A construction loan is structured as a reimbursement facility: the lender does not advance the full loan amount at closing, but rather funds draws against completed work as construction progresses. This structure aligns lender funding with actual project cost incurrence and protects the lender from fronting money for work that may never happen. The draw schedule is governed by a Schedule of Values — a line-item cost breakdown of the project that is typically developed by the general contractor, reviewed by the lender's construction consultant, and attached to the loan agreement as the basis for all future advances.
Each draw request is a formal application: the general contractor submits an AIA G702/G703 or equivalent form showing the percentage complete on each Schedule of Values line item, the amount of work completed in the current period, and the cumulative total requested to date. The lender's construction inspector visits the site, verifies the reported progress, and signs off (or flags discrepancies) before the draw is approved. A title update is run before funding to confirm no intervening liens have been recorded, and lien waivers are collected from subcontractors and material suppliers as evidence that previously funded amounts have been paid to them. The progression of lien waivers — conditional, unconditional, partial, final — is a critical compliance element that protects the lender from priority disputes.
Retainage is the portion of each draw the lender holds back from the contractor until specified milestones are met. A typical retainage is 5% to 10% of each draw, released at substantial completion or final completion depending on the project and the jurisdiction. The purpose of retainage is to give the contractor a financial incentive to complete punch list items and close out the project properly, and to give the lender a reserve against any unfinished or defective work. Substantial completion — the point at which the project is sufficiently complete that the owner can use it for its intended purpose — is a key legal milestone triggering the release of significant retainage, the start of the warranty period, and often the transition from construction financing to permanent financing.
Change orders complicate the draw schedule. A change order is a formal modification to the scope of work and typically requires lender approval before it can be included in a draw request. Unfunded change orders — scope changes the owner negotiates directly with the contractor without lender approval — create liability exposure because the owner will owe the contractor for the work but the lender will not fund it through the loan. Careful project management requires every meaningful scope change to be documented, priced, and formally approved by all parties before work begins. The loan's construction contingency line, typically 5% to 10% of hard costs, is the reserve for change orders and unforeseen conditions; running out of contingency mid-project is one of the most common reasons construction loans go into default.
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