What Is a Draw Request in Construction Financing?

A draw request in construction financing is a structured approach to funding large-scale building projects. This method allows for the incremental release of loan funds, aligning disbursements with the actual progress of construction. It serves as a control mechanism, ensuring money is allocated as work is completed. This differs significantly from traditional loans that often provide a lump sum upfront, and it helps manage financial exposure for all parties.

Understanding Draw Requests

A construction draw request is a formal application for a portion of pre-approved loan funds, tied to completed work or achieved milestones. This mechanism ensures money is disbursed in stages rather than all at once. For the borrower, draw requests provide access to necessary funds as construction progresses, preventing the need to finance the entire project upfront. This staged funding also helps maintain cash flow for ongoing expenses.

Lenders use draw requests to mitigate financial risk by disbursing funds only when verifiable progress has been made. This approach safeguards their investment by ensuring the loan amount aligns with the value added to the property. Draw requests are commonly employed in various construction scenarios, including the financing of new residential or commercial buildings, extensive renovations, or large-scale development projects. This structured payment system establishes a framework of accountability, ensuring funds are released incrementally as defined project phases are successfully completed.

Components of a Draw Request

A draw request package typically includes several documents that provide evidence of completed work and associated costs. Detailed invoices from contractors and subcontractors are a primary component, outlining the services performed, materials supplied, and amounts due. These invoices must clearly itemize the work for verification against the project’s budget and progress.

Proof of work completed is essential, often taking the form of progress reports, updated schedules of values, or photographic documentation. An updated schedule of values (SOV) details the breakdown of project costs by line item and shows the percentage of completion for each, allowing for a clear assessment of progress.

Lien waivers are legal documents signed by contractors, subcontractors, and suppliers. These waivers confirm payment has been received for specified work or materials, waiving their right to file a mechanics lien against the property. Approved change orders, which document modifications to the original project scope, costs, or timeline, are also included to justify adjustments to the funding request.

The Draw Request Workflow

Once the borrower or contractor has assembled a complete draw request package, they submit these documents to the lender or loan administrator. Submission methods can vary, including secure online portals, email, or physical delivery. The lender then initiates a thorough review and verification process, examining all submitted documents for accuracy, completeness, and adherence to the agreed-upon draw schedule and project budget.

During this review, an on-site inspection is ordered by the lender, often conducted by a third-party inspector. The inspector visits the construction site to confirm the reported progress, take photographs, and verify that the completed work aligns with the documentation. After verification, the lender makes a decision regarding the draw request, approving or denying funds if discrepancies or issues are found. If approved, the amount is disbursed to the borrower or directly to the contractors and suppliers within five to ten business days of approval.