What Is a Draw Schedule?

Draw Schedules Explained in 5 Minutes or Less

New homeowners shake hands with a person in a suit as contractors work behind them
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A construction draw schedule is an agreement between the lender, builder, and borrower that outlines when the builder will be paid for their work. In construction projects, payments are made throughout the course of the project rather than in a lump sum before or after.

A draw schedule is an important part of any major construction project, especially a home build. Keep reading to learn how draw schedules work and why it’s important to have them for your project.

Definition and Examples of a Draw Schedule

A draw schedule in a construction project outlines when the builder will receive payments—also known as draws—throughout the building process. When a bank is financing the project, the draw schedule is an agreement between the bank, the builder, and the customer.

  • Alternate name: Payment schedule

For example, suppose you’re building a home and the lender and contractor agree to a seven-payment draw schedule. Over the course of the building process, the bank would make seven separate payments to the builder, often based on the builder meeting certain milestones.

How Does a Draw Schedule Work?

During the construction of a new home, the lender delivers payments through several draws rather than in one lump sum at the beginning or end of the build process. These draw payments compensate the builder for materials they’ve purchased and work they’ve done, without paying for work that hasn’t happened yet.

A typical draw schedule has between four and seven payments, depending on the project and the bank.

Draw schedules are often designed around milestones in the build process. As the contractor surpasses each milestone, they receive the payment associated with that stage. Here’s a sample seven-payment draw schedule featured in Fannie Mae’s model construction loan agreement:

  • Stage 1: Closing
  • Stage 2: Site prep and utility service
  • Stage 3: Framing, utility hookup, and enclosing
  • Stage 4: Interior
  • Stage 5: Exterior finish
  • Stage 6: Interior finish and completion
  • Stage 7: Final

Each stage corresponds to a specific payment amount that is a percentage of the total cost of the project. These payments don’t necessarily have to be equal, and could instead correspond to the cost of the contractor’s materials and labor proportional to the full project.

Rather than being linked to project milestones, draw schedules can also be based on the percentage of the work that’s complete. For example, a project might have a draw schedule with five payments, and each time the builder finishes an additional 20% of the project, they get 20% of the total payment amount.

As they reach each project milestone, the contractor will submit a draw request that will outline:

  • The amount they’re requesting
  • The phase of the work they’ve completed
  • A description of any work or materials they paid for

When the contractor submits a draw request, the lender may also require an appraisal to ensure the work has, in fact, been done.

A draw schedule will also likely include what’s known as “retainage,” a percentage of each draw amount that’s set aside until the project is complete. Retainage can incentivize the contractor to complete the job, or provide a safety net in case the project runs out of money.

In some cases, a contractor may also ask for a down payment in addition to the draws throughout the project. While this isn’t unusual, it shouldn’t be too large. Some states even limit the amount a contractor can require for a down payment. For example, most contractors in California are prohibited from asking for a deposit that exceeds the lesser of $1,000 or 10% of the cost of the project.

Do I Need a Draw Schedule?

A draw schedule is a common feature in construction projects, and it benefits all parties involved. If you’re financing the build through a lender, they’ll almost certainly require a draw schedule to make sure they aren’t paying for work that hasn’t been done.

Even if you aren’t borrowing money for the project and are paying for it out of pocket, a draw schedule makes sense to ensure you’re only paying for a service you’ve received. Building a home is a lengthy and expensive process, and it’s not ideal to hand over the entire amount to the contractor before they start building.

A draw schedule also benefits the contractor. With a written agreement in place, they can feel confident they’ll have cash flow throughout the project and will be paid for their work in a timely manner, rather than having to wait until all the work is done.

Finally, a draw schedule can help reduce disputes during the building process. Each party knows their responsibilities when it comes to payment. An effective draw schedule will strike a balance so that the builder never feels they’re providing work without compensation, and you and the lender never feel as if you’re paying for something you aren’t getting.

Key Takeaways

  • A draw schedule in a construction project is a timeline of when the builder will be paid for each phase of the project.
  • Draw schedules usually have four to seven individual payments, and may include a deposit or down payment at the start of the project.
  • A draw schedule can have payments linked to milestones in the build process, or it may be based on the percentage of completed work.
  • Throughout the project, the contractor will submit draw requests for payment as they complete phases of work.
  • Draw schedules are an important part of any construction project and protect the customer, lender, and builder.

Article Sources

  1. 3Rivers Credit Union. “Building a New Home? Here's What You Need To Know About Construction Loans!

  2. Fannie Mae. “Construction Loan Agreement,” see “Exhibit B: Schedule of Advances.”

  3. Contractors State License Board. “What You Should Know Before Hiring a Contractor.”