Escrow Accounts in IHS. Starting March 1, 2025, Private House Construction Becomes Safer

As of March 1, 2025, a significant change has occurred in the sphere of Individual Housing Construction (IHS) in Russia, designed to fundamentally increase the level of trust and security for individual clients. The possibility of using the escrow account mechanism for payments under подряд (contract) agreements for the construction of private houses has come into force. This news is of substantial importance for future homeowners, as well as for all market participants: architects, designers, and construction companies.

What is an Escrow Account in IHS in Simple Terms?

An escrow account is a special bank account that acts as an independent intermediary between the construction client (investor, future house owner) and the подрядчик (contractor, construction organization, or individual entrepreneur).

The essence of the mechanism is as follows: the client does not pay money directly to the contractor. Instead, they deposit funds into a special escrow account at an authorized bank. These funds remain "frozen" in this account under the bank's protection. The contractor gains access to the funds only after completing a specific stage of work or the entire house construction according to the terms of the подряд agreement and the escrow agreement, by providing the bank with corresponding supporting documents.

Why is This Important for Private House Owners?

Until now, the IHS market was often associated with high risks for clients. Cases of unscrupulous contractors, delays, using low-quality materials after receiving advance payments – all this was, unfortunately, not uncommon.

The introduction of the possibility of using escrow accounts fundamentally changes the situation:

• Fund Security: The main advantage is the financial protection of the client. Funds deposited into escrow are safely stored in the bank and cannot be spent by the contractor until the work is actually completed.
• Risk Reduction: The escrow mechanism minimizes the risk of losing money due to the contractor failing to fulfill obligations. If the work is not completed, the client can reclaim their funds from the escrow account.
• Incentive for the Contractor: The contractor is motivated to complete the work with quality and on time, as they will only receive payment after doing so.
• Payment Transparency: The bank's participation as a third party makes the payment process more understandable and controllable.

Impact on the Architectural Community and the IHS Market

For architects, designers, and construction companies, this change also has significant consequences:

• Increased Client Trust: Companies that offer their clients the option to work through the escrow scheme gain a significant competitive advantage. This demonstrates transparency and reliability, which is crucial for clients investing in the construction of their home.
• "Whitening" the Market: The escrow account mechanism is likely to contribute to the departure of unscrupulous players operating using "grey" schemes from the market. This is beneficial for honest and professional market participants.
• Need for Adaptation: Professionals need to understand the nuances of working with escrow accounts to properly advise clients and integrate this mechanism into their contractual agreements and work processes.
• Focus on Quality: Under conditions where payment is tied to the actual completion of work, the focus shifts to the quality and timeliness of construction, which aligns with the interests of all добросовестных (conscientious) market participants.

Important Note: The use of escrow accounts for IHS construction **is not mandatory** for everyone. It is a voluntary option available upon concluding a подряд agreement and mutual consent of the parties. However, given the advantages for the client, it can be expected that this mechanism will gain popularity.