diff --git a/app/api/proposals/[id]/accept/route.ts b/app/api/proposals/[id]/accept/route.ts
new file mode 100644
index 0000000..aeed499
--- /dev/null
+++ b/app/api/proposals/[id]/accept/route.ts
@@ -0,0 +1,195 @@
+// app/api/proposals/[id]/accept/route.ts
+//
+// POST /api/proposals/:id/accept
+//
+// Accepts a freelancer's proposal and atomically creates:
+//   - A contract record (status='pending', escrow_status='unfunded')
+//   - Milestone rows from the proposal's milestone_breakdown
+//   - An audit log entry
+//
+// Authorization:
+//   - Caller must be authenticated (Bearer JWT via withAuthCtx).
+//   - Caller must be the client who owns the project.
+//   - Freelancers cannot accept proposals.
+//
+// Error codes returned:
+//   400 INVALID_UUID           — proposal ID in path is not a valid UUID
+//   401 AUTH_REQUIRED          — missing or invalid JWT
+//   403 FORBIDDEN              — caller is not the project client
+//   404 PROPOSAL_NOT_FOUND     — no proposal with that ID
+//   409 PROPOSAL_ALREADY_ACCEPTED  — proposal was already accepted
+//   409 PROPOSAL_NOT_PENDING   — proposal is in a non-acceptable state
+//   409 PROJECT_NOT_ACTIVE     — project is not open / in_progress
+//   422 INVALID_REQUEST_BODY   — body fails schema validation
+//   500 SERVER_ERROR           — unexpected failure
+
+export const dynamic = 'force-dynamic'
+
+import { NextRequest, NextResponse } from 'next/server'
+import { z } from 'zod'
+import { withAuthCtx } from '@/lib/auth/middleware'
+import { sql } from '@/lib/db'
+import { AcceptProposalSchema } from '@/lib/validations'
+import {
+  acceptProposal,
+  ProposalNotFoundError,
+  ProposalAlreadyAcceptedError,
+  ProposalNotPendingError,
+  ProjectNotActiveError,
+  UnauthorizedAcceptanceError,
+} from '@/lib/proposals'
+
+// ─── Route context type (Next.js App Router) ──────────────────────────────
+
+interface RouteContext {
+  params: Promise<{ id: string }>
+}
+
+// ─── ID validation ────────────────────────────────────────────────────────
+
+const UUIDSchema = z.string().uuid()
+
+// ─── POST handler ─────────────────────────────────────────────────────────
+
+export const POST = withAuthCtx<RouteContext>(
+  async (request: NextRequest, auth, context: RouteContext) => {
+    // 1. Extract and validate proposal ID from path
+    const { id: rawId } = await context.params
+    const idResult = UUIDSchema.safeParse(rawId)
+    if (!idResult.success) {
+      return NextResponse.json(
+        { error: 'Proposal ID must be a valid UUID', code: 'INVALID_UUID' },
+        { status: 400 },
+      )
+    }
+    const proposalId = idResult.data
+
+    // 2. Parse request body (body is optional for this endpoint)
+    let body: unknown = {}
+    const contentType = request.headers.get('content-type') ?? ''
+    if (contentType.includes('application/json')) {
+      try {
+        body = await request.json()
+      } catch {
+        return NextResponse.json(
+          { error: 'Request body must be valid JSON', code: 'INVALID_JSON' },
+          { status: 400 },
+        )
+      }
+    }
+
+    const parsed = AcceptProposalSchema.safeParse(body)
+    if (!parsed.success) {
+      return NextResponse.json(
+        {
+          error: 'Validation failed',
+          code: 'INVALID_REQUEST_BODY',
+          details: parsed.error.flatten().fieldErrors,
+        },
+        { status: 422 },
+      )
+    }
+
+    // 3. Resolve the authenticated user's DB id from their wallet address
+    const userRows = (await sql`
+      SELECT id, role
+      FROM users
+      WHERE wallet_address = ${auth.walletAddress}
+      LIMIT 1
+    `) as Array<{ id: string; role: string }>
+
+    if (userRows.length === 0) {
+      return NextResponse.json(
+        { error: 'Authenticated user not found', code: 'USER_NOT_FOUND' },
+        { status: 401 },
+      )
+    }
+
+    const { id: callerId, role: callerRole } = userRows[0]
+
+    // 4. Only clients (or admins) may accept proposals
+    if (callerRole !== 'client' && callerRole !== 'admin') {
+      return NextResponse.json(
+        {
+          error: 'Only clients can accept proposals',
+          code: 'FORBIDDEN',
+        },
+        { status: 403 },
+      )
+    }
+
+    // 5. Run the atomic acceptance flow
+    try {
+      const result = await acceptProposal(proposalId, callerId)
+
+      return NextResponse.json(
+        {
+          message: 'Proposal accepted and contract created',
+          proposal: result.proposal,
+          contract: result.contract,
