What does an escrow agent do? And what is a Construction Escrow Agreement?

Most construction project finances are handled by a third party, typically a title company or a bank, which acts as fiduciary, receiving and approving all contractor payout requests. This third party reviews all the construction management paperwork for accuracy before releasing construction funds kept in an escrow account. Whether you are the property owner or the contractor, you must provide sworn statements to the escrow agent so that every payout is fully detailed.

To establish this fiduciary relationship with the construction escrow agent, the property owner and the escrow agent must sign an Escrow Agreement. This document clearly identifies the procedures the escrow agent is to follow and contains authorization of the agent to make payments to the contractor provided that the construction management paperwork is all in order.

Today, I’d like to focus on what is typically included in the Construction Escrow Agreement and its four articles:

Article 1 Identifies and defines the parties and the project

Article 2 Identifies who the escrow agent is authorized to pay (prime contractor or sub-contractor)

Article 3 Identifies the deposits that are required to insure and disburse construction funds
♦ Contractor’s Sworn Statement
♦ Waivers of Lien (for current draw – include blanket waiver from Prime Contractor)

Article 4 General Conditions
♦ Authorizes escrow agent to stop disbursement:
◊ If mechanics lien is recorded against the project
◊ If loan becomes “out of balance” (percentage of project cost paid exceeds percentage of project Work completed)
♦ Limited indemnification from the owner to the escrow agent

Essentially, this document spells out the agent’s responsibility in making sure the project is accurately funded. As part of the agreement, this agent must collect a Lien Waiver from each contractor and materialman who is seeking to receive a payout. This waiver is essentially a written statement by the contractor that the work for which payment is required, has been completed and that there are no other sums due at the time of this payout. So, the escrow agent has to ensure waivers are included with every payout. Then funds can be distributed and paid according to the sworn statements of both the owner and the contractor during the construction process.

No deposit of funds or payout documentation can be submitted to the escrow agent until an escrow agreement has been signed by the owner and the escrow agent. For the protection of the property owner, the contractor and the project, a clear definition of the escrow agent’s job has to be outlined.

One Final Note

An escrow agreement is a critical safeguard and should always be examined carefully. Before you sign, it’s always in your best interest to have an attorney look over the documents and advise you on the most appropriate route to take.

Coming Soon

Next time, I’ll examine how to complete the Contractor’s Sworn Statement.