Definition
A draw schedule is the planned timing and line-item structure for when construction funds (typically from a construction loan) are released to pay for completed work. Draw schedules tie disbursements to verified progress—often based on a cost breakdown, inspections, lien waivers, and lender conditions—so the lender and owner can control budget and construction risk.
How Draw Schedules Work
- Budget is broken into categories (often called a Schedule of Values or cost code budget).
- Contractor submits a draw request showing percent complete by line item.
- Third-party inspector (or lender construction consultant) verifies progress on site.
- Lender funds the draw (net of retainage and any holdbacks) once conditions are satisfied.
- Borrower pays contractors/subs and provides lien waivers for the next draw.
Common Draw Schedule Formats
1) Cost-to-Complete (Progress-Based) Draws
Most common: funding is based on verified % completion of each budget line item.
2) Milestone-Based Draws
Funding is released when specific milestones are achieved (e.g., foundation complete, dry-in, TCO/CO, substantial completion). Milestone draws are common in certain build-to-suit or smaller projects but still often require inspection support.
3) Time-Phased Draw Forecast
A monthly cash flow curve (spend forecast) that complements the line-item draw process. This helps model interest carry and working capital needs even though draws still depend on actual progress.
What Lenders Typically Require
- Approved budget and Schedule of Values aligned to the GMP or contract.
- Inspector sign-off (site visit report).
- Lien waivers from GC and major subs/suppliers.
- Updated cost-to-complete and change order log.
- Evidence of insurance and required bonds (if applicable).
- Borrower equity funded first (many loans require an equity-first structure).
Key Concepts Inside a Draw Schedule
Retainage (Holdback)
Retainage is the portion of each draw held back (often 5–10%) to encourage completion and protect against defective work or lien issues. Retainage is typically released at substantial completion or final completion, subject to punch-list closeout.
Contingency
Most budgets include owner contingency and/or contractor contingency. Lenders often control when contingency can be used and may require approvals for draws against it.
Hard Costs vs. Soft Costs
- Hard costs: labor/materials and construction trades (typically draw monthly based on progress).
- Soft costs: architecture, permits, legal, insurance, financing fees (often drawn as incurred).
Stored Materials
Some lenders allow draws for stored materials (e.g., long-lead equipment) if properly documented, insured, and stored securely. Requirements may include bills of sale, paid invoices, and a warehouse agreement.
Why Draw Schedules Matter
- Cash flow control: prevents paying too far ahead of actual progress.
- Risk management: reduces exposure to cost overruns and mechanic’s liens.
- Timeline visibility: highlights schedule slippage early.
- Investor confidence: structured reporting supports governance and transparency.
Example (Simplified)
A project has a $20M hard-cost budget. The GC requests a draw showing the project is 15% complete. The lender verifies work and applies 10% retainage.
- Earned value: 15% × $20M = $3.0M
- Retainage (10%): $3.0M × 10% = $0.30M
- Net draw funded: $2.70M (plus eligible soft costs, if any)
Common Pitfalls
- Overbilling: GC requests exceed true progress, creating lender friction and audit risk.
- Misaligned cost codes: budget categories don’t match the contract/SOV, slowing approvals.
- Change order chaos: unapproved changes cause funding gaps and disputes.
- Missing lien waivers: can stop draws and trigger default provisions.
- Equity-first surprises: borrower expects loan funding but lender requires equity to be spent first.