+          milestones: result.milestones,
+        },
+        { status: 201 },
+      )
+    } catch (err) {
+      // ── Known domain errors → deterministic HTTP responses ──────────────
+
+      if (err instanceof ProposalNotFoundError) {
+        return NextResponse.json(
+          { error: err.message, code: 'PROPOSAL_NOT_FOUND' },
+          { status: 404 },
+        )
+      }
+
+      if (err instanceof ProposalAlreadyAcceptedError) {
+        return NextResponse.json(
+          { error: err.message, code: 'PROPOSAL_ALREADY_ACCEPTED' },
+          { status: 409 },
+        )
+      }
+
+      if (err instanceof ProposalNotPendingError) {
+        return NextResponse.json(
+          { error: err.message, code: 'PROPOSAL_NOT_PENDING' },
+          { status: 409 },
+        )
+      }
+
+      if (err instanceof ProjectNotActiveError) {
+        return NextResponse.json(
+          { error: err.message, code: 'PROJECT_NOT_ACTIVE' },
+          { status: 409 },
+        )
+      }
+
+      if (err instanceof UnauthorizedAcceptanceError) {
+        return NextResponse.json(
+          { error: err.message, code: 'FORBIDDEN' },
+          { status: 403 },
+        )
+      }
+
+      // ── DB unique constraint violation on uq_proposals_one_accepted_per_project
+      //    This is a last-resort guard if two concurrent requests race through ──
+      if (
+        err instanceof Error &&
+        err.message.includes('uq_proposals_one_accepted_per_project')
+      ) {
+        return NextResponse.json(
+          {
+            error: 'Another proposal has already been accepted for this project',
+            code: 'PROJECT_ALREADY_HAS_ACCEPTED_PROPOSAL',
+          },
+          { status: 409 },
+        )
+      }
+
+      // ── Unexpected error ─────────────────────────────────────────────────
+      console.error('[POST /api/proposals/[id]/accept]', err)
+      return NextResponse.json(
+        { error: 'Failed to accept proposal', code: 'SERVER_ERROR' },
+        { status: 500 },
+      )
+    }
+  },
+)
diff --git a/lib/validations/index.ts b/lib/validations/index.ts
index 53deec9..5d35beb 100644
--- a/lib/validations/index.ts
+++ b/lib/validations/index.ts
@@ -197,3 +197,65 @@ export type UpdateMilestoneInput = z.infer<typeof UpdateMilestoneSchema>
 export type CreateProjectInput = z.infer<typeof CreateProjectSchema>
 export type UserProfileInput = z.infer<typeof UserProfileSchema>
 export type WalletSignatureInput = z.infer<typeof WalletSignatureSchema>
+
+// ─── Proposal ─────────────────────────────────────────────────────────────
+
+export const PROPOSAL_STATUSES = ['pending', 'accepted', 'rejected', 'withdrawn'] as const
+export const ProposalStatusSchema = z.enum(PROPOSAL_STATUSES)
+
+/** Shape of one milestone entry inside proposal.milestoneBreakdown */
+export const ProposalMilestoneSchema = z.object({
+  title: z
+    .string({ required_error: 'milestone title is required' })
+    .min(1, 'milestone title cannot be empty')
+    .max(200, 'milestone title must be 200 characters or fewer'),
+  description: z
+    .string()
+    .max(2000, 'milestone description must be 2000 characters or fewer')
+    .optional(),
+  amount: z
+    .number({ required_error: 'milestone amount is required' })
+    .positive('milestone amount must be positive'),
+  due_date: z.coerce.date().optional(),
+})
+
+export const CreateProposalSchema = z.object({
+  projectId: z
+    .string({ required_error: 'projectId is required' })
+    .uuid('projectId must be a valid UUID'),
+  coverLetter: z
+    .string({ required_error: 'coverLetter is required' })
+    .min(10, 'coverLetter must be at least 10 characters')
+    .max(5000, 'coverLetter must be 5000 characters or fewer'),
+  proposedAmount: z
+    .number({ required_error: 'proposedAmount is required' })
+    .positive('proposedAmount must be positive'),
+  currency: z.enum(['XLM', 'USDC']).default('USDC'),
+  estimatedDuration: z
+    .string()
+    .max(100, 'estimatedDuration must be 100 characters or fewer')
+    .optional(),
+  milestoneBreakdown: z
+    .array(ProposalMilestoneSchema)
+    .max(20, 'milestone breakdown cannot exceed 20 milestones')
+    .optional()
+    .default([]),
+})
+
+/**
+ * Body accepted by POST /api/proposals/[id]/accept.
+ *
+ * Currently the proposal ID comes from the URL path, so the body may be
+ * empty or carry optional metadata.  We keep the schema here for
+ * completeness and future extensibility (e.g. client notes on acceptance).
