Navigating construction loan draws: Best practices & common challenges

Prompt payments and completed checklists keep construction projects moving forward. Staying on top of construction finances and tracking happens by establishing a clear construction draw process. Having a set payment plan and schedule will benefit both client and contractor – transparency and accountability are the keys to a successful relationship.

What is the construction loan draw process?

The construction draw process is simply a method of paying the contractor in installments, or draws, from the construction project funds. Instead of being paid in one lump sum, these funds are paid out during the progression of the project to reimburse the contractor for labor and materials.

Here are two key questions to understand about the draw process:

What is a construction draw schedule?

A draw schedule outlines when and how funds will be paid to the home builder throughout the project. It follows a timeframe and must be agreed upon by the client, contractor and bank. A draw schedule can align with project milestones or with the calendar – some companies submit draws monthly or even twice per month when working on a larger project.

What is a construction draw request?

A draw request is a formal submission for payment made by the general contractor. It’s submitted to the client or lender and should follow the draw schedule – the draw request process includes invoices, receipts and proof of work. Draw requests can range from 20 pages to 500+ pages for larger projects.

How does the construction draw process work?

Construction loans work a little differently than regular loans because they’re paid out in installments. When the draw process runs smoothly, builders have cash on hand to pay their bills, and the project can continue on its pace. Here are some key steps commonly followed in a construction draw process:

Milestone identification

Set the project milestones – foundation, framing, electrical, plumbing, etc. – and determine a draw schedule based on the completion of these steps. For example, once the foundation is poured, the contractor makes a draw request for payment.

Draw request submission

The home builder submits the draw request to the construction lender. This packet of documents outlines the owed funds and completed milestones with receipts and proof of work.

Documentation review

Depending on the project size, the review process can be very involved. The client or bank reviews the request along with supporting documentation to confirm the requested funds match the completed work and to weed out any duplicate or unclear invoices. They also make sure the project is running as scheduled. 

Inspection and verification

The client or lender may request a draw inspection to ensure the work was completed properly and to check any stored materials before approving payment. A third party might be necessary to check that the work meets building code and quality standards.

Lender approval

The bank reviews the request, supporting documents and inspection reports and then determines whether the funds should be paid out. To be approved, the request must prove the payment is for completed work or materials used on that particular job.

Disbursement of funds

Once the draw request is approved, the contractor gets paid based on the draw schedule. When the funds are released, the contractor can pay subcontractors and outstanding project bills.

Repeat process

The draw process repeats itself as milestones or timelines are met. This practice ensures builders have the funds they need at each stage throughout the project until it’s fully wrapped.

Construction draw best practices

By determining best practices, contractors have greater efficiency and transparency throughout the draw process. Here are some of the best practices in the construction draw process:

Clear and comprehensive loan agreement

The loan agreement outlines the terms and conditions of the draw process – how and when the payments will occur. It’s agreed upon by the client, contractor and lender. The schedule and the payment amounts to be distributed at each milestone should be clearly outlined.

Thorough documentation

Smart construction document management protects your business. Keep records of invoices, contracts, receipts and signed change orders to make sure you get paid. These documents will be your evidence of work and are essential for reimbursement; make sure they’re all there and in order. Errors in your documentation will lead to delays.

Timely draw requests

Consistency in invoicing is a top priority for construction payment strategies. Avoid delays in payment by following the draw schedule and making regular requests. Be prompt in these requests so you’re never left without cash to pay your own bills – this just comes down to efficient project management.

Accurate milestone tracking

Align draw requests with milestones to avoid confusion. Funds should only be released as your tracked milestones are completed. Project management software can help your team track the status of each milestone so you stay on schedule. 

Regular communication

Honest communication involving client, contractor, lender and inspector helps to immediately address any concerns. Regular meetings or progress reports keep everyone in the loop on the project’s status and payments. You can save time and schedule fewer meetings with construction software like Buildertrend that has the communication tools built in. 

Proactive issue resolution

If there are disagreements concerning completed work or payment, the contractor and client should work to promptly resolve them. It’s important to come to an agreement as quickly as possible to prevent delays in the draw process. 

Compliance with regulations

All regulations, codes and legal requirements must be followed throughout the project. This includes obtaining required permits, following safety codes and accurately reporting finances.

Professionalism and ethical conduct

Be honest and transparent in your project progress and financial reporting. You’ll earn your client’s and lender’s trust by staying professional throughout the draw process.

