They say that you may often expect great financial risks if you are involved in any construction project. There is always a possibility for delayed payment, or disputes and unexpected disruptions that may wreak havoc on construction timelines.
Creating escrow accounts may be able to address this by incorporating a conditional release mechanism.
How do escrow accounts work?
Escrow in construction is a special account where money is held for a building project. It may be required by the lenders or requested by project owners (or the contractor). Here is how it usually works:
- Creation of an escrow account (usually before construction begins and when the loan is secured)
- Account opening by the company managing it
- Depositing the project’s contract amount into the account
- The financial institution and title company manage the account and release funds as needed throughout the project.
- Submission of pay application to the financial institution once the contractor finishes their work
- The bank or fund control company reviews the application
- Approval and release of funds from the escrow account to the contractor.
Escrow accounts in construction projects can provide additional financial security. They serve as a guarantee that the owner has the money to fund the project.
Can a violation occur?
Yes, escrow violations can happen and they can disrupt the smooth progression of construction projects. For example, there can be a delay in paying subcontractors. It is also possible that someone might release excessive funds, or there may be insufficient funds in the escrow account. There may also be instances of withdrawing funds without proper authorization.
When this happens, there can be a disruption to the smooth progression of construction projects, which may affect a network of stakeholders. In addition, figuring out who is liable for such violations needs a complex understanding of the escrow law. Consulting with legal professionals may help make the process easier.
Although creating escrow accounts can help mitigate financial risks, proactive measures must still be in place to help address potential issues before they escalate into escrow violations.