Most construction projects are financed in whole or in part by a third-party lender, which means that understanding the draw process is crucial for the successful completion of a construction project.
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Understanding construction loan draw requests
It all starts with the draw schedule. A construction loan draw schedule is a detailed payment plan for the construction project. These are typically split up into various milestones or phases of the overall project.
With a draw schedule in place, an owner or project manager will submit a detailed report of the work completed at certain points in the project. This report should be substantiated by a bundle of various documents offered as proof of the work performed. If everything checks out, payment will be released. This bundle is commonly referred to as a draw request.
The draw request document bundle
A draw request isn’t just a simple form. It’s a bundle of documents submitted to the lender requesting funds to be released. These documents are meant to provide clear evidence of work that has been completed and support the costs associated with reaching the draw milestone.
The draw amounts are based on the cost breakdown for that particular milestone. The documents required for each draw depends on the lender (and sometimes the state). Still, let’s take a look at the typical documenttion that should be included in a draw request.
Invoices and receipts
Clearly, one of the more critical inclusions in a draw request is the invoices and receipts for the work performed during the draw period. These should be collected from all subs and suppliers before submitting a draw request as justification for the funding. Whether for work performed, or materials purchased, they should be sufficiently detailed to justify the draw request. Having all your invoices properly organized before submitting them to the lender, can save them time reviewing the request, and can get you paid more quickly!
Schedule of values
A schedule of values is a document that lists all line-item tasks that need to be completed along with an estimated budget for each task. Each line item should be updated with each draw request. Tracking work through the schedule of values helps keep track of how much money has been spent with regards to the amount of work that has been completed to date.
Change orders come up on just about every construction project. Anytime there is a modification or deletion to the original construction plans; a change order will arise. The change order will provide a detailed description of the changes made, and any additional time costs incurred by the contractor.
Lien waivers should be submitted along with every invoice. These will typically be conditional waivers since payment has not yet been made. Because a mechanics lien filing is the most prominent form of risk that concerns lenders, a draw request will likely be postponed until all lien waivers have been submitted.
Overview of project progress
Finally, some overview or explanation of the job’s progress will typically be required. This might be as simple as identifying the milestone that’s been reached or providing a checklist of itemized tasks needed to be completed to substantiate your draw request.
What’s the difference between a draw request and a payment application?
There’s not a substantial difference between draw requests and pay apps, but it is more than just semantics.
Payment applications are submitted to a customer as an invoice for performed work. Contractors and subs will submit payment apps, which are then verified by the owner or project manager, and ultimately submitted as a draw request.
Draw requests refer to the bundle documents submitted to the lender in order to draw payment for work performed. Draw requests are usually made by an owner or project manager, made up by any number of pay apps and other supporting documents collected by the prime contractor(s).
While both draw requests and payment applications feature similar documentation, these terms shouldn’t be confused. It is more accurate to refer to draw requests when exclusively discussing demands for payment from a lender. Conversely, when payment requests are submitted to some other party (like an owner or contractor), the term “payment application” is more appropriate.
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Reviewing the draw request
Once a draw request has been submitted to the lender, the review process begins. The lender needs to review all the documents, order and approve inspections, and verify that all the work claimed to be completed, has been. This draw approval process ideally takes about seven business days. However, depending on the size, complexity, and amount of draw request documents, this can take much longer.
Organized and thorough draw requests speed up payment
When a lender has to request additional documentation or has to verify certain information as correct, payment is slowed down for everyone on the project – and it has a snowball effect. It takes time for payments to wind through the payment chain. Funds must reach each link of the chain, and every time payment changes hands, there’s potential for additional delays. So, when submitting construction draw requests, it’s essential to have all of the information accounted for and organized. Streamlining the lender’s release of payment means streamlining payments for even the lowest tiers of the construction payment chain.
Technology to the rescue
The construction industry has a paperwork problem, and technology makes things easier. Because managing the construction draw request process can be such a chore for lenders, companies like Land Gorilla have begun to attack the problem. Plus, Levelset is here to help with any functions like requesting, submitting, and tracking lien waivers.