As a dedicated contractor, you reasonably expect to get paid for the work you do. However, for many contractors, this is not always the case. The property owner can run into financial problems during the project, leaving you without the funds you need to pay your employees, for the materials and vendors you used and of course, to support yourself.
Fortunately, there is a solution to this industry-old problem: construction escrow and draw services (sometimes referred to as “construction fund control”).
What Are Escrow And Draw Services?
Escrow is a financial arrangement in which a neutral third party holds funds until specific conditions are met. In construction projects, the escrow company holds construction funds until various milestones in the project are reached. When contractors reach these pre-determined milestones, they receive draws from the escrow funds.
The Escrow Agreement can be structured to allow direct payments to vendors or subcontractors from the escrow account, streamlining the process for contractors and enhancing transparency and clarity. Or the Escrow Agreement can have language stating that the contractor is responsible for paying all vendors and subcontractors. Ultimately though, the escrow arrangement serves to protect all parties in the transaction by providing timely draw payments once project milestones are reached.
How Financial Issues During Construction Projects Affect Contractors
The U.S. construction industry has experienced significant growth driven by economic conditions, government funding, and infrastructure demand. For 2024, industry revenue is forecasted to surpass $2 trillion, with further growth anticipated in the coming years. Still, unexpected financial issues can arise during a construction project.
The project may be more expensive than the property owner initially anticipated, or financial problems unrelated to the project can derail it. When these issues come up in a typical construction project, the project can come to a standstill. The property owner may refuse to pay for work already completed, or the project can be delayed indefinitely, leading to financial uncertainty for contractors’ businesses and their subcontractors.
Getting paid by an insolvent property owner can be difficult, frustrating, and time-consuming when these issues arise. Industry reports reveal that six out of ten contractors have filed a lien during their careers against a property owner who has not paid for their work. Securing a lien on a property requires taking specific steps at certain times and providing notice to the property owner with statutory language. Many contractors do not take these steps until payment issues arise, but this can sometimes be too late to protect their legal interests. The court may refuse to allow a lien. Even if a lien is properly secured, it usually only applies when the property owner sells the property, potentially delaying payment for years to come. Properties with uncompleted construction projects may sell for less than fair market value, making it unlikely that the contractor and all subcontractors will be paid what they are owed.
A majority of contractors who file liens never receive the payments they are owed, leading them to settle for far less than they deserve or write off the transaction as a loss. This can also expose them to liability when subcontractors pursue legal actions against them.
How Do Escrow and Draw Services Protect Contractors?
Escrow and draw services help avoid these issues. Rather than waiting to get paid directly from a property owner, contractors are paid from escrow. Escrow is pre-funded with the entire amount for the project or partially in stages, so contractors can trust that the funds will be there when the work is finished. Escrow ensures the necessary funds are set aside and protected.
Property owners are increasingly inclined to select contractors who use construction escrow services or fund control, as these arrangements offer greater assurance and transparency. Contracts involving an escrow service are often more streamlined and provide peace of mind to property owners, who are frequently wary of potential risks. Stories of fraudulent contractors have made property owners cautious about embarking on renovation projects.
With an escrow and draw service in place, projects gain a higher level of professionalism and accountability. Escrow services ensure that funds are disbursed based on project milestones, reducing the chance of mismanagement or misuse of funds. This arrangement not only benefits the contractor by demonstrating a commitment to transparency but also fosters trust and clarity among all parties involved, making the entire process easier to navigate and more secure for the property owner.
Learn More About Build Safe Escrow
At Build Safe Escrow, we aim to provide financial transparency throughout the course of a construction project. We offer escrow and draw services to protect all parties involved in these projects. Our team has successfully handled hundreds of escrow transactions over the last ten years. Our goal is to help contractors, builders, property owners, architects, lenders and any other party involved in a construction project have a more secure experience during construction and remodel projects.
Our escrow professionals enhance transparency and efficiency in construction projects, transforming a typically impersonal process into one that fosters clarity and streamlined collaboration. Learn more about how our construction escrow and draw services can help with your next remodel or new construction project by contacting us via our Secure Contract Form or by calling us at (855) 611-3532.
