Living from payment-to-payment as a construction contractor can be tough.
But it’s no surprise.
Construction jobs can take hundreds of thousands of dollars to complete, but in order to pay their subcontractors, GC’s need to get paid themselves.
To get paid, most general contractors have to go through a process known as a draw request.
And you might be wondering, “What is a draw request? How does it work?”
We’ve got the answers.
In this guide, we’re walking you through everything you need to know about the process, including what a draw request is and how to get the money you need faster.
Understanding Draw Requests: Where Should You Start?
You need funding for your construction project.
You’ve submitted forms for your construction loan, and it’s been approved, but you weren’t given the money upfront and you’re left wondering how to get the money you need to start.
Now what?
Obtaining that money should be simple since you’ve already requested the loan.
Unfortunately, it isn’t as easy as it seems — Construction loans work differently than most other loans.
Because of the size of most construction projects, and the problems that often arise, lenders are unable to hand over hundreds of thousands of dollars — or more — at once.
Instead of receiving funds in one “lump sum”, they supply the funding in “bite-size” amounts throughout the entire project.
To receive this funding, you’ll make what is called a draw.
It’s okay if you’re still asking, “What is a draw in construction?”
These installment payments from your lender are known as “draws”. In order to make those draws, a draw request must be submitted.
Draw requests can be complex. They require large amounts of:
- Documentation
- Inspections; and
- Processing time.
Flexbase understands the complexity of draw requests, but more importantly, we understand that time is money.
Our app can help take care of the tedious tasks that come with completing draw requests. From the documentation to the request forms — even access to lenders — we have everything you need to get paid for your work at your fingertips.
Flexbase can help you submit draw requests easily and efficiently.
What is a Draw Request?
All the different terminology that comes with construction payments are easy to get mixed up.
You’re curious, “What is a construction draw request and how exactly does it work?
Let’s break it down:
A draw request is a written request for funds from a construction load to be disbursed to a contractor or project owner as certain phases of the project are complete.
During the loan application, these specific phases are agreed upon by the lender and the contractor — this is known as the draw schedule.
When you’re ready to withdraw funds from the construction loan, the bank requires certain conditions to be met — for instance, specific phases to be completed for each draw period.
But that isn’t all lenders require.
To receive funds, contractors must complete a “draw package”. This package is made up of multiple forms that are sent to the lender at the time of the draw request.
Depending on the size and complexity of the construction job, the draw request “package” can have anywhere from 20-500+ documents involved.
But why would you need to ask for approval for funds you’ve already been approved for?
Draw requests keep all the parties involved in a construction project on track.
Draw requests are for the…
- Contractor’s
- Subcontractor’s; and
- Lender’s
...protection.
They prove that the payment being requested is for work that’s been completed and/or materials for that specific construction job.
What is Included in a Draw Request?
If only it were as simple as completing a construction draw request form and receiving funds.
Every lender has its own requirements for processing draw requests and the requirements may vary from state to state and project to project.
With that being said, some of the most common documents required in the “draw package” include:
- Receipts
- Budgets
- Bonds
- Licensing info
- Invoices
- AIA Forms G-702 or G-703
- Lien waivers
- Proof of insurance
- Permits
- Etc.
Invoices and Receipts
Contractors get paid for work that’s been documented, so invoices and receipts need to be provided to have your draw request approved.
It’s important to note that draw requests must fall within budget expectations.
Proof of material purchases, labor costs, etc. help prove that the money requested has been used for the construction project.
Scope of Work
Without the scope of work (SOW), or if an SOW is lacking detail…
- Failure
- Miscommunication; or
- Risk of construction stoppage
...become increasingly likely.
In order to provide lenders with the information they are looking for — like the direction of the construction project — an SOW provides details like:
- Reports
- Milestones — how workers will complete each stage
- Deliverables to be expected; and
- What each team member is responsible for on the job.
Change Orders
Modifications and changes on a project happen —in fact, it’s expected on almost every construction job.
Change orders give detailed descriptions of:
- Any changes that have been made; and
- Any additional costs a contractor has incurred due to that change.
Lien Waivers
Each time a draw is requested from a loan, the banks may require proof that no liens have been put out against the property.
If there are any liens, the bank will not disperse any funds until the lien has been released.
Because of this, lien waivers are vital.
