As someone who works in construction, you may have recently had a client ask you for an escrow holdback agreement. This can occur whether you are building new construction or providing renovation and repair services.
If you are not yet familiar with escrow, it is when a neutral third party holds money pending a specified outcome. A common example of using escrow is in the purchase or sale of a house.
The “what” and “when” of escrow holdback agreements
An escrow holdback is an agreement to withhold a portion of funds until the contractor completes the work. Parties may enter into this type of arrangement under a variety of circumstances. Applicable situations may include when someone agrees to buy a home that is still under construction, in preparation for renovating a home or for contracting with repair professionals.
For example, if a client wishes to build a new home, the significance of this investment may make the client particularly cautious about the companies they hire. If you agree to escrow holdback, it may incentivize the client to pick your company over the competition, because you effectively agree that you only get paid in full if you follow through.
The “why” and “how” of these agreements
Prospective clients want confidence that the company they hire will properly manage and apply the money they are investing. To achieve that, clients may employ a variety of methods for safeguarding their financial investment, such as verifying contractors’ licenses or reviewing complaints and ratings on consumer reporting sites. An escrow holdback agreement may be among the safeguards a client requests, as it may provide the client with more confidence that they are hiring a legitimate and honest business.
All parties involved — including the lenders, if any — must mutually consent to an escrow holdback agreement. Therefore, you have the right to participate in negotiating terms that are equitable.