The exact deposit amount will depend on the agreement of the parties to the construction contract, and will usually be negotiated as part of a wider discussion about performance bonds, retentions, parent company guarantees and the like.
As a rule of thumb, however, we recommend 3-4 times the maximum forecast monthly valuation during the project. This ensures that there is sufficient deposited to protect the Contractor without the Employer having to tie up too much in the escrow account.
The purpose of a Construction Escrow account, generally, its to give the Contractor comfort that the line of credit it is extending to an Employer or Developer is not going to turn into an irrecoverable liabilty.
In practice, the value of the line of credit is calculated as:
That adds up to 2.5 months.
In practice, however, it is rare for a Contractor to issue notices and suspend automatically - often, there will be a reason for the non-payment (other than the impecuniosity of the Employer), so the Contractor will continue to progress on site at risk. In addition to this, if the Contractor has entered into a Collateral Warranty with a Funder, that warranty will usually require the Contractor to give a further month's notice before terminating the contract, to allow the Funder time to evaluate whether it wishes to step in.
For this reason, we recommend 3.5 months' of maximum forecast valuations as an absolute minimum.
Frequently, we have Employers deposit as much as six months as part of the negotiations, from which we are instructed to pay down the last 5 months of the project and to hold any surplus on account of the retention to be paid by the Employer.
Private escrow accounts provide security, trust and transparency to ongoing or ad-hoc payment requirements.
Third-Party Managed Accounts (TPMA's) are a convenient way to manage complex, high-value or even routine payment operations.