Lien waivers are documents signed by:
- Contractors
- Subcontractors; and
- Occasionally even major suppliers
...waiving their rights to take a lien out on the property.
Any lien waivers are usually required to be sent in with the other documents for a draw request.
How Does a Construction Draw Work?
Construction draw payments are made according to the draw schedule defined in the contract of the loan. The construction budget is predetermined and specific amounts are taken out against that budget.
Construction draws are a multi-step process.
First, a construction draw request has to be submitted, with all the proper paperwork, to the lender.
Additional documents, aside from those listed above, may be required for a draw request.
These documents may include...
- Certificates
- Affidavits
- Releases
- W-9 Forms
- Any terminations
… the list goes on.
Once the construction draw request has been received by the lender, it must be reviewed.
This review process is very involved, as the reviewer must make sure that all the draw packages provide all the necessary information that lenders need to verify.
What’s Involved in the Review Process of a Draw Request?
During the review process, lenders must verify the following things:
- What work is expected to be completed at the time of the draw request.
- Send inspectors to the job site to confirm that the progress being made is satisfactory.
- No liens have been filed against the contractor, subcontractor, or supplier.
- Work is progressing on schedule — per the contract.
Documents Review
The document review process can take a week or more depending on:
- The size and complexity of the project; and
- The amount of documentation involved in the draw request.
The documents in the draw request package may contain information including:
- The balance available to finish a construction process.
- How much money has already been paid to a contractor from previous draws.
- The amount of the requested draw.
- A Notice of Acceptance (NOA) stating the buyer is satisfied with the project to date.
It’s a given that humans make mistakes. And unfortunately, errors on draw requests cause delays.
If receipts don’t match the scope of work, or paperwork is missing, the draw package may be sent back to the contractor for revisions, or completely denied.
Flexbase helps keep your business organized with everything you need in one place.
Forget having to track down paperwork in another software program, or having to search for receipts from two months ago — upload everything on to Flexbase, submit the requested documentation, and get paid.
Third Party Site Inspection
In order to disperse any funds, lenders need to see a construction draw inspection report.
The construction draw inspection involves having a certified inspector come to the job site and show exactly where the job is in relation to the timeline that has been submitted.
Inspectors will also look at:
- Timeline accuracy
- The budget, and
- Any stored materials on site.
Approvals from Lending Partners
Unfortunately, it isn’t uncommon for draw request approvals to get delayed.
One of the most common reasons for lost time: lending partners.
Depending on the lending institution, the draw request may be sent to a lending partner.
If this is the case, lenders are often stuck in limbo waiting for signatures from multiple parties.
How Can I Speed Up My Draw Request?
With hundreds of documents to be sorted and the requirement of on-site inspections, draw requests can take quite a bit of time.
In fact, the average contractor only sees payment 84 days after making a draw request.
But there has to be a way to speed up the process, right?
In order to speed up the process, being as organized as possible is key. This starts at the bottom of the chain.
Each member involved should make sure they have all their paperwork in order, no missing information, etc.
When Should I Make a Loan Draw Request From the Bank?
Schedule draw requests in advance. Make loan draw requests before funds are needed.
This avoids:
- Liens filed by subcontractors
- Material deliveries being held up
- Work stoppage
- Etc.
Do not wait until you need the funds to file a loan draw request from your bank. Being timely and concise is the key to staying on top of the project’s cash flow.
Eliminate the Headache of Draw Requests With the Flexbase App
Instead of...
- Wasting time waiting longer than necessary for payment; or
- Stressing over whether or not you’ve submitted the correct paperwork for each construction project you’re in charge of
...you could be using Flexbase.
With a Flexbase subscription, you can aggregate all the information from each of your construction projects and move forward with each project — without the risk of human error.
We aim to streamline and automate the paperwork involved in the payment process to reduce human error and accelerate receipt of payment.
How’s it work?
Easy. After you subscribe to Flexbase, you’ll save time by aggregating all of your business information into one area.
No more logging into ten different platforms to find the information you need to get your draw request sent.
All of your construction company’s payment data, documents, etc. are already integrated into our system.
You can:
- Upload receipts after purchasing materials; plus
- Keep track of licenses, and certifications of completion.
Let Flexbase help generate the request and get you paid faster.
Whether you’re just starting a construction process (and you’re looking for a lender) or you’re ready to send your lender a draw request package, Flexbase has your business covered.
