Draw Schedules for Construction Contracts
The draw schedule is the detailed payment plan for your construction project. It should be clear and agreed upon by both parties. It should also provide you adequate assurance that you will have the funds necessary to complete the project. Along these lines, here are some important considerations for your draw provision:
Initial draw: many owners’ reluctance to front any payments has caused contractors not to ask for them. That puts contractors behind from the outset. In many other professions (such as legal) it is common to obtain an advance on work performed. Therefore, if having an upfront draw is necessary or advantageous, it doesn’t hurt to ask for or require one.
Timing of draws: what triggers the payment of draws? Think about whether you need/prefer set dates for draws, or whether the draws should be tied to percentage completion. If they’re tied to completion, then who decides on the completion progress? If the project is being financed by a construction loan, then the bank will determine progress. Even if it’s not a construction loan, it may be advantageous to build into your pricing the cost of hiring a 3rd party inspector to conduct inspections to verify percentage completion - this way, the owner doesn’t just have to rely on you (or vice versa).
Retainage: how much should be withheld pending completion of the punch list? It’s common for the owner (or lender) to withhold a certain amount at the end of the project for final payment after the punch list is completed. But there is no set standard on the amount that should be withheld. As a contractor, you should try and negotiate retainage out of the contract altogether, or at least negotiate down the percentage amount that is withheld.
Manner of payment: How should payments be made? The goal is to get paid as quickly and effortlessly as possible. Wire or bank transfers are best for this purpose. If the owner or bank wishes to pay by check, make sure there is a clear deadline in your contract for when the check must be delivered to you. For instance, you could include a provision that the check should be delivered to you within three business days of the benchmark (completion %) being met.
The takeaway here is that you need to know for certain when and how you are getting paid. This is important for ensuring you have the funds you need to allocate to the project. If a payment deadline is missed, you need to know about it as soon as possible so that you can stop work if necessary to ensure you will not be out additional time and money.
At Downs Law, we understand that construction agreements can be confusing - but they don’t have to be. In our free e-book, we’ve taken 10 important contract provisions and distilled them into plain, understandable language. You will be able to use these as a guide to determine whether your contract is on solid footing, or whether it needs more attention. And as always, we’re here for you if you need help. Contact us!