All parties involved in a construction or renovation project (such as contractors, builders, property owners, architects, designers, and lenders) can benefit from escrow and draw services that protect and control project funds until agreed-upon project milestones are reached.
The foundation of these services is a Construction Escrow Agreement, which is the legal document that specifies the terms and conditions of how disbursements will be made for a new construction or renovation project.
What Is a Construction Escrow Agreement?
An Escrow Agreement establishes a neutral third party who manages funds for other parties involved in a financial transaction. In real estate and construction transactions, an Escrow Agent manages the funds until the parties fulfill the terms of an underlying agreement. For example, in a transaction to purchase real estate, buyers may deposit 1-2% of earnest money into an escrow account to show they are serious about purchasing the property. The funds are held in escrow until the deal closes.
In construction and renovation projects, funds for all or part of a project can be deposited into an escrow account, to be held and disbursed per the terms of an Escrow Agreement. The Escrow Agreement sets forth the key terms of how funds will be held in trust and when they will be released. The Escrow Agent then releases the funds in draws when the parties reach project milestones. All parties involved in the escrow arrangement must sign the Escrow Agreement.
Key components of a Construction Escrow Agreement?
For construction escrow and draw services, Escrow Agreements typically include details about the following:
Identification of the Parties
The Escrow Agreement clearly identifies each party and their role (contractor, property owner, lender, vendors, etc.). It also identifies their legal status, such as individual, corporation, limited liability company, or trust.
Purpose of Escrow
The construction Escrow Agreement is customized to each project, outlining the underlying transaction necessitating escrow and why it is being used. For example, it could state that the purpose is to provide draws to a contractor or subcontractors as they complete milestones that are specified in the escrow agreement or a separate construction agreement.
Deposit and Funds
The Escrow Agreement also provides details about the amount of money that should be deposited in the escrow account and the method of payment. It may also indicate the date the funds should be deposited into the escrow trust account and details about the financial account that will hold the funds during the transaction.
Conditions for Release
This is one of the most important components of the construction Escrow Agreement. It establishes the contractual conditions of the parties and the milestones they must meet before the Escrow Agent is entitled to release funds. The parties agree on these conditions in advance. For example, the Agreement may state that a draw will be made after the electrical and plumbing work is complete, and a city inspector approves the work. This portion of the Agreement should include clear stipulations about the conditions the contractor must satisfy to release funds.
Timeline
The Escrow Agreement will include a timeline for the account to be in place, based on the terms of the construction project and completion of the work. Escrow releases are often dependent on when the parties fulfill their contractual conditions.
Escrow Agent Duties
The Agreement also specifies the duties of the Escrow Agent, including how they handle the funds, communicate with the parties, and update parties about the availability or status of escrow funds.
Dispute Resolution
The Escrow Agreement should include a dispute resolution clause. Litigation can be disruptive, costly, and time-consuming, so construction Escrow Agreements include a method to resolve any disputes that arise during the process, such as mediation or arbitration. If a dispute arises during the project, project funds are securely held until the issue has been resolved.
Fees
The Escrow Agreement also includes information about the fees associated with the escrow service, which covers the management of the escrow account and the handling of transactions. Build Safe Escrow for example, provides a transparent fee structure, and the parties can split fees. All costs associated with these services are fully disclosed before setting up the account.
Get Started with Your Construction Escrow Agreement Today!
Build Safe Escrow provides tailored construction escrow agreements and comprehensive support for construction fund control and draw requirements. Build Safe Escrow can handle your entire construction escrow transaction and create a customized construction Escrow Agreement to meet your unique needs. 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.
