What is a Construction Linked Payment Plan in Real Estate

By aquireacres Jul 15, 2024 241 views

Construction Linked Payments (CLPs) are a common financial model used in real estate and infrastructure projects. This payment scheme ties the release of funds to specific construction milestones, ensuring that payments are made in line with the project's progress. CLPs are designed to protect both developers and buyers by aligning financial transactions with the actual state of construction, thereby minimizing financial risk.

In this article, we will delve into the details of construction linked payments, exploring their benefits, challenges, and best practices. We will also answer some frequently asked questions to provide a comprehensive understanding of this payment model.

Understanding CLPs

Construction linked payments are designed to ensure that payments are made only when specific construction milestones are reached. These milestones are predefined and agreed upon by all parties involved, including the developer, contractor, and buyer. Common milestones include the completion of foundational work, structural framework, roofing, and final finishing. Each milestone triggers a payment, usually a percentage of the total project cost.

This payment model offers several advantages. Firstly, it ensures developers have a steady cash flow to fund ongoing construction activities. Secondly, it provides buyers with security, as they only make payments when they see tangible progress. Lastly, financial institutions and lenders prefer CLPs because they reduce the risk of default by ensuring that funds are used exclusively for construction purposes.

construction linked payment

Benefits of CLPs

For Buyers

Security and Transparency: Buyers make payments only when specific construction milestones are achieved, ensuring their money is used appropriately.
Reduced Financial Burden: Payments are spread out over the construction period, making it easier for buyers to manage their finances.
Protection Against Delays: If the project is delayed, buyers don't have to make payments until the next milestone is reached.

For Developers

Steady Cash Flow: Developers receive payments at regular intervals, helping them manage the project's financial needs efficiently.
Reduced Financial Risk: Linking payments to construction progress reduces the likelihood of financial shortfalls.
Increased Buyer Confidence: Buyers are more likely to invest in projects with CLPs due to the transparent payment structure.

For Financial Institutions

Lower Risk of Default: Tying payments to construction progress reduces the risk of project abandonment or delays, lowering the risk for lenders.
Improved Loan Management: Financial institutions can monitor project progress and release funds accordingly, ensuring loans are used for their intended purpose.

Challenges of CLPs

Accurate and Timely Reporting of Construction Progress: Developers must ensure that milestones are clearly defined and documented to avoid disputes with buyers and lenders.

Potential for Delays: Construction projects can face unforeseen challenges like weather conditions, labor shortages, and supply chain disruptions. These delays can impact the payment schedule, causing financial strain for both developers and buyers.

Cumbersome Inspection and Verification Process: Financial institutions and lenders may require third-party inspections to verify milestone completion, adding to the administrative burden and potentially delaying payment disbursement.

Best Implementation Practices

To maximize the benefits and minimize the challenges of construction linked payments, it's essential to follow best practices. Here are some key recommendations:

Clear Milestone Definition: Define construction milestones clearly and ensure all parties agree on them. This will help avoid disputes and ensure a smooth payment process.

Regular Progress Reporting: Maintain accurate and timely records of construction progress. Regularly share progress reports with buyers and lenders to keep them informed.

Third-Party Inspections: Consider using third-party inspectors to verify the completion of milestones. This adds transparency and builds trust among all parties.

Contingency Planning: Develop contingency plans to address potential delays and unforeseen circumstances. This will help mitigate the impact of delays on the payment schedule.

Communication and Collaboration: Encourage open communication and collaboration among all stakeholders. Regular meetings and updates can help address issues promptly and keep the project on track.

Legal and Contractual Compliance: Ensure that all contractual agreements are legally sound and comply with relevant regulations. This will help protect the interests of all parties involved.

CLPs in Different Regions

The adoption and implementation of construction linked payments (CLPs) vary significantly across regions and countries. Regulatory frameworks, market conditions, and industry practices play a crucial role in shaping the use of CLPs.

In Asia: In Asia, the use of CLPs varies by country. In rapidly developing markets like India and China, CLPs are gaining popularity due to the financial security and transparency they offer. However, challenges such as regulatory compliance and market volatility can affect their effectiveness.

In the United States: In the United States, CLPs are commonly used in both residential and commercial real estate projects. The payment structure is typically outlined in the construction contract, with milestones defined based on project-specific requirements. Financial institutions often oversee the disbursement of funds, ensuring payments are linked to construction progress.

In Europe: In Europe, CLPs are widely used, particularly in large-scale infrastructure projects. The European construction industry emphasizes transparency and accountability, making CLPs a preferred payment model. Regulatory bodies often provide guidelines and standards for implementing CLPs, ensuring consistency and reliability.

Procedure for CLPs in India

In India, construction linked payments (CLPs) are a popular payment model for real estate and infrastructure projects. The implementation of CLPs can be done both online and offline, depending on the preferences and capabilities of the stakeholders involved.

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Offline Procedure

Agreement and Documentation

Developers and buyers enter into a formal agreement outlining the terms and conditions of the CLP scheme.
The agreement includes details such as construction milestones, payment schedules, and the responsibilities of each party.

