What is a Draw Request?
Draw Requests For Construction Projects
In a construction process, having the funds available to pay the labor, materials, and other expenses as the project progresses usually means getting money from a bank. To get the money needed to pay the bills, a contractor makes a Draw Request. In other words, they want to withdraw some of the funds available from the construction loan to pay expenses. Sounds simple enough, but there are some conditions that must be met and other issues that must be considered before the money tap turns on.
Doing the Same Thing … Differently
Taking money out of an account to pay bills isn’t a big deal and it happens all the time. A Draw can be paid out in different ways for different purposes. Some banks and mortgage companies allow the prime contractor to withdraw funds directly from a construction account while others only release funds to an Escrow Agent for disbursement. Use of Escrow Agents is common as it helps ensure a level of oversight of the funds to protect the bank and the project owner. Depending upon the size of the project and the amounts disbursed, conditions established by the lender will have to be followed without exception or else the contractor risks losing the loan altogether.
The Draw Process
Lenders outline the procedures that need to be followed for a contractor or project owner to receive funds advanced against a construction loan. In most cases, when a draw is requested, the contractor needs to pay the bills quickly or incur late payment penalties and deal with possible work stoppages. Construction lenders understand this situation and have documents that can be filled out to help speed the approval process along. Changes to construction projects occur frequently and the lender will have procedures in place to deal with any changes or additional costs that may arise. Most construction loans have a maximum amount that will be paid out, but that amount may change during construction.
The Draw Schedule
Construction projects have milestones that can trigger draw payments. Lenders don’t disburse all the construction funds at one time and most lenders want to know that work on the construction project is proceeding according to expectations. To help lenders keep track of draws paid out, project owners have to provide documents from subcontractors, laborers, and vendors which acknowledge payment in full for services or materials. These “Sign off” documents release the project owner from any financial liabilities and let the lender know there are no Mechanics Liens or other encumbrances are being placed against the property due to non-payment.
Draw Request Form
Many banks and mortgage lenders use the American Institute of Architects Form G-702 as the document to submit for payment. The G-702 request for draw includes:
- Original Contract Amount – This is the total amount of the loan provided for the construction project.
- Change Orders – When conditions on the project change and costs associated are added into the draw request.
- Total Completed – The total of all draw requests including the current request.
- Retainage to Date – Retainage is payments withheld from contractors and vendors to ensure contract terms compliance.
- Total Earned Draw – The amount of the draw to be paid out less any retainage deductions.
- Previous Payment Amounts – The total of prior draws taken out against the construction loan.
- Current Payment Due – The funds needed to pay expenses as calculated in the Total Earned Draw amount.
- Balance for Completion – The amount of funds remaining that are available for future draws.
In addition to the G-702 Draw Request is the G-703 Continuation Sheet which is used by subcontractors to break their contract down into phases or portions of work performed. The G-703 form follows an established schedule of contract values and completion stipulations that are outlined in the original work agreement.
Construction Progress Payments
Because many of the subcontractors, laborers, vendors, and other resources will have an on-going presence in the construction projects, payments are made as the provider completes the different phases of their work. The same concrete installation company that put in the foundation at the beginning of the project may also be the company that puts in the garden edging at the end of the project. Progress payments ensure the continued presence of the resources used throughout the construction phases. Continuity of efforts by the same providers ensures fewer problems and better quality than having multiple providers taking over a prior contractor’s work.
Many lenders request a Draw Inspection of the project from time to time to make sure the draws are being paid to suppliers and subcontractors. Inspection can involve more than the job site as lenders want to know draw funds have been paid according to agreements. Lenders also like to make contact with subcontractors and others on the job to determine if there are any problems or issues that may increase the costs of construction to complete the project. Draw inspections can be done by bank officers, mortgage agents, third-party inspection companies, and, in some cases, accounting and auditing staff. Certified inspectors are often used to ensure compliance with codes and construction protocols.
When contractors, lenders, and project owners submit documents to release draw money, documents and forms must be submitted to guarantee all work is being completed as agreed and all payments are being disbursed as well. Title insurance companies are involved in the construction lending process and they are responsible to ensure there are no liens filed against the project so that a “clean” title can be acquired upon completion of construction. The documents that must be included in the Draw Package for draw requests include:
- Sworn Statements
- W-9 forms
All documentation requires validation and many forms must be witnessed and notarized so that they can be recorded in official government files with county recorders and state offices.
Draw Timing is Everything
Knowing when to submit a request for a draw is just as important as getting the draw itself. Unpaid contractors can cause all kinds of problems by filing liens and leaving job sites due to unpaid invoices. Materials suppliers can stop deliveries resulting in work stoppages. Coordinating payments for subcontractors and vendors takes time and forethought. Working together with the lender helps ensure smooth processing of draw requests. Project owners are ultimately responsible to make sure all the I’s are dotted and the T’s are crossed on every piece of paper required to complete the draw request process.