The draw schedule is a detailed payment plan for a construction project. If a bank is financing the project, the draw schedule determines when the bank will disburse funds to you and the contractor.
The goal is to make progress payments to the contractor as work is completed. You don’t want to pay for materials that have not been delivered or work that is not complete. It’s not your job to provide working capital for the contractor. (If you are an owner-builder, the draw schedule will determine when the bank releases money to you to pay for materials and subcontractors.)
Draw schedules are typically proposed by the contractor and may be further negotiated between the contractor, the bank, and yourself. If a bank is involved, they may want to use their own standardized draw schedule. But in any case, the bank’s appraiser will make sure the draw schedule is reasonable based on his knowledge of construction costs. If you are paying cash, you will need to do your own independent estimate (or hire an estimator or appraiser to review the draw schedule), or trust that the contractor’s proposed payment schedule it is reasonable.
The number of payments in the draw schedule will depend on the size of the project and the preferences of the builder or bank. A draw schedule of five to seven payments is common for a new house.
Most draw schedules link payments with milestones in the project, such as completion of the foundation and completion of the rough framing. Sometimes, the draws are more generally based on the percent complete of the total job.
In either case, the payment should be roughly equal to the value of the work completed. These line-item values have been determined by the owner or builder in their detailed estimate, and are summarized in budget breakdown called a schedule of values. This cost breakdown will also become your project budget. If you are working with a lender, contact them first to see if they have a specific format to follow.
To avoid conflicts over payment, it’s important that the draw schedule closely reflect the actual value of work completed. The schedule of values can be highly detailed or pretty basic, depending on the type and size of project and the financing arrangements. In either case, a good draw schedule is based on an accurate, detailed estimate, and the resulting schedule of values:
Download sample New Home Schedule of Values.
|Sample Schedule of Values for a 2000 sq. ft. Custom Home|
|Cost||% of total|
|Plans and specs||$2,000||1|
|Permits, fees, inspections||4,000||2|
|Clear lot, rough grade||1,500||1|
|Water hookup and fees||3000||1.5|
|Sewer hookup and fees||3000||1.5|
|Well, pump, hookup, and water treatment||NA|
|Septic system and hookup||NA|
|Excavation and backfill||4,000||2|
|Foundation and flatwork||12,000||6|
|Exterior doors and hardware||2,000||1|
|Siding and ext. trim||10,000||5|
|Gutters and downspouts||1,000||0.5|
|Cabinets and countertops||12,000||6|
|Floor coverings: wood, tile, carpet, vinyl||12,000||6|
|Garage doors and opener||2,000||1|
|Porch, wood deck, or patio||5,500||3|
|Driveway and walkways||6,000||3|
|TOTAL CONSTRUCTION COST||$200,000|
The sample above is based on a typical, small custom home. The numbers, of course, will vary enormously, depending on a wide variety of factors, including the size and quality of the home, the materials selected, and the location. But the numbers in this sample are typical for an average new home, and will give you a sense of where the money goes, and where you may be able to cut if your house comes in over budget and you need to make cuts.
If the estimate was done by you, the owner, the numbers will represent your actual cost for materials and labor. If your contractor does the estimate, these numbers will be as much as 20% to 25% higher, accounting for the contractor’s overhead and profit.
Banks distribute money for a project in several payments as the work progresses. While procedures vary a bit from lender to lender, all follow the general principal that the bank does not want to pay for work that has not been completed. (Nor should you if you are funding the project with your own cash!)
A typical draw schedule for a new home has five to seven payments, but some may disburse money as frequently as once a week. Most draw schedules link payments to the “substantial completion” of a phase of work such as the foundation or rough framing. Some correspond more generally to the percent of completion of the entire project, a more difficult number to track, leaving greater room for disagreement. A bank draw schedule is generally more complex than a cash job. Compare the draw schedule in Fannie Mae’s model Construction Loan Agreement to the samples below from owner-financed projects.
| Sample Draw Schedule: Small Remodeling Project
|Draw 2||Framing, wiring and plumbing rough-in, insulation.||$6,000|
|Draw 3||Drywall, windows, cabinets.||6,000|
|Draw 4||Patch exterior, painting, flooring, fixtures, cleanup.||5,000|
|Sample Draw Schedule: Custom Home or Addition (owner financed)|
|Draw 1 Foundation||Plans and specifications, permits, excavation, footings, foundation.||$37,500 (15%)|
|Draw 2 Rough Framing
||Wall and roof framed and sheathed. Subflooring, interior partitions.||$37,500 (15%)|
|Draw 3 Dry In||Asphalt shingle roofing, wood siding, windows, exterior doors.||$37,500 (15%)|
|Draw 4 Rough In||Rough HVAC, electrical, plumbing. Set tubs and shower. Insulation. Flatwork.||$30,000 (12%)|
|Draw 5 Trim Out||Drywall, interior doors, cabinets, countertops, interior trim, finish flooring.||$50,000 (20%)|
|Draw 6 Substantial. Completion||Exterior trim, gutters, water and sewer hookups, finish plumbing and electric, carpeting, garage doors.||$45,000 (18%)|
|Draw 7 Retainage||Substantial Completion||$12,500 (5%)|
Payment for work completed. The contractor, naturally, is in a rush to get paid for work completed and would like to be a little ahead to have some working capital. You and the bank, on the other hand, only want to pay for materials delivered and work completed. It’s not your job, or the bank’s, to provide the contractor with working capital. However, some jobs do require more money than normal upfront, for example, to for costly special-order items such as SIPs (structural insulated panels).
