Escrow Account

An escrow account is a special bank account where a contractor must deposit the homeowner’s progress payments until the project is substantially complete. Under New York State Lien Law §71-a, NYC home improvement contractors cannot spend these funds freely. The money must sit in escrow and may only be used to pay for labor, materials, and other direct project costs.

Instead of using an escrow account, a contractor can choose to post a bond or a contract of indemnity that guarantees the homeowner’s payments will either be returned or properly applied to the job.

For homeowners, the escrow rule is a safeguard: it prevents contractors from collecting large deposits and then disappearing or using the money for unrelated expenses. For contractors, it’s a strict compliance requirement—failure to escrow progress payments is a violation and can lead to fines or license problems.