Introduction to Construction Loan Draw Schedules
The construction loan draw schedule is among the most important documents on any project. Because the majority of construction projects today are funded by financial institutions or other third-party lenders, it’s imperative that contractors understand the details of the construction loan draw request process. After all, the draw schedule is essential to getting paid, tracking cash flow, and ensuring the overall success of the project.
The construction loan draw schedule forms the payment plan for the project and is typically broken down into progress milestones. Such draw requests facilitate the actual funding of the job from a borrower’s construction loan. Read on to explore the key features of the typical construction loan draw schedule as well the components of the draw request process. Discover strategies and best practices for creating an effective construction loan draw schedule and learn its importance for managing cash flow and financial health over a project’s life.
In This Article
Components of a Draw Schedule
Typical construction loan draw schedules are generally written around particular project milestones representing significant stages of the job. These milestones are often listed and billed as a percentage of the project’s total quote and frequently feature an even distribution of payments for the completion of certain hard costs and job phases like site development, framing, rough-in, trim-out, and final completion. More detailed draw schedules may be broken down into trade-specific tasks, including plumbing, electrical, and HVAC, among others. Soft costs such as general project requirements, the loan’s interest reserve, and contingencies are also key items listed on most draw schedules.
The timeframe for funding disbursements from a construction loan usually details lender requirements like inspections, and it addresses the total time required for the review and approval process. Well-structured draw schedules also account for retainage amounts withheld over the course of the project, ensuring any retained funds are ultimately paid as per the construction agreement.
Understanding the Draw Schedule Process
Construction loan draw schedules form a detailed payment plan for the project based on milestones or steps toward completion of the job. They are generally developed in collaboration with the project’s stakeholders. It’s particularly vital that the contractor maintain clear communication and coordination with the project’s lender to ensure the accurate and timely disbursement of funds. It’s equally important that the contractor understand the details of the draw process.
Upon receipt of a construction loan draw request, the lender typically orders an inspection to verify job progress before the release of funds. A bundle of related documents is also provided to the lending institution, containing evidence of the work completed to date and the associated costs for each milestone. The typical document bundle includes detailed invoices and receipts supporting work expenses and related material costs. The project’s updated schedule of values is also typically included with the draw request to facilitate the tracking of job progress and spending. It’s also essential to include change orders detailing any modifications to the job as well as any associated lien waivers in the draw request bundle.
Factors Influencing Draw Schedule Development
A number of factors influence the development of the typical construction loan draw schedule. Aspects such as the scope and complexity of the project, the timeframe of the job, budget projections, and contractual obligations play a role in structuring the draw schedule. It’s critical to align the draw schedule with specific project milestones and cash flow requirements. For shorter duration or more straightforward jobs, the draw schedule may be as basic as four or five general milestones with evenly distributed payment percentages. Construction draw schedules for more complex projects generally require more detail and a more granular breakdown of payments.
Best Practices for Creating an Effective Draw Schedule
Contractors will find a variety of tips and tricks to help develop accurate and effective construction loan draw schedules. Generally speaking, thorough project planning, consistent communication with lenders, and incorporating contingency plans are solid strategies for creating the draw schedule. Among the critical first steps toward building an effective draw schedule is defining key progress stages or milestones for the project and assigning a corresponding payment amount or percentage due upon completion of each phase. It’s also important to ensure the draw schedule mirrors the schedule of values on most construction projects.
Managing Funding Disbursement
As we’ve seen, the construction draw schedule drives the disbursement of funds from the lender to the builder on a particular project. Unsurprisingly, most lenders demand proper proof of progress and expenses before the release of payments. Such documentation includes invoices and receipts, an updated schedule of values, and copies of any change orders or lien waivers. Lenders typically order an inspection upon receipt of each draw request to verify the satisfactory completion of milestones and ensure that the project remains on track per the loan terms.
Addressing Changes and Modifications
Changes or modifications to the construction loan draw schedule may be necessary from time to time due to unforeseen circumstances, changes in the scope of the job, or inevitable project delays. That’s simply the nature of the construction business. When such unavoidable revisions are required, timely communication with lenders and stakeholders is critical to maintaining financial transparency, preventing or mitigating disputes or delays, and avoiding the inevitable trickle-down effect resulting from late payments.
Ensuring Compliance and Financial Control
Maintaining financial control and compliance throughout the construction loan draw schedule process is critical to every project. Successful contractors understand the importance of proper record keeping, observing all contractual obligations, and accurate tracking of all job costs.
Contractors will find a variety of tools and technology to help them connect the job site with their back-office accounting, ensuring accurate job tracking as well as effective capturing of any change orders. By employing such resources, contractors can better manage their cash flow, maintain financial control, and stay compliant with all contractual obligations throughout the course of the job. Among the top tools contractors have at their disposal for managing project finances is CrewCost construction accounting software, an industry-leading platform designed by contractors for contractors.
Conclusion and Key Takeaways
A carefully-structured draw schedule is a significant element of successful construction project management as well as the contractor’s ability to control their all-important cash flow over the life of the job. Contractors are advised to implement strategies and best practices for developing an effective draw schedule, including maintaining clear communication and coordination with project stakeholders and lenders.
Providing detailed documentation supporting the work progress and payment requests is also essential. Invoices, receipts, and an updated schedule of values are among the documents generally bundled with a construction loan draw request. It’s also vital that change orders are managed and communicated accurately and efficiently in order to avoid payment disputes or delays.
Understanding and leveraging the benefits of a well-structured and properly-managed construction loan draw schedule is invaluable to a contractor’s ability to get paid on time. And one of the best tools for maintaining the accurate job tracking and financial reporting necessary for managing the draw process is the CrewCost construction accounting system. Contractors are invited to try CrewCost for free today with early access!
Yancy Lassiter, a CPA with a degree from the University of Texas, is a mastermind in construction financial management. With 12 years under his belt as a Controller and CFO for some of Texas’s biggest construction companies, he’s your go-to guy for finance in the building industry.