What "Beginning Construction" Really Means (And Why a Signed Contract Isn't Enough)

A signature on a contract does not start your construction clock. The IRS has a specific test, and missing it can cost you the credit.

Featuring Caleb Quaid, President, Clean Energy Help. Adapted from the SunSmart Engineering × Clean Energy Help × FlaSEIA panel, Commercial Solar in 2026. Watch the clip: "04 - What Beginning Construction Really Means.mp4".

If you want to keep the commercial solar tax credit alive, you have to "begin construction" by July 4, 2026. That phrase carries a lot of weight, because it buys you a multi-year window to actually finish the project (up to four years of continuity). Miss it and your only other path is to be placed in service by December 31, 2027. The trouble is that "beginning construction" is a defined term, and a contract with a signature on it does not get you across the line.

Two ways to start the clock

There's one piece of IRS vocabulary you'll hear over and over. Here's how Caleb Quaid put it:

"One of the terms you're going to hear a few times is 'safe harbor.' It's a common term in government, and here it applies to three different things. As it relates to beginning construction, there are two tests. One is a physical work test, meaning significant physical work, on-site or off-site; generally that requires permits, breaking ground. It's the harder bar. Most of what you'll run into is the 5% safe harbor test."

The first route is the physical work test. You show that significant physical work has started, on-site or off-site. As Caleb noted, that usually means permits in hand and ground broken. It's the higher bar, and most commercial projects racing the deadline won't go that way.

The second route, and the one most contractors actually use, is the 5% safe harbor. Instead of proving you've started building, you prove you've committed real money. A safe harbor is just a set of conditions the IRS will accept as meeting the requirement. Hit every mark and you're covered. Miss one and there's no partial credit.

The 5% safe harbor has three parts

This is where people get tripped up. The 5% safe harbor isn't a single box to check. Caleb breaks it into three pieces that all have to be true at once: a contract, a payment, and performance.

An executed contract. You need a real signed contract for a defined scope at a defined price, between the project owner and the contractor. As Caleb put it: "We need to know the system is 100kW for $200,000, or whatever it is, and it needs to be executed." A letter of intent or a handshake won't do it. The scope and the price have to be locked, and both parties have to sign.

A documented payment. This is the part a signed contract alone never covers. Money actually has to change hands from the client to the EPC (the engineering, procurement, and construction contractor), and it has to be documented. Caleb described the paper trail this way: "Typically an invoice that references the contract, the client paying it, and proof of the funds clearing the bank." Notice the word clearing. The funds have to move and settle, not just be promised.

That payment has to be at least 5% of the final project cost. That's where the name comes from. On a $200,000 system, that's $10,000 paid, documented, and cleared.

Economic performance by the contractor. The third leg is that the contractor has to do something with that money. Caleb framed it as "taking action on that contract and payment, either through entering an engineering contract or procuring materials tied to the project." The cash can't just sit in an account. It has to go to work, starting engineering or ordering materials tied to your specific job.

All three have to line up. A contract with no payment doesn't count. A payment with nothing happening behind it doesn't count either.

Why Caleb tells clients to pay 10% down

Don't aim for exactly 5%. Here's his advice:

"I highly recommend you build in wiggle room. I typically have my clients do 10% down, so if there are change orders down the line you're covered."

The math is measured against the final project cost, not today's estimate. Pay exactly 5% now, then let change orders push the price up (a bigger system, added gear, scope creep), and your payment can quietly drop below 5% by the time the job wraps. At that point you may no longer satisfy the safe harbor, and the credit is in jeopardy.

Ten percent down gives you a cushion. It costs nothing in the long run, since it's money you were spending on the project anyway, and it protects the most valuable part of the whole deal.

Key takeaways

• "Beginning construction" has two routes: the harder physical work test (permits, breaking ground) and the more common 5% safe harbor.
• A signed contract isn't enough on its own. The 5% safe harbor needs three things together: an executed contract, a documented payment, and economic performance by the contractor.
• The payment has to be 5% or more of the final project cost, backed by an invoice that references the contract and proof the funds cleared.
• Economic performance means the contractor actually acts, by starting engineering or buying project-specific materials.
• Pay 10% down instead of the bare 5%, so change orders don't drop you under the threshold later.
• The deadline: begin construction by July 4, 2026 (to keep the multi-year finish window) or be placed in service by December 31, 2027.

How SunSmart Engineering can help

Hitting the 5% safe harbor is part paperwork and part engineering. You can't define a scope and price without a real design behind the contract. SunSmart Engineering delivers the full-service plan sets and engineering that let you lock the scope and give your contractor something real to procure and engineer against. We're a Florida-based firm working nationwide on solar and storage, and we can move fast enough to help you beat the deadline. Visit sunsmartengineering.com or call 866-786-8655.

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Educational information only, not tax, legal, or engineering advice. Rules referenced (credits, FEOC, safe-harbor litigation, and the July 4, 2026 / December 31, 2027 dates) were current as of the June 2026 webinar and continue to change. Confirm current requirements with a qualified professional before acting.