Contractors’ Questions: Is an escrow service right for me and my client?

Contractor’s Question: A large systems integration project has got the customer of my 'Plan B' business nervy, in that they don’t really want to hand me the total £40,000 up front.

Despite this being our third year of business together, I understand their uneasiness. I don’t want to get left unpaid but equally want them to feel happy and confident in going ahead, which they’re not at present. What’s the answer? I‘ve heard it’s escrow but am unsure.

Expert’s Answer: Contractual arrangements are typically built on trust in B2B engagements such as yours. A customer puts their faith in the contractor to deliver a timely and quality product/service while the contractor puts their faith in the customer that they will pay them for such a product/service.

But things don't always go to plan. The provider of the product or service – having secured payment in advance – might produce something sub-standard. With the client money banked, they might then flout project milestones, skimp on quality or overlook specifications. Customers come up short as well, too often in relation to honouring payment terms.

To help avoid this type of breakdown in trust from occurring, there is escrow. It’s basically a third-party service that mediates the supplier-client relationship. It takes the form of a financial arrangement -- the client will pay whatever fee is due for a particular service to the third-party provider, who holds it ‘in escrow’.

The money is kept until the project is finished or until all products/services are signed-for, and only gets released to the provider when both provider and customer agree that the conditions of the transaction have been met.

This is the answer to your predicament. Because what you need is a kind of referee or umpire – and that’s what escrow services effectively are in commercial transactions, including yours, as they can help make sure both parties stick to what they’ve agreed with each other.

Common in the in the property and mortgage markets, escrow in the contracting space comes into its own for longer term projects, where there may be a long list of deliverables to be met, providing reassurance to both parties that each and every one will be met, and paid for.

For the provider, the fact that the customer puts the money up front into escrow mitigates against the risk of doing weeks’ or months’ of work then not being paid. While for the client, they know that final payment is conditional on all the agreed terms being met.

More generally, escrow is also useful where there is any uncertainty between buyer and seller. As a contractor, if you suspect that a customer may be experiencing financial difficulties and you are anxious about getting paid, escrow is a slightly softer stance than asking for payment up front – a stance that you imply your customer isn’t supporting. Much better would be to put the money in escrow and then once you’ve completed all works, and given you want a happy client, point out to them they’ll be able to confirm their willingness to pay, albeit only once they are totally satisfied with what you have provided. A win-win hopefully!

The expert was Adam Home of Safe Collections Ltd, a debt recovery firm serving contractors.