Construction

Construction operations, by their nature, tend to be both high in value and also take place over prolonged periods of time.  For larger projects, they can involve many tiers of contractors and sub-contractors, with each tier lower down the supply chain granting (often significant) payment terms to those higher up.

With the prevalence of insolvency in the construction sector and with the often very fine margins involved in delivering construction works, there can often be a shortage of trust or a requirement for increased due diligence and assurance when it comes to the transaction and ensuring that everyone is going to get paid.

Issues of Trust

These trust issues can arise at every stage of a project's life cycle—from the very earliest consultant fees and enabling costs to the actual building, fit-out and commissioning operations, and on throughout the rectification and warranty periods after completion.

Building Owner ↔ Adjoining Owner: Party Wall

In circumstances where the project is taking place and involves work to a party wall or along a boundary, the adjoining owner (the one not carrying out the works) will be concerned to ensure that if the works stop for whatever reason, or the party wall is damaged, or their property starts to become unstable, they can call upon funds to protect themselves and shore up the building.

Building Owner ↔ Railway/Statutory Undertaker

Where the project abuts a railway, base station or similar infrastructure element, the possible costs of disruption or repair if the construction operations lead to damage or shutdown can be considerable.

Leaseholder ↔ Freeholder: Licence to Alter

Where works are being carried out in a leased premises, subject to a licence to alter, the freeholder might be concerned that the works could cause damage to the public areas or otherwise interfere with the building, its tenants or its neighbours in such a way that might cause the freeholder costs, the freeholder may wish to ensure that it can secure funds to be able to discharge those responsibilities as a condition of granting the licence to alter.

Employer ↔ Contractor: Escrow & Retentions

An Employer's primary concern might be to ensure that the money they give to the Contractor is used only for their own works and not, for example, used by the Contractor to work on other clients' projects.

Where the Contractor is granting the Employer a line of credit to get the works underway, often for many months at a time (with a month of works generally being valued at the end of the month and then taking another 4-6 weeks to be paid-for), however, they may be concerned to ensure that they will get paid for the works carried out.

Equally, if the Contractor is consenting to the Employer holding onto retentions either during or after the works, they will wish to ensure that in the event of the Employer's insolvency (or if the Employer or their assets are based in jurisdictions where it is difficult to get arbitral awards or court orders enforced and the Employer chooses not to repay the retention) they are still able to be paid the retention for works that they have carried out and had certified.

Conversely, an Employer who agrees to pay for works that are not on site (say, where joinery is being build by a sub-contractor at a different location), or to provide advance payments in respect of similar works may wish to ensure that they will get their money back if for whatever reason those off-site items never materialise.

Client ↔ Interior Designer: FF&E Procurement

Where the client is commissioning an interior designer to source, specify and procure furniture, fixtures and equipment ('FF&E'), they might be concerned that the interior designer is mixing their cash with the designer's own, or that the designer is not regulated to carry out payment transactions on their behalf.

Contractor ↔ Sub-Contractor: Escrow & Retentions

Where the Sub-Contractor is granting the Contractor a line of credit to get the works underway, often for many months at a time (with a month of works generally being valued at the end of the month and then taking another 4-6 weeks to be paid-for), they may be concerned to ensure that they will get paid for the works carried out.

Equally, if the Sub-Contractor is consenting to the Contractor holding onto retentions either during or after the works, they will wish to ensure that in the event of the Contractor's insolvency they are still able to be paid the retention for works that they have carried out and had certified.

Conversely, a Contractor who agrees to pay for works that are not on site (say, where joinery is being build by a sub-contractor at a different location), or to provide advance payments in respect of similar works may wish to ensure that they will get their money back if for whatever reason those off-site items never materialise.

The Role of the Escrow Agent

Escrow agents help to bridge these trust gaps by offering a reliable, independent, objective third party to handle the exchange of money and documents in accordance with the parties' wishes and the terms of the escrow agreement, without having to rely solely on trust to ensure the security and success of the transaction.

We offer escrow solutions to address all of the above trust issues and would be delighted to provide you with a quote for your specific requirements. You can also check out our detailed service pages listed above.

Benefits of Escrow over Insurance/Bonds

Some of the trust issues outlined above can be addressed through the purchase of a contract of insurance or a bond. These typically involve the payment of a fee (a "premium"), and in the event of default, the beneficiary under the policy must make a claim from the insurer or bondsman for their loss.

This approach comes with four primary drawbacks:

1. The premium is spent—regardless of whether or not a claim is made, the insurer or bondsman charges the premium as consideration for assuming the risk in the transaction;
2. There is a credit risk on the insurer/bondsman/guarantor—even the largest underwriters carry a credit risk; a policy of insurance is only as useful as the financial capacity of the underwriter to satisfy all of the claims they are underwriting at any one time. In circumstances where an insurer faces many simultaneous (or a few ultra-high-value) claims, they may not be able to fulfil their obligations;
3. It takes time to process a claim—even a successful claim can entail months of paperwork and administration before it is paid out;
4. Every policy or bond is written with very specific wording—it might be that, for unexpected reasons, an anticipated claim is not actually covered by a policy or bond (either because it is specifically excluded or because the wording allows it to be excluded for some other reason).

Cash-backed escrow, by contrast, addresses all of these issues. It is generally cheaper to administer than the cost of a premium; in most cases, there is no credit risk because the funds are segregated and safeguarded by the escrow agent; payouts generally happen within a few days; and there will not be any circumstances in which a payout is excluded—the terms of the escrow agreement will make it very clear what circumstances need to exist to trigger a payment, rather than necessarily the reasons behind those circumstances.

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