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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.