Definition
A construction draw is a scheduled disbursement of funds from a construction loan that pays for work completed during a specific period. Draws are released after the lender verifies progress through inspection and documentation.
In simple terms: a construction draw is how developers access loan funds to pay contractors as work gets done.
How Construction Draws Work
- Contractor submits a pay application for completed work.
- Developer reviews and approves the request.
- Lender orders a third-party inspection.
- Lender verifies percent completion and budget alignment.
- Funds are disbursed (minus any retainage).
Draw Schedule
Draws typically occur monthly, but frequency can vary.
- Monthly draws are most common.
- Some lenders require minimum draw thresholds.
- Final draw often requires additional documentation.
Example
- Total construction budget: $10,000,000
- Work completed this month: $1,000,000
- Retainage: 10%
Approved draw = $1,000,000 – $100,000 retainage = $900,000 disbursed.
Documents Required for a Draw
- Pay application (AIA form or equivalent)
- Schedule of values
- Conditional lien waivers
- Updated budget tracking report
- Inspection report
- Evidence of stored materials (if applicable)
Lender Oversight
Lenders carefully monitor construction draws to:
- Prevent cost overruns
- Ensure work matches approved plans
- Confirm budget category allocations
- Verify equity has been funded (if required first)
Equity vs. Loan Funding
Many construction loans require developers to fund their equity contribution before loan proceeds are advanced. This is called “equity first†funding.
Construction Draw vs. Reimbursement
- Advance draw: Lender funds before contractor payment clears.
- Reimbursement draw: Developer pays first, then gets reimbursed.
Final Draw
The final draw often requires:
- Certificate of Occupancy
- Completion of punch list items
- Final lien waivers
- As-built plans
- Updated rent roll (if applicable)
Investor Impact
- Cash flow timing: Delays in draws can delay contractor payments.
- Interest carry: Interest accrues as funds are drawn.
- Budget control: Draw reviews expose overruns early.
- Risk management: Third-party inspections protect capital.
Common Pitfalls
- Submitting incomplete draw packages.
- Underestimating inspection timing delays.
- Failing to reconcile schedule of values with budget.
- Ignoring retainage accumulation.
- Overlooking stored materials insurance requirements.
Developer Checklist
- Maintain organized draw documentation.
- Track retainage totals.
- Monitor percent complete vs. budget line items.
- Confirm equity funding compliance.
- Coordinate closely with lender inspector.