A draw request review is a meticulous, multi-step process designed to assure the lender that the project and the application of the loan funds are progressing per the agreed plans and established budget. Below are best practices for reviewing a draw request to ensure that funds are allocated appropriately, project progress is monitored effectively, and risks are managed proactively to support the successful completion of the project.
Check Documentation and Assess Costs
Verify that all required documentation is included and organized properly, including invoices and receipts, lien releases, budget (aka schedule of values) and change orders. Depending on the project and the specific legal requirements of a state, a draw request may require additional documentation beyond these groups. However, these documents are generally the same for all construction loan draw requests.
Review the itemized breakdown of costs to understand how funds are being allocated and compare the costs to the budgeted amounts outlined in the schedule of values. Look for any discrepancies, overages, or unexpected variances that may indicate scope changes, cost overruns, or inefficiencies. Let's take a look at how to review each of the document groups and the common draw request issues to anticipate.
Invoices & Receipts
Whether it is the concrete supplier or the architect, invoices in a draw package can include an excruciating level of detail, down to the number of screws all the way up to a very basic lump sum number that just says “plumbing.” Before you approve the invoice, you should confirm that each invoice is:
A Project Expense : Fairly simply, but is the invoice for this project? Sometimes with so many invoices flying around one can accidentally end up in the wrong stack!
For an Approved Item : Was the work that was completed approved? No one wants to pay for a swimming pool if the project doesn’t have one.
Of an Understood Cost : Do you understand what the charge is for? A line that says “plumbing” is not sufficient.
Not Invoiced Before : Often, since invoices take so long to be paid, they get submitted a second time (and potentially aggregated together/carried forward.) So, making sure it has not been invoiced previously is sometimes difficult, but important.
Once you have confirmed these items, the last part is just performing a visual inspection of the invoiced work, if applicable.
Lien Releases
The release of mechanic’s lien rights is an important part of a construction project as mechanic’s liens can get messy, complicated, and costly. Whether they physically step foot on the property or simply supply materials to the property, making sure that you confirm contractors and suppliers have been paid is important to avoid issues later. There are two types of lien releases to look for:
Conditional Lien Releases : Documentation that states if you pay their invoice they will not submit a lien.
Unconditional Lien Releases : Documentation that confirms that payments made last month were actually received by the company submitting the invoice and they have now released their right to file a lien.
Tracking lien releases to invoices and payments can sometimes feel like unraveling the cords behind your entertainment center, but it is key to having a clean title at the end of the project. It’s important to review Date Down endorsements, Major Subcontractor Lien Releases, and whether they are signed and notarized as required in the location of the project. This is essential for managing risks associated with title issues, subcontractor disputes, and legal compliance.
Budget
The budget, AKA the schedule of values or scope of work, shows the progress of the line items in the project. This is where you can track how much is being spent in relation to work completed in the field and overall health of the project. The budget review places all the ongoing costs into the broader context of the project’s overall financial health. It tracks all expenses concerning the project’s progress. Specifically, this stage of the draw request review aims to confirm that the requested amounts are covered with invoices, to ensure that the remaining balance is sufficient for the completion of the project or its specific stage, to ensure that any potential retainage is being held correctly, and to adjust for any reallocations of line items.
Budget Review Checklist:
All Amounts Being Requested Have an Invoice : Do the invoices make sense relative to the budget? If they are billing $20,000 for plumbing, is there an invoice for $20,000 worth of plumbing?
The Remaining Balance Is Sufficient to Complete the Work : If there is $60,000 left in the plumbing line item, is there only $60,000 of plumbing work to be completed? If anything is getting close to the original budgeted amount, it should be nearing completion on the build site.
Is Proper Retainage Being Held : If the project calls for retainage, this document should show how it is being withheld to make sure it is in line with the invoiced amounts.
Reallocations : Have line items increased or decreased in amounts over the last month? This is typically tracked in an adjustments column and making sure that these adjustments make sense with the project progress is the last step to ensure the budget looks good.
A lot of information resides in the schedule of values. Making sure all of the invoices tie correctly to line items and then to retainage, and any adjustments should be clear before approving the draw request.
Change Orders
Construction projects inevitably require changes arising from unforeseen circumstances. In such cases, a change order is submitted, usually requesting additional funds for the implementation of these changes. When reviewing a change order, the loan administrator will be looking to see if the contract includes the proposed incremental work, whether the submitted costs are realistic, and the cause of the change. We recommend reviewing the PCO (Potential Change Order) log to track the status of Contingency on a construction project. This helps project stakeholders proactively manage changes and unforeseen expenses, ensuring the project's success and minimizing financial risks.
Change Order Review Checklist:
Claiming Not in Original Contract : Sometimes something that the vendor may have overlooked is actually in their contract and you don’t want to pay for it twice.
Do the Costs Make Sense : Do we agree that the costs submitted are realistic for the work being performed?
Cause of the Change : Is this change due to a request of the owner, an unforeseen condition, or a mistake from a contractor? Is it possible that a legitimate cost is actually the expense of another contractor, not billable to the project, or should be handled through a back charge?
Who is Responsible : Which funder involved in the project is going to pay for the additional funds being requested via the change order?
Each change order is unique, but this checklist will get you started in the right direction.
Assess Progress
Evaluate the progress update provided in the draw request to understand the status of the project and confirm that milestones are being achieved according to schedule. Consider any challenges or issues reported and assess their impact on the project timeline and budget.
Ensure Compliance
Verify that the draw request complies with all relevant regulations, contractual obligations, and project specifications. Check for any required permits, certifications, or compliance documentation and ensure that all necessary approvals have been obtained.
Consider Risks: Assess the draw request for any potential risks or issues that may impact the project's success. This may include financial risks, scheduling delays, quality concerns, or legal liabilities. Address any identified risks with the project team or stakeholders as needed.
Approve or Request Modifications
Once you have completed your review, make a decision to approve the draw request, request modifications, or reject it if necessary. Provide clear feedback and guidance to the project team on any required changes or actions to take.
Maintain Records
Keep detailed records of the review process, including any correspondence, approvals, or modifications made to the draw request. This documentation serves as a valuable record of project progress, financial management, and decision-making.
In conclusion, performing a quality draw review involves a meticulous process to ensure that funds are allocated appropriately, project progress is monitored effectively, and risks are managed proactively. These best practices help support the successful completion of your projects while minimizing financial risks and ensuring compliance with contractual obligations and regulatory requirements.
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