With the vast majority of construction projects financed, it is important to understand the draw process. Each bank has specific requirements, but the general principle is the same: money is withdrawn from the loan to pay contractors and suppliers. Understanding this process will enable you to have a streamlined construction process.
How do draws work? Banks will have forms that need to be filled out when submitting a draw. The forms include the names of the companies or people being paid, the amount requested, and a corresponding line on the budget. Some banks offer online draw request forms where you simply enter the amount needed. In addition to the draw form, you may be required to supply written documentation. This can include receipts, invoices, and proof of payment. The bank may even want lien waivers signed by the companies or contractors listed on the draw. They require waivers to prove the person was paid and prevent them from placing a Mechanic’s Lien on the property. Besides the paperwork trail, what else is important about draws?
Draws – and the money they release – keep the project moving. If a contractor is not paid on time, he or she can cease working until payment is received. A supplier can withhold material deliveries if your account has not been paid. These situations cause time delays which ultimately cost you money in interest, time, and aggravation. You will want to plan draws so that they keep the process moving. Some banks may limit the number of draws you can request. This makes planning your draws even more important. In a typical 12 month construction loan, draws could look like this:
1st Draw – pays soft costs such as permits, fees, architect, etc
2nd Draw – pays excavator, septic and well (if applicable), pays for deposit on foundation
3rd Draw – pays foundation contractor, puts deposit on lumber, windows, and doors
4th Draw – progress payments to framer, electrician, plumber
5th Draw – pays framer for completion, puts deposits on roofing and siding
6th Draw – pays plumber, electrician, and HVAC contractors, pays for roofing and siding, and puts deposits on insulation and drywall
7th Draw – insulation and drywall contractors are paid in full, deposits paid on interior trim, cabinets, countertops and painter
8th Draw – Interior doors, cabinets, countertops and painter paid in full
9th Draw – Flooring, appliances, and finish plumbing and electrical paid in full
Of course, your individual draw schedule will vary from this example. But as you can see, draws involve a series of progress payments, deposits, and final payments. Organizing them will allow you to keep the contractors and materials arriving on the job site.
Make sure that your contractors understand the draw schedule. Builders like to be paid when work is completed, and keeping them happy will make your life easier. However, if they understand the draw process, they will understand what you must go through to get the money. This will alleviate much of the stress surrounding the touchiest of subjects: money. If you plan your draws and make contractors aware of the process, you can keep work progressing in a timely fashion.