For any value-add Fix & Flip or new build construction project, you’ll live and die by your draw schedule. Managing and monitoring cash flow is as important as the actual construction, and a well-managed and maintained (and realistic) draw schedule goes a long way toward keeping a project on time and within budget.
What is a construction draw schedule?
Hard money lenders financing your construction project won’t just drop the entire budget’s worth of cash in your account. Instead, you’ll get periodic payments according to your draw schedule. The draw schedule describes, in detail, when you plan to receive and spend specific loan allocations. It’s driven by your budgeted requirements and in-progress milestones that you flesh out with the lender.
Depending on whether you’re going it alone or working with a contractor, generating a broad-scope draw schedule at the beginning can serve as a good roadmap. However, you will need to get granular with your construction draw schedule as the project progresses to keep all parties aligned and things running smoothly.
Each stage will have an itemized listing of cost requirements tied to the milestone’s expected loan portion disbursement. Meet the prior stage’s requirements, and you’ll be ready to draw more capital to keep things rolling.
Contractors will generally assist with a draw schedule, but remember that the onus ultimately falls on you to secure funding: keep these tips in mind as you build your construction draw schedule or start planning your next project.
1. Remember: Less is More
Not less detail – but fewer milestones in the draw schedule reduces time wastage and keeps the project on schedule. The lender will validate that all agreed-upon sub-tasks within each milestone are complete before releasing funds, and they’ll require an inspection to do so.
There’s a fine line to walk, though. Shooting for one or two draws isn’t realistic; draws are funded in arrears, so you’ll need the cash to kickstart the project and get “reimbursed” after the first milestone’s completion. The draw, therefore, provides startup capital for the next phase. If you only have a handful of draws and meet even modest disruption, you could run out of cash quickly. Aiming for five or six draws strikes a good balance between efficiency and not dipping into your checking account to keep the project rolling more than necessary.
2. Get Granular with Your Construction Draw Schedule
Less is not more when it comes to the level of detail and due diligence applied to the actual budget itemization. There’s nothing scientific about a ballpark estimate, and scope creep starts with a few dollars undershot here and there.
Getting granular is where upfront due diligence and deliberate planning save time down the road. If you’re not comprehensive and exhaustive, something as small as door framing or bathroom fixtures could stall your project and rapidly run things off the rails.
But, at the same time…
3. Keep it Simple
Though you’ll need to be exhaustive with the ins and outs of your construction draw schedule, remember to keep it at a reasonably high level for the lender. Does the financing team care which brand of toilet you’re buying or the type of sod you’re laying (the answer is no). You should know the intimate details of each project segment and itemized budget listing, but you don’t need to give your lender that degree of fidelity.
This is about more than saving paper, too – remember that the draw schedule is an agreement between you and the lender to complete work according to scope. If you budget for Acme brand light fixtures but only find Initech in stock, the inspector could take notice during pre-disbursement inspections and stall the project for going out of scope. Unlikely, perhaps – but not worth the risk.
Likewise, staying broad can help you shift things within your internal schedule, i.e., “cabinet upgrades” as a line in one phase of your construction draw schedule could let you start on bathroom cabinetry while kitchen cabinets are delayed and vice versa. Specifying “kitchen cabinet upgrades” could put your project on hold as you wait for supply chains.
4. Itemize Your Draws
This tip walks the line between getting granular and keeping it simple. Breaking your draw schedule into clear and discrete items, though, will help you better monitor what cash is going where and identify budget issues early.
For example, a bad draw layout may say:
Draw 1: $20,000
(Framing, HVAC roughed, electric repairs, plumbing repairs, bathrooms tiled)
Whereas a better (and itemized) layout reads:
Draw 1: $20,000
- Framing: $5,000
- HVAC: $5,000
- Electric: $2,500
- Plumbing: $2,500
- Bathrooms: $5,000
You can provide in-progress updates better and shift the construction draw schedule around if you keep things itemized. For example, a lender could elect to fund a $17,500 partial draw if electric is held up and your schedule is itemized. With the first, suboptimal example, you’re waiting for the entire milestone to be complete to get funded.
5. Keep it Consistent
Remember that draws are funded in arrears, so you’re paid upon completion of the prior construction draw schedule milestone. To minimize the net outflow from your personal funds, try to keep the stages at roughly the same amount for consistency. This may take some creative scheduling and sequencing, but if you can keep all draws within the $20,000 across six stages rather than a $40,000 kickoff cost and the rest ranging between $15,000 and $20,000, you’ll reduce your personal stake.
At the same time, trying to keep it consistent makes you take a hard look at what fits where. For example, you may find that you can slide a $2,000 gutter job to the left with the driveway paving milestone to even out the draws and thus improve project efficiency.
Need More Help with Your Construction Draw Schedule?
We have a free construction draw schedule template to help you start planning and budgeting your project’s draws and milestones. Remember, though, that the best tips and most effective templates in the world mean nothing if you don’t stick to the plan. Things happen, and projects go awry, but if you go into construction with a firm grasp of sequencing and stick to the plan, you’ll prevent the worst effects of compounding and snowballing delays and out-of-scope cost creep.
If you want to see how draw scheduling looks in practice or want to get a second set of eyes on your initial plan, reach out today.