Construction & EPC Projects: escrow, retainage, and multi-jurisdiction progress payments

Construction cash doesn’t flow in a straight line. An EPC or GC juggles design packages, long-lead imports, on-site progress claims, variations, and a tiered subcontractor stack—each with its own currency, tax, and evidence. Finance wins when payment triggers are event-driven and auditable, retainage is predictable, and foreign currency exposure is boxed in. Below is a practitioner’s playbook to make that real.

The money map (who pays, for what, and when)

A typical project has the Owner (or SPV), EPC/GC, multiple subs, specialist suppliers, and lenders. Cash is released against certified progress, not against hope. Anchor your design to five artefacts:

The contract form (FIDIC/NEC/JCT/AIA or bespoke)
The schedule of values/BoQ and baseline program
The payment certificate (engineer’s/PM’s certificate or architect’s valuation)
Security package (advance-payment guarantee, performance bond, parent guarantee)
Retainage and release conditions (substantial vs final completion)

Every downstream rule—escrow set-up, rate locks, VAT/GST handling, withholding, LDs—should attach to these artefacts, not live in email threads.

Project escrow and PBAs (project bank accounts)

Escrow and PBAs exist to ensure certified funds reach the right parties and don’t vanish in head-contractor working capital.

Use named, ring-fenced accounts with dual control. Map payee lists to subcontract packages, not just vendor names.
Allocate virtual IBANs per work package or subcontractor cohort; when the Owner funds a certificate, remittance auto-segments and reconciliation becomes deterministic.
Tie disbursements to the certified amount net of retainage and tax. Enforce rule-based waterfalls (e.g., direct pay to subs for nominated packages).
Publish a funding calendar keyed to valuation dates and cut-offs. This reduces “awaiting confirmation” tickets and claims for finance-caused delays.

Progress payments that survive audit

Progress claims are only as clean as their evidence.

Build the schedule of values (SoV) granularly: each line has a measurement method, unit, rate, and currency.
A claim bundles: latest drawings revision, site diary extracts, quantities measured, photos, drone scans or laser models if used, test packs where relevant, and the subcontractor’s tax data.
The engineer/PM validates quantities; the payment certificate is the cash trigger. Store certificate ID, date, and approval trail with the monetary event.
For design-build, include design deliverable gates (IFC/IFR) with acceptance memos as separate SoV lines so design cash doesn’t clog behind civil progress.

Change management: each VO/CO must be a first-class object with scope, basis of rates, time impact, currency, and a signed instruction. Unpriced change → provisional sum, priced and certified later. Never roll variations into base lines invisibly; finance loses the thread.

Retainage/retention without surprises

Retainage protects defects risk but kills subcontractor liquidity if mismanaged.

Encode retention % by package (often 5–10%), with automatic step-down at substantial completion and full release on certificate of making good defects.
Separate retention in the ledger; don’t bury it inside “net payment.”
For vulnerable tiers, consider retention bonds in lieu of cash retention; cheaper than the claims noise a starved subcontractor creates.
Publish a retention aging dashboard by package; if retention sits beyond contractual windows, expect claims or rate creep later.

Pay-when-paid vs pay-if-paid (and prompt-payment regimes)

Your jurisdiction matters. In some places, pay-if-paid clauses are unenforceable; prompt-payment acts impose strict certification and payment clocks with adjudication on tap.

Wire the clock into your system: date claim received → review window → certification → mandatory payment date.
If legislation forces direct payment to subs from a trust/PBA, model that waterfall from day one to avoid double funding.

Imported equipment, advance payments, and trade finance

Long-lead items (turbines, switchgear, façade systems) need deposits and letters of credit.

Use advance-payment guarantees for deposits; release proportionally on milestone evidence (factory inspection, FAT, shipping) rather than time alone.
For high-value imports, issue LCs with precise documents (packing lists, inspection certificates, Incoterms, latest shipment dates). Incomplete LC terms cause weeks of DSO pain on site.
Split price into currency buckets that mirror supplier cost base; you’ll earn better unit prices than pushing home currency and shifting the FX pain to treasury.

