The short answer
In the construction loan draw process, the borrower requests funds for work completed, typically monthly, with a payment application, lien waivers and supporting invoices. The lender has the work inspected, confirms the budget still balances, updates the title policy for the new advance, and disburses the approved amount less any retainage.
Each draw works like a small closing that repeats for the life of the project. Teams that template the draw package run it on schedule. Teams that assemble each draw from scratch repeat the scramble every month.
What goes in a construction draw package?
| Document | Purpose | Common gap |
|---|---|---|
| Draw request and borrower certification | Funding request by construction phase and cost category, with the borrower's certification that loan conditions are met | Cost categories that fail to match the approved budget |
| Payment application (often AIA G702 and G703) | The contractor's request against the schedule of values | Percent complete claimed ahead of the work in place |
| Lien waivers | Proof that the contractor, subcontractors and suppliers were paid for prior work | A waiver missing from one subcontractor |
| Invoices and receipts | Support for soft costs and direct purchases | Costs outside the approved budget line |
| Inspection report | Independent confirmation that the claimed work is complete | A report dated too long before the draw |
| Title update | Confirmation of no intervening liens and coverage for the new advance | Ordered late, holding the disbursement |
| Budget reconciliation | Evidence the remaining budget covers the remaining work | Reallocations made informally |
How do lenders structure construction disbursements?
The OCC's Commercial Real Estate Lending handbook describes two common plans. A standard payment plan, used for residential and smaller commercial projects, pays fixed amounts at predetermined construction stages. A progress payment plan, normal for commercial projects, releases funds as the borrower completes phases of construction.
Under a progress plan, the handbook notes, the bank normally holds back 10 to 20 percent of each payment to cover cost overruns or outstanding bills from suppliers and subcontractors. Some lenders instead disburse on a voucher basis, paying each bill as presented, which adds control and administrative work.
OCC Comptroller's Handbook, Commercial Real Estate Lending.
What controls should govern each disbursement?
- Inspection before fundingEach draw is commensurate with improvements made as of the inspection date.
- Use of fundsFunds go solely to the financed project, as stipulated in the draw request and loan agreement.
- Equity maintainedThe borrower's minimum equity requirement holds throughout construction.
- Funds to completeThe remaining loan balance and equity cover the remaining cost of the project.
- Title updateThe lender's title policy is updated with each draw.
- Exception reportingBudget overruns, delays and missing documents get reported and resolved.
Why do lien waivers and title updates matter so much?
Mechanics' liens protect contractors and suppliers who improve a property and go unpaid. The OCC handbook calls them the most common form of lien on construction projects and notes that in some jurisdictions they can take priority over the bank's lien.
That is why the handbook describes updating the lender's title policy with each draw, with the title company confirming no outstanding liens. ALTA publishes endorsements designed for construction lending, including the ALTA 32 construction loan endorsement and the ALTA 33 disbursement endorsement.
What does a monthly draw cycle look like?
- Request window opensThe borrower and contractor receive the draw checklist with the package due date.
- Package submittedThe draw request, payment application, waivers and invoices arrive against their items.
- Completeness checkMissing waivers and budget mismatches get flagged the same day.
- InspectionThe inspector confirms work in place and reports percent complete.
- Title updateThe title company searches for new liens and updates coverage for the advance.
- ApprovalThe lender reconciles the request to the inspection and budget and approves the amount.
- FundingThe approved amount disburses, less retainage, and the budget updates.
How should change orders be handled?
Change orders alter scope, cost or schedule, and they reach the draw as budget reallocations. The OCC handbook calls for changes in construction plans to be reviewed by competent staff or a construction consulting firm and approved and documented by the bank and any take-out lender.
The handbook adds that a significant number of change orders could indicate poor planning, design problems or construction problems, and should be tracked and reflected in the budget. Record each change order with its approval before funding a draw that relies on it.
How does the interest reserve fit into draws?
Many construction loans fund interest from a reserve inside the budget. The OCC handbook expects the reserve to cover interest through completion and lease-up, with project cash flow during lease-up applied to interest before the reserve.
Watch the reserve's pace against the schedule. A reserve running low ahead of completion signals delays or overruns, and the handbook treats repacking a depleted reserve with more debt as a red flag for credit deterioration.
What monitoring runs alongside the draws?
The OCC handbook describes monthly reports of work completed, costs to date, costs to complete, construction deadlines and loan funds remaining. During lease-up, it describes monthly leasing reports with rent rolls compared against the underwriting projections and the appraisal's assumptions.
Tie each report to the draw it supports. The file then shows the project's progress and budget month by month, alongside the money that funded it.
How are soft costs and stored materials drawn?
Soft costs, such as architecture, engineering, permits, legal fees and interest, draw against invoices and receipts, because they leave nothing on site to inspect. Match each invoice to its budget line and keep the invoice with the draw.
Stored materials need extra evidence before a lender pays for them. Lenders typically ask for invoices, proof the materials are on site or in a bonded location, insurance covering them and a waiver from the supplier, since materials that never get installed leave the lender paying for collateral it cannot find.
What does the final draw require?
The final draw usually releases the retainage. Before funding it, the OCC handbook lists confirming that the borrower obtained lien waivers or releases from contractors, subcontractors and suppliers, reviewing the final inspection report to confirm the project is complete to specifications, and confirming the certificate of occupancy.
After the final draw, the loan converts to permanent terms or pays off from take-out financing. The draw record becomes part of the file the permanent lender or buyer reviews.
How do teams turn draws into a routine?
Template the draw package, since it repeats every month. Each draw becomes a recurring checklist with the same items, owners and due dates, and the contractor learns what complete looks like after the first cycle.
Start title and inspection ordering on a fixed day each month, so neither becomes the item that holds funding. Track missing waivers by subcontractor, because the same subcontractor tends to be late every month.
How does Prodeal support construction draws?
Prodeal lets lenders run each draw as a checklist from a template, with the borrower and contractor uploading requests, payment applications and lien waivers against their items, and inspection reports, title updates and approvals recorded on the same deal. Confluence Companies closed a $22M construction loan for a 168-unit multifamily project on Prodeal in under 45 days.
Questions lenders ask
- How does a construction loan draw work?
- The borrower requests funds for completed work with a draw request, payment application, lien waivers and invoices. The lender inspects the work, reconciles the budget, updates the title policy for the advance and disburses the approved amount less retainage.
- What documents are needed for a construction draw?
- A draw request with the borrower's certification, the contractor's payment application such as AIA G702 and G703, lien waivers, invoices for soft costs, an inspection report, a title update and a budget reconciliation.
- What is retainage on a construction loan?
- Retainage is the portion of each progress payment the lender holds back to cover overruns and unpaid bills. The OCC notes banks normally hold back 10 to 20 percent of each payment under a progress payment plan, releasing it with the final draw.
- Why do lenders update title with each draw?
- Mechanics' liens from unpaid contractors and suppliers are the most common construction liens and can take priority over the lender's lien in some jurisdictions. A title update confirms no new liens and extends coverage to the new advance.
- How often are construction draws funded?
- Most commercial construction loans fund draws monthly under a progress payment plan, tied to inspections of work completed. The loan agreement sets the schedule and requirements.
- What does the final construction draw require?
- Lien waivers or releases from contractors, subcontractors and suppliers, a final inspection confirming the project is complete to specifications, and the certificate of occupancy, before the retainage is released.
- What is an interest reserve on a construction loan?
- It is a budgeted reserve that pays loan interest during construction and lease-up. Lenders monitor its pace against the schedule, since a reserve running low early signals delays or overruns.