Contractors in New York state are required by law to place initial deposits in an escrow account. Remodeler Dett Otterbeck of Otterbeck Builders in Castleton, N.Y., says the practice works well for his company. When he receives the first payment on a project, he puts that money in an escrow account. “We don't draw on it until we offset it with the first receipts,” he says.
For example, for an $80,000 addition, he divides the cost into five payments. He places the first payment of $16,000 in escrow and does not use it until he receives invoices for the materials and work for the foundation. The money goes from the client to Otterbeck to the bank, then from the bank back to Otterbeck as working capital.
This practice seems to ease the concerns of nervous clients. “They can check with the bank for the balance on the account,” he says. Otterbeck's office staff can also show the clients the paid bills so they know how much of that money the company has used for subs and materials.
For this to work, the remodeler says, it is important to maintain good cash flow. Consultant Steve Maltzman suggests contractors study the requirements for their state so they understand which payments — deposits only or all payments — need to be put into escrow. In any case, remodelers should structure the draw schedule to ensure good cash flow.