+ */
+export const AcceptProposalSchema = z.object({
+  notes: z
+    .string()
+    .max(1000, 'notes must be 1000 characters or fewer')
+    .optional(),
+})
+
+export type AcceptProposalInput = z.infer<typeof AcceptProposalSchema>
+export type CreateProposalInput = z.infer<typeof CreateProposalSchema>
+export type ProposalMilestoneInput = z.infer<typeof ProposalMilestoneSchema>
diff --git a/scripts/012-proposals.sql b/scripts/012-proposals.sql
new file mode 100644
index 0000000..410b43b
--- /dev/null
+++ b/scripts/012-proposals.sql
@@ -0,0 +1,92 @@
+-- Migration 012: Proposals table (UUID schema)
+--
+-- Stores freelancer proposals submitted against open projects.
+-- A proposal can transition: pending → accepted | rejected.
+-- Exactly one proposal can be accepted per project (enforced by partial unique index).
+-- When a proposal is accepted the system atomically creates a contract record.
+
+-- ─── Proposal status enum ─────────────────────────────────────────────────
+
+DO $$
+BEGIN
+  IF NOT EXISTS (SELECT 1 FROM pg_type WHERE typname = 'proposal_status') THEN
+    CREATE TYPE proposal_status AS ENUM ('pending', 'accepted', 'rejected', 'withdrawn');
+  END IF;
+END;
+$$;
+
+-- ─── Proposals table ──────────────────────────────────────────────────────
+
+CREATE TABLE IF NOT EXISTS proposals (
+  id                  UUID          PRIMARY KEY DEFAULT gen_random_uuid(),
+
+  -- References
+  project_id          UUID          NOT NULL REFERENCES projects (id) ON DELETE CASCADE,
+  freelancer_id       UUID          NOT NULL REFERENCES users (id) ON DELETE CASCADE,
+
+  -- Proposal content
+  cover_letter        TEXT          NOT NULL,
+  proposed_amount     NUMERIC(18,6) NOT NULL
+    CHECK (proposed_amount > 0),
+  currency            TEXT          NOT NULL DEFAULT 'USDC',
+  estimated_duration  TEXT,                       -- e.g. "2 weeks", "30 days"
+
+  -- Milestone breakdown submitted with the proposal (optional JSON array)
+  -- Each element: { title, description, amount, due_date? }
+  milestone_breakdown JSONB         NOT NULL DEFAULT '[]',
+
+  -- Lifecycle
+  status              proposal_status NOT NULL DEFAULT 'pending',
+
+  -- Traceability: which contract was created from this proposal
+  contract_id         UUID          REFERENCES contracts (id) ON DELETE SET NULL,
+
+  -- Timestamps
+  accepted_at         TIMESTAMPTZ,
+  rejected_at         TIMESTAMPTZ,
+  created_at          TIMESTAMPTZ   NOT NULL DEFAULT NOW(),
+  updated_at          TIMESTAMPTZ   NOT NULL DEFAULT NOW(),
+
+  -- A freelancer may only submit one proposal per project
+  CONSTRAINT uq_proposal_per_freelancer_project UNIQUE (project_id, freelancer_id)
+);
+
+-- ─── Indexes ─────────────────────────────────────────────────────────────
+
+-- Proposals for a project (client reviews these)
+CREATE INDEX IF NOT EXISTS idx_proposals_project_id
+  ON proposals (project_id);
+
+-- Proposals by a freelancer (freelancer's application history)
+CREATE INDEX IF NOT EXISTS idx_proposals_freelancer_id
+  ON proposals (freelancer_id);
+
+-- Status filtering (e.g. open proposals awaiting response)
+CREATE INDEX IF NOT EXISTS idx_proposals_status
+  ON proposals (status)
+  WHERE status = 'pending';
+
+-- Only ONE accepted proposal is allowed per project.
+-- This partial unique index enforces that at the DB level.
+CREATE UNIQUE INDEX IF NOT EXISTS uq_proposals_one_accepted_per_project
+  ON proposals (project_id)
+  WHERE status = 'accepted';
+
+-- Back-reference from contract to the originating proposal
+CREATE INDEX IF NOT EXISTS idx_proposals_contract_id
+  ON proposals (contract_id)
+  WHERE contract_id IS NOT NULL;
+
+-- ─── updated_at trigger ───────────────────────────────────────────────────
+
+DO $$
+BEGIN
+  IF NOT EXISTS (
+    SELECT 1 FROM pg_trigger WHERE tgname = 'trg_proposals_updated_at'
+  ) THEN
+    CREATE TRIGGER trg_proposals_updated_at
+      BEFORE UPDATE ON proposals
+      FOR EACH ROW EXECUTE FUNCTION set_updated_at();
+  END IF;
+END;
+$$;