Tax, withholding, and invoicing

Construction touches multiple tax mechanics:

VAT/GST: some regimes apply reverse charge to construction services; others require domestic VAT with specific evidence of place of supply. Encode tax codes per SoV line; don’t let A/P “guess.”
WHT: many countries withhold tax on construction payments to non-residents or specific services; net pay in the waterfall and surface the certificate to the payee.
Retention and tax: know whether retention is taxed at invoice or on release; model both in your ledgers to avoid month-end gymnastics.
E-invoicing: where mandated, integrate early; blocked e-invoices create spurious “late payment” disputes and LD arguments.

FX policy that builders can live with

Project cash spans currencies: local labor and concrete, USD-priced imports, EUR-denominated design, and a home-currency contract.

Natural hedge: collect and spend in the same currency where possible (local payroll, rental, quarry, transport).
Rate locks: lock the exchange rate at payment-certificate date for the portion payable in foreign currency and store rate + source + timestamp on the ledger entry.
Rolling forwards: cover forecast net exposure (imports, foreign subs) on a ladder 3–12 months out; avoid 100% single-day rolls.
Provisional sums: if index-linked (steel, diesel), freeze a pricing window (e.g., prior-month average) and store the index snapshot with the valuation so disputes don’t devolve into “which day did you pick.”

Bonds, guarantees, and LDs (cash consequences)

Performance bond and parent guarantee: register amounts, expiry, and claim conditions; calendar follow-ups for renewals so coverage doesn’t lapse mid-project.
Liquidated damages: LDs are not a finance panic button—tie calculation to critical-path delay and specify offsets (EOT awards, acceleration). Record LD accruals as a separate line tied to program evidence, not as a round number.
Insurance proceeds (CAR/EAR): treat claims as ledgered receivables; don’t net informally against subcontractor payments without contractual grounding.

Subcontractor payouts and supply-chain health

KYB subs; verify beneficiary bank accounts by name-match to kill payout failures.
Pay on the certified amount net of retention/WHT; publish a predictable run calendar (weekly or fortnightly).
Offer early-pay for clean, dispute-free packages; it often costs less than rate inflation caused by cash-starved subs.
For cross-border subs, use local rails (SEPA Instant, Faster Payments, Pix, local ACH equivalents) where feasible; reserve SWIFT for high values or exotic corridors.

Data model and reconciliation discipline

Store money as integer minor units + ISO currency.
Every monetary event carries rate, source, timestamp, and an idempotency key.
Model SoV lines, VO/COs, certificates, retainage, bonds, LDs, and tax as native objects with states, not comments.
Ingest ISO 20022 bank statements; use virtual accounts per project/package to hit 98%+ auto-match by count and 95%+ by value.
Variance engine classifies differences: FX drift, rounding, WHT, certificate delta, VO pending, retention timing.

KPIs that predict margin and cash reliability

DSO on certificates; DPO to subs; % paid within statutory prompt-payment windows
Variation value as % of contract and average time to agree VOs
Retention aging and % released within contract windows
FX cost (bps of certified value) and hedge coverage vs policy
LD accrual vs EOT awards; dispute cycle time
Auto-reconciliation rate and manual minutes per 1,000 payment lines

A pragmatic 90-day rollout

Days 1–30: stand up project escrow/PBAs with virtual IBANs per package; freeze SoV structure and bind tax codes; wire certificate metadata (ID/date/approver) into the ledger; set retention rules.
Days 31–60: enable local payout rails for domestic subs; integrate ISO 20022 bank statements; launch VO object with pricing windows and evidence; start rolling forwards on net FX exposures for imports.
Days 61–90: introduce early-pay for clean packages; automate WHT certificates; publish dashboards (DSO/DPO, retention aging, VO backlog, FX bps, auto-match rate); dry-run an LD/EOT scenario end-to-end.

When a payment intermediary helps

If you need multi-currency accounts per project, virtual IBAN segmentation by package/subcontractor, and local rails for predictable payouts across jurisdictions—without stitching a dozen bank integrations—short-list a specialist such as Collect&Pay. Score vendors on corridor breadth, uptime, payout-failure handling, and line-level fee/FX transparency; headline fees matter less than reconciliation clarity.