Milestone Definition

Construction milestones are clearly defined and agreed upon by both parties. Common milestones include foundation completion, structural framework, roofing, and finishing.

Progress Reporting

Developers maintain detailed records of construction progress. Regular site visits and inspections are conducted to verify the completion of milestones.
Progress reports are prepared and shared with buyers and financial institutions.

Payment Disbursement

Upon verification of milestone completion, buyers make payments according to the agreed schedule.
Payments are typically made through bank transfers or cheques.

Third-Party Inspections

To ensure transparency, third-party inspectors may be engaged to verify the completion of milestones before payments are disbursed.

Record Keeping

All documentation, including progress reports, inspection certificates, and payment receipts, are maintained for future reference.

Online Procedure

Digital Agreement

Developers and buyers can use digital platforms to enter into a CLP agreement. E-signatures are used to authenticate the agreement.

Online Milestone Definition

Construction milestones are defined and recorded on a digital platform accessible to all parties.

Real-Time Progress Tracking

Developers use digital tools, such as Building Information Modeling (BIM), to track and report construction progress in real-time.
Progress updates are automatically shared with buyers and financial institutions.

Automated Payment Disbursement

Payments are linked to the achievement of milestones and can be automated using smart contracts on a blockchain platform.
Once a milestone is verified, the smart contract triggers the payment disbursement directly from the buyer’s account to the developer’s account.

Third-Party Digital Inspections

Third-party inspectors can use digital platforms to conduct remote inspections and verify milestone completion.
Inspection reports are uploaded and shared with all stakeholders.

Digital Record Keeping

All records, including agreements, progress reports, inspection certificates, and payment receipts, are stored on secure digital platforms for easy access and reference.

Draft construction linked payment plan

Taking the value of the property at 30 lakh, the payment plan for the same can be calculated as mentioned below.

Payment particulars (Total 100%)	Amount paid	Total payment
10% booking amount	Rs 3 lakh	Rs 3 lakh
20% within the next 45 days of booking	Rs 6 lakh	Rs 9 lakh
10% on completion of plinth/foundation	Rs 3 lakh	Rs 12 lakh
10% on the casting of the first-floor slab	Rs 3 lakh	Rs 15 lakh
10% on the casting of the second-floor slab	Rs 3 lakh	Rs 18 lakh
10% on the casting of the third-floor slab	Rs 3 lakh	Rs 21 lakh
10% on the casting of the fourth-floor slab	Rs 3 lakh	Rs 24 lakh
15% on the casting of the final-floor slab	Rs 4.5 lakh	Rs 28.5 lakh
5% on possession	Rs 1.5 lakh	Rs 30 lakh

Technological Advancements and CLPs

Technological advancements are significantly enhancing the efficiency and effectiveness of construction linked payments (CLPs). Digital tools and platforms streamline the payment process, improve transparency, and reduce administrative burdens.

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Blockchain Technology

Blockchain technology is revolutionizing the construction industry. By providing a decentralized and immutable ledger, blockchain enhances the transparency and security of CLPs. Smart contracts enabled by blockchain can automate payment disbursements based on predefined milestones, reducing the risk of disputes and delays.

Building Information Modeling (BIM)

Building Information Modeling (BIM) is transforming the construction industry by providing a digital representation of buildings. This technology allows stakeholders to visualize and track construction progress in real-time. Integrating BIM with CLPs gives developers and buyers a clear and accurate view of project milestones, facilitating timely and accurate payments.

Conclusion

Construction linked payments offer a robust and transparent financial model for real estate and infrastructure projects. By aligning payments with construction progress, CLPs provide financial security for developers, buyers, and financial institutions. However, implementing CLPs requires careful planning, clear milestone definitions, and effective communication among all stakeholders. By embracing best practices and leveraging technological advancements, the construction industry can maximize the benefits of CLPs and ensure the successful completion of projects.

Also Read: Latest RBI Guidelines for Home Loans 2024

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Frequently Asked Questions

Ans 1. It's a home loan payment plan under which you have to pay 10%-15% of the total property value at the time of booking. In the construction-linked instalment plan, the first few instalments, usually 2-3, are calendar-based, and the remaining amount is linked to the construction progress.

Ans 2. The subvention scheme attracts more buyers than CLP as the buyer doesn't have to pay the EMI or pre-EMI amount unless and until the key to the house is in the buyer's hands. In the CLP plan, a buyer pays pre-EMI amounts, and full EMI payments as the construction progresses.

Ans 3. Full-EMI payment Some financial institutions allow you to start paying full EMI from the beginning, even when the loan is still being disbursed in stages for your under-construction home.

Ans 4. The Subvention Scheme is highly beneficial to homebuyers. The person doesn't have to pay back the loan money to the bank or the finance company unless or until he gets possession of the house. The money is to be paid back in the form of EMI, and thus there is less burden on the person.

Ans 5. If there is delay in project, the cost of property will increase exponentially for buyer. All the benefits of Subvention Scheme will wipe off in few months. Secondly, in case of delay and after EMI holiday period buyer may find it difficult to pay Pre-EMI. This is one of the key reason for default on Home Loan.

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