The draw schedule is the mechanism through which a construction loan is disbursed, the framework that determines when funds are advanced, in what amounts, and on what basis. A well-structured draw schedule protects the lender by ensuring that loan advances are tied to verified construction progress, that the lender retains adequate coverage over the remaining work at each stage, and that the borrower’s equity is being consumed before the lender’s capital. A poorly structured draw schedule inverts these protections, advancing loan funds ahead of the work that justifies them and leaving the lender with diminishing collateral coverage as the project progresses.
The Schedule of Values: The Foundation of Every Draw
Every construction loan draw schedule is built on the schedule of values, a line-by-line breakdown of the total construction cost by trade and work category, showing the budgeted cost for each component of the project. The schedule of values serves as the reference against which completion percentages are assessed at each draw: when the inspector reports that framing is 70% complete and the schedule of values shows $480,000 budgeted for framing, the inspector’s finding supports a draw of $336,000 for that line item (70% of $480,000), less retainage.
The schedule of values for a construction loan should be established at closing, reviewed by the monitoring firm as part of the pre-closing plan and cost review, and incorporated into the loan agreement as the basis for draw requests. A schedule of values that was prepared by the GC without independent review, and that contains line item allocations that don’t reflect actual trade costs, will produce draw requests that are inaccurate because the basis of the requests is inaccurate.
Common schedule of values problems that pre-closing review should identify: front-loaded schedules where early trades (site work, concrete, framing) are over-allocated and later trades (MEP trim, finishes, landscaping) are under-allocated; general conditions that are overstated relative to the project’s actual supervision cost; and profit and overhead allocations that are embedded within individual line items rather than shown separately, making it difficult to verify that the contractor’s markup is consistent with what the contract specifies.
Percentage of Completion vs. Milestone Draws
Construction loan advances can be structured on two primary bases: percentage of completion, where each draw is tied to the verified completion percentage of each line item in the schedule of values, or milestone-based, where draws are released when specific construction milestones are achieved.
Percentage-of-completion draws are the standard approach for most construction loans and provide the most granular alignment between funding and verified progress. Each draw package includes the contractor’s claimed completion percentages for each schedule of values line item, and the monitoring inspector independently verifies those percentages against field observations. The draw amount is calculated by applying the verified completion percentages to the schedule of values line items, less retainage and less amounts previously disbursed.
Milestone draws are simpler to administer and are sometimes used for smaller loans or less complex projects. The loan agreement specifies a series of milestones, foundation poured, building framed and dried-in, MEP rough-in complete, substantial completion, and a specified draw amount is released when each milestone is achieved and verified. Milestone draws are less precise than percentage-of-completion draws because they release fixed amounts regardless of exact completion status, but they reduce administrative complexity for clear projects.
Front-Loading: The Risk the Draw Schedule Must Prevent
Front-loading, advancing loan funds ahead of the construction progress that justifies them, is the most significant structural risk in construction loan disbursement. A draw schedule that allows the borrower to receive more money than the verified work supports at each stage produces a loan that is chronically over-advanced relative to the collateral value of the partially complete building.
The risk of front-loading crystallizes when a project fails. If a project is 60% complete and the loan is 80% advanced, because draws were structured or approved at rates that exceeded the verified completion percentage, the lender has a partially complete building that will cost significant additional capital to complete, and a loan balance that exceeds the collateral’s current value. The additional capital required to bring the building to completion (and to a state where it can be sold or refinanced) may not be recoverable.
Preventing front-loading requires that the monitoring program’s completion percentage assessments are used as the controlling inputs to draw calculations, not as checks on contractor submissions that are routinely confirmed rather than independently assessed. When the inspector’s completion percentage for a trade differs from the contractor’s claimed percentage, the draw for that line item should be calculated on the inspector’s assessment, not the contractor’s claim.
Retainage: Its Role in the Draw Schedule
Retainage, typically 10% withheld from each draw, serves as an additional buffer against overfunding and as a contractual incentive for the contractor to complete all punch list items and warranty obligations. The retainage amount accumulates throughout the construction period and is released at project completion when the conditions specified in the loan agreement are satisfied.
The retainage release conditions should be specific: substantial completion, resolution of all punch list items identified by the owner’s representative or monitoring firm, receipt of all required warranties and as-built documents, unconditional lien waivers from all parties who furnished labor or materials, and issuance of the certificate of occupancy. Releasing retainage before these conditions are met, even under borrower pressure at the end of a long project, eliminates the contractual leverage that retainage provides to ensure complete project delivery.
A draw schedule tied to construction milestones, verified by independent inspection at each draw, and structured to ensure funds always lag behind completed work rather than advance against projected progress, is the single most effective tool for managing construction loan risk.
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