow offers. They also deprive the Contractor of the sub-contractor cashflow which many Contractors find unpalatable.
Each alternative has merits, but none offers the same blend of flexibility, transparency, and enforceability as construction escrow - particularly when managed through modern escrow platforms like dospay.
For Contractors and Employers seeking a modern, trustworthy solution, dospay offers a bespoke escrow service tailored to the construction industry. Funds are held securely and released only when agreed criteria are met, and all of this is managed through a user-friendly digital platform.
This not only increases efficiency and transparency but also ensures that both parties are protected throughout the project’s lifecycle. By engaging with a specialist provider, Contractors can differentiate themselves and set a professional tone for the project.
Pricing is done on a project-by-project basis, and we are happy to provide early quotes for Contractors when they are at the tender stage. This way, everyone knows from the beginning how much it will cost.
Construction escrow is a powerful tool for mitigating non-payment risk in projects, reducing disputes, and fostering trust between Contractors and Employers. It offers simplicity, flexibility, and legal robustness - all attributes that are especially valuable in today’s high-stakes construction environment.
By introducing escrow early in project discussions and framing it as a mutual benefit, Contractors can protect their cash flow while enhancing their commercial credibility. As traditional security methods face growing scrutiny, escrow, particularly when implemented through platforms like dospay, is set to become the new standard for responsible contracting.
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.
All of our GBP escrow and third-party managed accounts are segregated and safeguarded at the Bank of England.
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