Common construction draw process challenges

The draw process doesn’t always go as planned – and when it doesn’t, your business is at risk of delays, liens and running over your loan terms. Be aware of these common challenges and potential solutions that’ll help you better navigate your process:

Documentation and recordkeeping

Missing or incomplete records often lead to disputes followed by delays in payment. Find an organized approach to recordkeeping and a central place to store your documents. A construction management software provides easy access and storage for all documents, change orders, contracts, invoices and receipts.

Disputes and communication issues

Conflicts with contractors, clients or lenders can arise from communication issues. Provide regular project updates and address all concerns. When you define roles and responsibilities, the expectations will be clear and you’ll minimize disputes.

Project delays and cost overruns

When you don’t get paid, your subs don’t get paid. Delays and cost overruns happen, and they also impact the finances and draw process. The best way to manage this is by minimizing the delays and overruns with a scheduling software. Scheduling software gives you the ability to map out jobs, giving you a holistic view of where parts of your building process can be shortened up or where more time is needed. It also helps you make room for unavoidable dead days due to circumstances like weather or short-staffing. When a task has to shift, connected tasks will automatically shift, too, without impacting the final deadline – and everyone on the team will be notified of the update. If the changes can’t be helped, adjust the draw schedule and finances as needed.

Change orders

Change orders are common, and you must plan for them within your draw process. Because they affect the funds and schedule, you need a solid program that’ll capture these changes for you. Construction change order software automatically communicates changes to all stakeholders – and you can even request to be paid on the platform before moving forward with the change.

Funding constraints and financial disruptions

Constraints or disruptions in funding often lead to delays and lack of project funds. Check in with clients and lenders about funding availability and closely monitor cash flow so you spot issues as they arise. A work in progress report is a helpful tool that allows you to see where you stand financially at all stages of a project.

Compliance and permit issues

Compliance issues during the draw process will inevitably delay your project. It’s important to stay on top of local building codes and permit requirements – apply early for all necessary permits.

How to ensure construction draw approval

Slow payment processing can lead to contractors having to file lien waivers and apply for additional loan amounts. Large requests can run over 100 pages long, sometimes with difficult-to-read or disorganized documentation. Follow these tips to get your construction draw requests approved quickly.

1. Familiarize yourself with the terms and conditions in the loan agreement

Read and understand the terms for how you’ll be paid and review guidelines to help align your draw requests with the agreed-upon terms.

2. Prepare thorough and accurate documentation for each draw request

Compile all documents needed to support your request and be sure they accurately reflect your request. If receipts are hard to read, supply additional printed documentation.

3. Submit draw requests in a timely manner

Make a point of following the draw schedule by submitting requests each time you hit a milestone so you don’t get behind on payments and then fall behind on your own bills.

4. Maintain open lines of communication with the lender

Reviewing these requests can be tedious. Communicate and offer assistance where there are questions. Prepare your lender for when large draw requests will be coming in for approval and give updates on project changes that affect the timeline or budget or may require an inspection.

5. Conduct yourself in a professional and transparent manner

Provide accurate, organized information and quickly respond to communication requests, addressing any issues that need your attention. 

6. Ensure that the construction project complies with all regulations

Your construction project must follow all necessary codes and have required permits, or draw approvals will be delayed.

7. Maintain a high standard of workmanship

Adhere to best practices and industry standards to increase the confidence of the lender and increase approval success.

8. Monitor the project’s budget carefully to avoid cost overruns

Manage construction costs to avoid exceeding the approved budget – excessive cost overruns will make lenders question your ability to manage the construction budget.

9. Seek the help of professionals, such as project managers, architects or contractors

Ask the advice of qualified professionals who can help streamline the draw approval process by ensuring everything meets quality standards.

Optimize your construction draw process with Buildertrend

Turn to technology and improve your construction draw process with the help of Buildertrend’s construction management software.

Here’s how our platform helps:

• Change orders and document management
• Financial tools
• Wallet
• Construction lending

Keep all documents – including change orders – in one easy-to-access spot.

Buildertrend’s financial tools are your solution for tracking and documenting costs, invoices and payments and integrating financials with QuickBooks. It allows you to centrally manage your company’s spending.

Buildertrend’s financial services go beyond digital tools – they also include Buildertrend Wallet. Wallet is an online service for Buildertrend customers that allows contractors to track expenses, make purchases and earn cashback rewards.

Connected to Buildertrend, Wallet is a seamless addition to your business and makes managing company spending simpler.

To help you have steady funds throughout the draw process, Buildertrend also offers business financing. If you need construction financing or a quick loan, Buildertrend has you covered.

Schedule a demo today to see how Buildertrend can set you up for success in the evolving construction industry.

Construction draw process FAQs

Get answers to the most common construction draw questions.