escrow account usually required when there is equity financing

  • Escrow account usually found on financed projects to provide additional oversight as a guarantee that the fund will be available for the project.

    • It provide assurance to financier (that the project will be completed) as withdrawal is governed by financier and only for the financed project. As opposed to going into company’s book where it can be used for other expenses
    • It provide assurance to the financed (that the money is there for the project) and ensure no delays in construction due to funding issues
      • Depending on the nature of the project, cash is normally deposited into them before work starts, so the contractor knows the funds are available

  • Normally escrow account holds funds for the project until the work is complete, and then releases them to the contractor/financed

    • Usually, accounts are funded for the amount of the completed contract for the project.
    • At the end of the project there will be escrow account liquidation where the account’s balance will be fully released to the financed.
      • The amount retained varies depending of the nature of the project. For housing construction, it’s normally 1~2%. For higher risks constructions, it can be 10~12%
      • The financed will have to serve the financing terms (principal and interests) as stipulated in the agreement

  • Escrow account also used in sales transaction as a form of “insurance” in the case the transaction turn out to be deceptive or other risks

    • In this case, the escrow account is a temporary account with a neutral third-party that’s responsible to releases funds only after the fulfillment of the contractual commitment.
    • This mitigates the risk of deception. Moreover, it is a common practice when it comes to high-value goods and services, especially for long-term contracts.

References

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  • topic:: 00 Engineering Economics00 Engineering Economics
    #MOC / for economics notes with focus on petroleum fiscal and engineering
  • updated:: 2022-12-05 Private or Broken Links
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