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.
Each draw is a formal application rather than an automatic transfer. The general contractor submits a draw request, typically the AIA G702 application and G703 continuation sheet or an equivalent, showing the percentage complete on each Schedule of Values line, the work put in place during the period, and the cumulative amount requested to date. The lender's construction consultant or inspector then visits the site to confirm the reported progress before anything funds.
Two protections run alongside the inspection. A title update, or date-down endorsement, is run before funding to confirm no intervening mechanic's or other liens have been recorded since the last advance, preserving the lender's priority. And lien waivers are collected from the contractor, subcontractors, and suppliers to evidence that previously funded amounts were actually paid down the chain. The sequence of conditional, unconditional, partial, and final waivers is a core compliance element of every draw.
Retainage is the slice of each approved draw the lender or owner withholds, commonly 5% to 10%, and releases only when the project reaches a defined milestone. Its purpose is to keep the contractor financially motivated to finish punch-list items and close the project out properly, and to give the lender a reserve against unfinished or defective work. Substantial completion, the point at which the owner can occupy and use the property for its intended purpose, is the key milestone that releases much of the retainage, starts warranty periods, and often triggers the move to permanent financing.
Draw structures come in two broad forms. A cost-to-complete or percentage-of-completion structure, the institutional norm, funds each line item as verified work is put in place. A milestone structure instead releases a fixed amount when a defined stage such as foundation, top-out, or dry-in is reached, which is simpler to administer but less precisely tied to actual spend. In either case the loan carries a construction contingency line, usually 5% to 10% of hard costs, to absorb change orders and unforeseen conditions; exhausting that contingency mid-project is a common path to default.
A draw is a partial disbursement of construction loan funds that reimburses the borrower for work already completed. Instead of releasing the full loan at closing, the lender advances money in stages as the project progresses, after verifying the completed work and confirming clear title.
The contractor submits a draw request (often the AIA G702/G703 form) showing percentage complete on each budget line. The lender's inspector verifies progress on site, a title update confirms no new liens, and lien waivers are collected; the lender then funds the approved amount, less retainage.
It is the plan for how and when loan proceeds are released over the build, tied to the Schedule of Values, the line-item cost breakdown. Draws can be structured as cost-to-complete advances against verified progress on each line, or as fixed amounts released when defined milestones are reached.
Retainage is a portion of each draw, commonly 5% to 10%, that is withheld rather than paid to the contractor. It is released at substantial or final completion, giving the contractor an incentive to finish punch-list and closeout work and giving the lender a reserve against defective or unfinished work.
A lien waiver is a signed acknowledgment from a contractor, subcontractor, or supplier that it has been paid for work covered by prior draws and waives its lien rights to that extent. Lenders require waivers (conditional, unconditional, partial, and final) at each draw to prevent mechanic's liens from jumping ahead of the mortgage.
Milestone draws release a set amount when a defined stage of construction is reached, such as foundation or top-out. Cost-to-complete (percentage-of-completion) draws release funds against verified work put in place on each Schedule of Values line. The cost-to-complete method ties funding more precisely to actual spend and is the institutional norm.
Substantial completion is the point at which the project is finished enough that the owner can occupy and use it for its intended purpose, even if minor punch-list items remain. It is a key milestone: it releases much of the retainage, starts warranty periods, and often triggers the transition from the construction loan to permanent financing.