Contract Simply is now Rabbet. We’re the same company – just with a new name – building the only intelligent construction finance platform. The content of this post has been preserved with the Contract Simply name.
Managing the flow of funds within a construction loan is much different than for traditional loans. Rather than receiving a lump sum check, construction loans pay out the loan amount over the course of the project. The installments are called draws, as the lender draws funds from the account. A draw request is necessary to ensure disbursement of the funds.
A draw request is an aggregation of invoices, receipts, budgets, change orders and lien releases. The developer or general contractor is responsible for collecting all of the documents from contractors and suppliers. They then package the draws which are often submitted monthly and aligned with the overall project plan and budget. Draw requests typically range in size from 20 documents on the small end up to 500+ documents for larger projects. Multiply that times the number of loans within a developer and lender portfolio and you start to see the magnitude. One of our loan monitoring software customers said their most massive draw request was nearly 1000 documents. Can you imagine?
Let’s break down the different documents included within a draw request:
Invoices and Receipts – To get paid, contractors and suppliers must submit an invoice for the work performed during the draw period. The contractors who provide an invoice include tradespeople like plumbers, electricians, drywall installers, and roofers. They also include suppliers, architects, and the company that drops off the onsite porta potty, among many others. These invoices vary in their level of detail and must be reviewed carefully to make sure they match the project scope and to avoid the risk of overcharges or mistakes. One of the biggest draw package frustrations comes from catching duplicate invoices.
Lien Releases – These documents, otherwise known as a mechanic’s lien, are submitted along with invoices as a conditional lien. The condition is that the contractor is paid for his or her work promptly. Upon receipt of payment, the contractors negate the conditional lien by submitting an unconditional version. Money in the pocket means the conditions have been met. Liens serve as one of the top risks associated with construction lending and the lien-free completion of the project is the goal for construction lenders.
Related: Embracing Mechanic’s Liens With Construction Lending Software
Budget – The budget, also known as a schedule of values or scope of work, is typically a spreadsheet showing the progress of each element of the project. Each line item within the budget is updated with each draw request because it is critical to know the amount spent to date in relation to the work completed. Many construction loan administrators are skeptical that today’s technology could automate the review of a budget. The good news is that this type of machine learning is not only available, but also matches the detail of a budget to invoices, identifies errors, and provides recommendations to address any issues. This video explains intelligent process automation in action.
Change Orders – Change is inevitable during a construction project which is why a contingency plan is always in place to account for costs that are difficult to anticipate in advance. A change order comes about due to modification or deletions to the original project plan. A change order document provides a description of the changes made, any additional time allowance required, and the associated costs. A change order serves as an addendum to the original contract. Common reasons for construction change orders include errors or omissions in the project scope, design changes, or material substitutions.
As you can imagine, draw requests can be monsters with a long list of items to review. Dozens, sometimes 100s, of stakeholders are involved, and many livelihoods are at stake. We did a study on the impact slow payments have on the industry. The results of the study were published within our 2018 Construction Payments Report and uncovered that 84% of contractors had filed a lien due to slow payment processing.
One of the most significant challenges for both construction borrowers and construction lenders is to review and approve draw requests quickly. These large files typically come with honest mistakes or hard to read elements like a handwritten receipt or invoiced items that don’t seem to match the schedule of values. It’s the challenging job of construction loan administrators to make sense of the draw packages, quickly schedule a third-party inspection, and work within their organizations to get proper approvals. Luckily, tools like Contract Simply serve as a helpful assistant to construction loan management by taking on much of the tedious and error-prone document review and reconciliation work.
Check out the Contract Simply product demonstration video to see how machine learning can help read and process documents, identify errors, and provide recommendations to expedite the overall draw package approval process.