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Should the owner or builder manage construction loan draw requests?
I’m comparing two ways to handle construction loan draws and would appreciate advice from owners who’ve dealt with both.
The first option is owner-controlled: I would verify the work completed, reconcile the requested amount against the approved budget, collect the required invoices and lien waivers, and submit each draw package directly to the lender. That seems to provide better visibility and control, but it also puts the paperwork and responsibility for errors on me.
The second option is builder-managed: the builder would assemble the draw request, coordinate the lender’s required inspection, provide progress documentation and lien waivers, and handle corrections if the lender finds missing or incomplete information. That could be more efficient, but I’m unsure how much independent review the owner should still perform.
A few questions I’m trying to resolve:
- Does your construction contract clearly make the builder responsible for preparing and coordinating draw requests, or is that left to the owner?
- Who verifies that the claimed work is actually complete before the lender’s inspection?
- Who reconciles each draw with the line-item budget and approved change orders?
- If a subcontractor’s lien waiver is missing, or the lender disputes the percentage complete, who is responsible for resolving it?
For those who have been through this, what arrangement worked best, and what would you make sure is spelled out in the contract?
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4 replies
I’d push back on treating builder-managed draws as a complete handoff. The builder should probably assemble the package and deal with lender corrections, but the owner should still review it before submission.
The builder has a direct financial interest in both the amount and timing of each request. I’d want the contract to spell out that the builder prepares the draw, while the owner verifies:
- work claimed is actually complete and installed
- the request matches the line-item budget
- change orders are approved and included correctly
- subcontractor and supplier lien waivers are current and properly conditional or unconditional as required
That review doesn’t mean the owner has to become the lender’s project administrator. It’s a second set of eyes before money leaves the loan. I’d also require the builder to provide the supporting invoices, updated schedule, and waiver package a few days before submission, with no draw going forward until missing documentation is resolved.
Put the timing and dispute procedure in writing. Otherwise, a disagreement over whether a phase is 80% or 90% complete can turn into an informal negotiation that delays everyone’s payment.
The contract should specify:
- a fixed draw-submission calendar and the deadline for the builder to deliver the package
- how many business days the owner has to review it
- who orders the inspection and how quickly corrections must be addressed
- what happens when the owner, builder, and inspector disagree on completion percentage
- whether the undisputed portion can still be submitted while the disputed item is resolved
That keeps the builder responsible for assembling the package without making payment timing dependent on whoever happens to respond fastest. The owner still needs to check the budget, change orders, and waiver package, but there should be a defined escalation path for anything that doesn’t match.
A lender’s progress inspection shouldn’t be treated as a guarantee that the reported work or value is accurate. If a draw is paid on overstated progress, the money may be gone while the work still needs funding. Who bears that shortfall under the proposed contract? I’d have the agreement spell out responsibility and a remedy for an inaccurate draw, rather than leaving that risk implicit.
The lender’s paperwork can dictate who actually submits the draw. Check the loan documents for who’s authorized to request disbursements: if only the borrower can submit, the builder can still prepare the package, but the owner has to send it in. That changes who handles the lender-facing step, not who gathers or reviews the backup.