How Do Construction Draws Work?
Construction draws, also known as progress payments, are a crucial aspect of the construction process. They provide funding to contractors and builders throughout the duration of a project. Understanding how construction draws work is important for both contractors and clients to ensure a smooth and transparent payment process. Here is a breakdown of how construction draws work:
1. Contract agreement: The contractor and client agree upon the terms of payment in the contract before the project begins. This includes the schedule for construction draws.
2. Draw schedule: A draw schedule is created to outline when and how much money will be released to the contractor at specific milestones or stages of the project.
3. Progress inspection: Before each draw, a progress inspection is conducted to determine the completion percentage of the project stage. This inspection ensures that the work done aligns with the amount requested for payment.
4. Payment request: The contractor submits a payment request to the client, detailing the completed work and the amount requested for payment.
5. Lender approval: If the project is financed by a lender, the payment request is sent to the lender for approval. The lender may conduct an inspection to verify the progress.
6. Payment release: Once the payment request is approved, the client or lender releases the funds to the contractor.
7. Retainage: A portion of each draw, typically 5-10%, is retained by the client or lender until the project is completed to ensure the contractor fulfills all obligations.
FAQs about Construction Draws:
1. How often can a contractor request a draw?
Contractors typically request draws once a month or at specific project milestones.
2. How is the amount for each draw determined?
The amount for each draw is determined by the percentage of completion of the project stage.
3. What happens if there are disputes regarding the payment request?
Disputes regarding payment requests are typically resolved through negotiation or mediation.
4. Can a contractor receive an advance payment before the project starts?
In some cases, contractors may negotiate an advance payment to cover initial expenses.
5. What if the project is delayed and the contractor needs additional funds?
Contractors can request an extra draw if the project is delayed, subject to agreement with the client or lender.
6. Can the client or lender inspect the progress before releasing a draw?
Yes, progress inspections are conducted to ensure the work aligns with the requested payment.
7. What happens if the contractor fails to meet project milestones?
The client or lender may withhold payment until the milestones are met or take other legal actions as specified in the contract.
Understanding how construction draws work is essential for both contractors and clients to ensure a fair and transparent payment process. By following a well-defined draw schedule and maintaining open communication, the construction project can progress smoothly and efficiently.