What Is a Draw Schedule & How Does It Work?
Learn how a draw schedule structures project financing, ensuring funds align with verifiable progress and milestones.
A draw schedule outlines when funds are disbursed incrementally for a project, aligning payments with specific milestones or stages of completion. This structured approach ensures money is released as work progresses and is verified, rather than in a single lump sum. It provides control and predictability for all parties involved.
Understanding the Basics of a Draw Schedule
A draw schedule manages cash flow in project financing by aligning funding with verifiable progress. Lenders disburse funds in stages, or “draws,” as specific project phases are completed, rather than providing the entire cost upfront. This ensures money is used as intended and the project remains on track.
This approach provides financial control, promoting accountability by tying payments to milestone completion. For contractors, draw schedules are important for managing cash flow, as they rely on timely payments for ongoing expenses like materials and labor.
Key Elements of a Draw Schedule
A draw schedule includes components defining its structure and conditions for fund release. Central are defined milestones, representing significant stages of project completion, such as foundation pouring, framing, or roofing installation. Each milestone is assigned a percentage of the total project cost or a fixed dollar amount.
The schedule also specifies required documentation to verify milestone completion, such as invoices, receipts, and lien waivers. Another element is a “holdback,” where a portion of the payment (often 5% to 10% of the contract value) is withheld until the project is fully completed and inspected. This retainage incentivizes quality work and helps mitigate financial risk.
The Draw Request Process
The process begins once a project milestone is completed. The borrower or contractor then prepares and submits a formal draw request to the lender. This request details the completed work and includes supporting documentation like invoices, lien waivers, and an updated schedule of values, which itemizes costs for each task.
Upon receiving the draw request, the lender initiates a review process, which includes an inspection to verify reported progress and ensure work aligns with agreed-upon standards. An independent inspector visits the site, assesses the condition, and confirms the percentage of completion. After the inspection report is reviewed and approved by the lender, the requested funds are disbursed.
Common Scenarios for Draw Schedules
Draw schedules are widely used where progressive funding is necessary, particularly in large-scale projects. Their most common application is in construction loans for building custom homes, commercial properties, or multi-family developments.
These schedules are well-suited for construction projects, enabling lenders to disburse funds in alignment with physical progress and minimizing the risk of overfunding or misuse. They ensure money is released only as work is completed and verified, which is essential for projects spanning months or years and involving substantial capital.