A construction draw is a disbursement of funds from a construction loan released after completing a specific project phase. Instead of receiving all money upfront, you get it in chunks as work progresses, which protects both lender and borrower. Each draw corresponds to a construction milestone like foundation completion or framing completion.
Construction Draws Explained: How Project Financing Actually Works
If you're new to construction lending or project financing, understanding construction draws is fundamental. A draw is how construction projects get funded in real time, and it's the mechanism that keeps projects moving while protecting everyone's interests.
Let's start with the basics: What is a construction draw?
A construction draw is a payment—a release of funds from a construction loan—that occurs when a specific phase of work is complete. It's called a "draw" because the borrower is drawing down the available loan balance. Instead of receiving the entire construction loan amount on day one, the borrower receives it in stages, aligned with project milestones.
This staged approach is fundamental to how construction lending works. It protects the lender by ensuring money isn't given out until work actually happens. It protects the borrower by ensuring they have cash when they need it to pay workers and suppliers. And it protects subcontractors because they know payment is tied to verified work completion.
How Construction Draws Work: The Mechanics
Imagine a $1 million construction loan for a residential project. The lender doesn't hand over $1 million on day one. Instead, they disburse it as follows:
- Draw 1 (Foundation): $150,000 - Released when foundation work is 100% complete and inspected
- Draw 2 (Framing): $250,000 - Released when framing work is 100% complete and inspected
- Draw 3 (Rough-In): $200,000 - Released when electrical, plumbing, and HVAC rough-ins are complete
- Draw 4 (Drywall & Interior): $250,000 - Released when drywall is hung, taped, and mudded
- Draw 5 (Final): $150,000 - Released when project is 100% complete and passed final inspection
Each draw is tied to objective, verifiable completion criteria. The contractor doesn't get Draw 2 until Draw 1 work is done. They don't get Draw 3 until Draw 2 is done. This keeps the project sequenced logically and prevents overpayment for incomplete work.
The Construction Draw Schedule: Your Project Roadmap
Before construction begins, the lender and borrower agree on a detailed draw schedule. This document specifies:
- What percentage of total project cost each draw represents
- What specific milestones trigger each draw
- How much is held back as retainage (typically 5-10%)
- Interest reserve amounts
- Payment schedule for draw requests and inspections
This draw schedule is the roadmap for the entire project financing. When contractors know exactly what needs to be complete to get paid, everyone stays focused on the right priorities.
Modern platforms like Sekady make managing draw schedules infinitely easier. Instead of tracking everything in spreadsheets, the platform maintains the draw schedule, tracks progress against it, and automatically calculates remaining balances, retainage, and when draws are due.
Key Stakeholders in a Construction Draw
The Lender: Wants to ensure money is only disbursed for work that's actually complete, on budget, and meets quality standards. Minimizes risk by having a draw structure.
The Borrower: Wants efficient draws so they have cash when they need to pay workers and suppliers. Wants clarity about what needs to be done to get each draw.
The General Contractor: Needs predictable funding to manage project cash flow, pay subs, and keep the project moving. Submits draw requests and works with the lender.
Subcontractors: Need to know when they'll get paid for their work. Want proof that their work was included in the draw request. Provide lien waivers confirming payment.
The Inspector: Verifies that work described in the draw request is actually complete and meets quality standards. Provides objective third-party verification.
The Draw Request vs. The Draw: Understanding the Difference
These terms are often used interchangeably, but they mean different things:
- Draw Request: The formal submission by the borrower/contractor asking for the next disbursement. It includes documentation (invoices, photos, lien waivers) supporting the request.
- Draw: The actual fund disbursement that occurs after the draw request is approved. Money moves from the lender to the contractor/borrower.
Think of it this way: a draw request is the ask. A draw is the answer.
Why Construction Draws Exist: The Protection Structure
Construction draws exist for a fundamental reason: real estate is expensive, and the inherent risk is significant.
For the lender: If they hand over $1 million and the contractor disappears, the lender loses. Draw verification ensures work is happening and the property is increasing in value with each draw.
For the borrower: If the contractor takes all the money upfront and does poor work, the borrower is stuck with a half-finished project and no recourse. Draws tied to completion milestones ensure the contractor has incentive to do good work.
For subcontractors: Without draws tied to work completion, they might work for months and never get paid. Draw verification ensures their work is documented and payment is confirmed.
Construction draws create aligned incentives. Everyone benefits from project completion, so everyone works toward that goal.
Common Construction Draw Scenarios
Scenario 1: Single-Family Home A $500,000 construction loan might have 5-6 draws: site prep, foundation, framing, exterior/rough-in, interior/finish, final. Each draw is 15-20% of the total, released as each phase is verified complete.
Scenario 2: Multi-Family Development A $10 million project might have 15-20 draws over 18 months, tied to specific unit completion percentages, building system completion, and occupancy milestones. Draws are released more frequently because the project is larger and extends over longer periods.
Scenario 3: Commercial Project A $25 million commercial build might have draws tied to specific trade sequences: excavation, foundation, steel, enclosure, MEP, interior, finish. Draws are only released when each phase is independently verified.
The Draw Verification Process
Before any draw happens, the lender requires verification that work is actually complete. This typically involves:
Step 1: Draw Request Submission Contractor submits documentation showing what work has been completed, including invoices, photos, and lien waivers from subs.