Simply put, the contractor is afraid of not getting paid for work completed or materials he has purchased and the owner (and bank) is afraid of paying ahead of time for work that may never be done or done incorrectly.
A good draw schedule strikes a reasonable balance between the builder’s need to get paid on time and the owner’s and bank’s need to pay only for work completed. The key is to have a payment plan that based on an accurate budget, fair to all parties, and easy to follow. In that case, there should be few problems with payments.
Front-loading. Some builders like to front-load the payment schedule to improve their cash flow and to act as a buffer in case, for any reason, the owner withholds the final check. They may ask for a large down payment, or simply fatten the early draws to stay ahead of their expenses. Another ploy is to link payments to the beginning, not the completion, of a phase of work. This is risky for you since many things can be started without any being completed. For example, if $20,000 is due at the start of Rough-In, it doesn’t mean that the siding has been installed even though it was paid for in the previous draw. This benefits the contractor, but can leave the owner far ahead on payments. Banks will not approved this type of payment schedule and neither should you if you are paying cash.
If you are also buying land. In this case, the first draw, including your down payment, will be used to purchase the land, including closing costs. It may also cover some the the “soft costs” such as permitting and site development in the case of vacant land.
To protect homeowners, some states, such as California and Maryland limit the size of the down payment on home-improvement contracts. The limit in Maryland is one-third the contract price; in California the limit is 10% or $1,000, whichever is less.
Owner financing. If you are not borrowing money, you will still need to establish a draw schedule with your contractor so that you don’t get ahead of the work completed. It’s not your job to play banker and provide your contractor with working capital or extra spending money. However, it’s reasonable for the contractor to ask for money to cover the deposit on special-order items. If you are putting up a lot of money, it’s best to put the material orders in your name. If anything goes wrong along the way, at least you’ll own the 20 high-end windows you’ve paid for
My experience as a contractor. As a contractor, I never got “stiffed,” as in not paid the final check, but I often heard such stories from other contractors. In some cases, I’m sure the contractor should not have been paid in full because he did a lousy or incomplete job. In others, I suspect the owners withheld money for no good reason – or a little of each. However, in my experience, if the draw schedule is fair, the contractor reputable, and the owner reasonable, the payment process should go smoothly. Yet another reason to find a contractor you have confidence and trust in. Hint: He may not be the lowest bidder on the job.
The most common approach is to make payments contingent on substantial completion of key phases of construction, such as the foundation or rough frame. Banks send an inspector to approve each payment and charge an inspection fee of $50 to $100. If no bank is involved, you (or your construction manager) will want to stop by to confirm that the reported progress is being made. “Substantial completion” means that the payment request if valid even if a few 2x4s are missing from an otherwise complete frame. The contractor should not request a payment before it is due, and you should not nitpick a few loose ends. An exception is the final check, which should not be released until everything is complete and correct.
Title companies. Some bankers use a title company to conduct the inspections and disperse funds. This adds more fees and delays payments, so discuss the pros and cons of this procedure with your lender, as you may be able to opt out of using a title company and handle the disbursements yourself.
Lien wavers. Assuming the inspection passes, the proper documentation is supplied, and the general contractor signs a lien waver, the funds will be wired to the builder’s account, minus the 5% to 10% held back for retainage. The bank may require other lien wavers, for example, from key subcontractors, or the largest supplier, before the last check is released. Even without a lender involved, you will want to get lien wavers from the general contractor and main suppliers, at least before cutting the final check.
Change orders. It is in the best interests of all parties to keep the work on schedule, pass all inspections, and avoid changes to the plan. Some banks will not pay for change orders, which can be a good thing as it motivates the builder to make sure nothing essential is left out of his bid. If the owners decide to add a $3,000 jetted tub or to upgrade from carpet to hardwood floors, they will have to come up with the cash out of pocket.
Final payment. Generally, progress payments are made directly from the lender to the contractor, while the final check is made jointly payable to the owner and contractor after all work is complete and certificate of occupancy (CO) has been issued. The joint check, requiring both endorsements to cash, gives you, the owner, some leverage to get the contractor to take care of any punch list items, or other loose ends before handing over the final check.
Conflicts over payment. While most projects with a reputable builder proceed pretty smoothly, occasionally bad things happen. A contractor can skip town or go bankrupt, a sub can show up drunk or not at all, an innovative building system may not work out as planned, or the new super-duper paint specified for the project peeled off the new wood siding for some reason.
If there are significant problems at the end of the project, you should have a frank discussion with your bank and loan officer about withholding the final check until the problems are resolved. At the least you should withhold enough money to get the work corrected by another contractor if necessary. The loan officer may want to cut the final check to get paid, but the bank may not want to hold a mortgage on a property with serious flaws that lower its value – or one with possible litigation pending.
Withholding money is a powerful motivator, but will not endear you to the contractor. Whatever happens, always be civil. Explain that you fully intend to pay up as soon as the job is completed. Whatever the issue, do your best to work out an acceptable resolution with your contractor. If you cannot work things out satisfactorily with the contractor and bank, it’s probably time for a quick consult with your lawyer. Read more on dispute resolution.
See also Construction Loans