Step 2: Budget Review Lender reviews the request against the approved budget and draw schedule to ensure the request aligns with what was planned.
Step 3: Inspection Scheduling Lender (or third-party inspection company) schedules a site visit to verify work.
Step 4: Physical Inspection Inspector visits the site, compares actual work against construction plans and the draw request, takes photos, and prepares a report.
Step 5: Discrepancy Resolution If the inspector finds issues (work incomplete, quality problems, progress inconsistent with the claim), the lender doesn't approve the draw until issues are resolved.
Step 6: Approval and Disbursement Once inspection confirms work is complete, the lender approves the draw and disburses funds via ACH, wire, or check.
Construction Draws and Project Budgets
Construction draws are inextricably linked to the project budget. The budget is divided into line items (foundation, framing, electrical, plumbing, etc.), and each line item has a dollar amount. As each phase is complete, that portion of the budget is "drawn down."
If a contractor completes foundation work budgeted at $150,000, that's the foundation draw amount. If foundation costs overrun to $180,000, the contractor has a problem—they've exceeded their budget allocation and won't get all that money without a change order.
This is why budget tracking is critical in construction lending. Modern platforms like Sekady automatically check every draw request against the approved budget, flag overages, and prevent over-budget draws from being approved without proper authorization.
Interest Reserves and Holdbacks in Draws
Most construction loans include two financial mechanisms in the draw structure:
Interest Reserves: The lender may hold back a percentage of each draw to cover monthly interest payments. For example, if monthly interest is $5,000 and the project is expected to take 12 months, the lender might hold back $60,000 from draws to cover interest. The borrower doesn't have to pay interest out of pocket—it comes from this reserve.
Retainage (Holdback): The lender (and often the contractor) withholds a percentage (typically 5-10%) of each draw as a guarantee that work will be completed properly. This holdback is released only after final project completion and all lien waivers are received. Retainage protects the lender from the contractor abandoning the project.
These financial mechanisms reduce risk and ensure the lender has recourse if something goes wrong during construction.
The Digital Evolution of Construction Draws
Historically, managing draws meant:
- Spreadsheets tracking budgets, percentages, and remaining balances
- Email chains requesting documentation
- Manual inspection scheduling
- Paper files organizing invoices and lien waivers
- Days of delay between inspection and payment approval
Today, platforms like Sekady have digitized this entire process. Draws are managed in the cloud, documentation is collected digitally, inspections are scheduled automatically, and approvals happen with a click. What used to take weeks now takes days.
Best Practices for Managing Construction Draws Efficiently
- Establish a clear draw schedule upfront - Before construction starts, agree on the specific draws, what triggers each one, and exactly what documentation is needed. Write it down and share it with everyone.
- Keep your budget accurate and updated - Any changes to the project should result in a change order that updates the budget. Draw requests should reference the most current budget.
- Collect documentation proactively - Don't wait until you're ready to submit a draw request to collect invoices and lien waivers. Have subs sign waivers as their work is complete.
- Take comprehensive completion photos - Quality photos with clear documentation of completed work prevent inspection disputes.
- Communicate project progress regularly - Keep the lender informed about how the project is progressing. Proactive communication prevents surprises.
- Use a platform built for construction draws - Managing draws manually is inefficient. Platforms like Sekady automate documentation collection, inspection coordination, and approval workflows.
- Understand your lender's specific requirements - Different lenders have different draw processes. Understand your lender's specific requirements and follow them precisely.
Construction Draws in Different Loan Types
Construction-to-Permanent Loans: Draws happen during construction, and when the project is complete, the loan converts to a permanent mortgage. Interest-only payments typically happen during the construction phase, with the loan converting to regular principal-and-interest payments after completion.
Standalone Construction Loans: Strictly for the construction phase, with a defined end date. Once construction is complete, the borrower must obtain permanent financing or refinance the construction loan.
Bridge Loans with Construction: Some bridge loans include a construction component, with draws during the construction phase and a takeout refinance after completion.
Private Construction Loans: Private lenders may have more flexible draw schedules, higher interest rates, and different draw structures tailored to the specific deal.
Troubleshooting Common Draw Issues
Problem: Contractor requests a draw, but inspection shows work is incomplete. Solution: Communicate clearly about what needs to be finished. Don't approve the draw until work is verified complete. Use digital platforms to track what's remaining.
Problem: Subcontractors won't sign lien waivers, delaying the draw. Solution: Make lien waivers a requirement before final payment for each phase. Use your draw management system to track which subs haven't signed and follow up proactively.
Problem: Project costs are exceeding the draw budget. Solution: Issue a change order immediately and adjust the budget. Don't approve draws that exceed approved line items without proper authorization.
Problem: Inspectors and contractors dispute the percentage of work complete. Solution: Use digital inspection tools (photos, measurements, checklists) that provide objective evidence. Modern platforms like Sekady reduce these disputes by standardizing documentation.
Conclusion: Draws Are How Construction Gets Financed
Construction draws are the operational heartbeat of construction lending. They enable projects to be funded in real time, aligned with actual progress. They create accountability, control risk, and keep projects moving.
For lenders, understanding how to manage draws efficiently is critical to scaling. For borrowers, knowing how to submit draw requests correctly and maintain a well-managed project is how you get fast funding.
Ready to optimize your draw management process? Learn more about how Sekady streamlines construction draws by visiting our FAQ page.
