Clients financing custom home construction through a construction loan encounter a payment process that differs from most other types of purchases. The loan is not dispersed as a single lump sum at closing. It is released in stages, called draws, keyed to construction milestones. Understanding how draw schedules work helps clients budget cash flow, evaluate builder payment requests, and work effectively with their lender throughout the build.
What a draw schedule is
A draw schedule is the contractual document that defines when and how much money is released from a construction loan or from the client's own funds to the builder during a project. It typically breaks the total construction cost into 6 to 12 milestone-based payments, each released after a specific portion of the work is complete and verified.
A typical draw schedule
A representative draw schedule for a $3 million custom home might look like:
- Preconstruction / mobilization: 5 percent, paid on contract signing ($150,000)
- Site work and foundation complete: 10 percent, paid on foundation inspection ($300,000)
- Framing and dry-in complete: 20 percent, paid when roof sheathing and envelope are complete ($600,000)
- Rough mechanical complete: 15 percent, paid after rough-in inspection ($450,000)
- Drywall complete: 10 percent ($300,000)
- Interior finish 50 percent: 15 percent ($450,000)
- Interior finish 90 percent: 15 percent ($450,000)
- Substantial completion / CO: 8 percent ($240,000)
- Final punch list / warranty retainage: 2 percent ($60,000)
The specific milestones vary by builder and lender, but the general structure (progress-based releases tied to observable milestones) is consistent.
How draws work with construction loans
When a construction loan finances the project, the lender releases each draw after verifying the work has been completed. The verification typically involves a third-party inspector retained by the lender, who visits the site, confirms the milestone has been reached, and signs off on the release. The lender then transfers funds to the title company, which disburses to the builder.
The draw process can take 7 to 14 days from request to payment receipt. Builders manage cash flow around that delay by maintaining working capital, typically through their relationships with subcontractors and suppliers (net 30 or net 45 terms). A builder who cannot absorb the 7 to 14 day draw delay often has working capital constraints that should concern the client.
Cash clients and draw schedules
Clients paying cash (not using construction loans) still benefit from using a milestone-based draw schedule rather than paying the builder large lump sums in advance. The reason is risk management: progress payments ensure the client is paying for work that is visibly complete rather than extending credit to the builder for work not yet done.
Even without a lender in the transaction, a formal draw schedule with defined milestones protects both parties. The builder knows when payments are coming and can plan accordingly. The client knows the payment is tied to verified work rather than to a calendar or to the builder's working capital needs.
Retainage
Retainage is a portion of each draw withheld by the client until final completion. A typical retainage structure withholds 5 to 10 percent of each draw until substantial completion or CO, at which point the accumulated retainage is released less any punch list holdbacks.
Retainage protects the client in case of builder default or quality issues: if work has been paid for but is defective and needs correction, the retainage provides funds to complete the work without the client paying additional money. It also provides the builder with a strong incentive to complete the project and resolve punch list items, because the retainage release is a significant payment.
Not all projects use retainage. Smaller projects sometimes skip it for simplicity. Larger projects almost always include it.
What to watch in draw schedules
Red flags in draw schedules:
- Large front-loaded deposits (25 percent or more paid before substantial work is complete)
- Milestones defined vaguely ("work progressing" rather than "foundation inspection passed")
- Draws tied to calendar rather than progress
- No retainage in projects above $1 million
- Payment terms that put the builder in position to demand additional payment on the basis of "delays caused by the owner" or similar soft triggers
- Missing substantial completion milestone with specific payment tied to it
A well-structured draw schedule ties every payment to a specific, observable milestone that a third party could verify. Ambiguity in the milestone definitions is the place where disputes happen.
How SouthShore structures draws
Our contracts use progress-based draw schedules tied to observable milestones that match industry standard. Retainage (typically 5 to 10 percent) is held through substantial completion and released after punch list resolution. Every draw request is accompanied by a sworn statement itemizing the work completed and a lien release from subcontractors confirming that each trade has been paid for the prior draw period. The paperwork is bureaucratic but protects both parties and provides clean documentation throughout the project.
Clients paying cash can follow the same structure. Clients using construction loans follow the lender's specific draw process, which is typically compatible with our standard schedule with minor adjustments. You can read more about our overall contract and payment approach on our [custom home building](/services/custom-home-building) page.
Frequently Asked Questions
Can the draw schedule be adjusted during construction?
The milestones can be refined if construction conditions require it, but the overall structure should remain aligned with the original contract. Change orders that add scope also adjust payment amounts, but the milestone-based logic persists. Material changes to the draw schedule should happen in writing with both parties' agreement.
What happens if a milestone is partially complete when the draw is due?
Partial payments on partial completion are sometimes permitted if the schedule defines how they work. More commonly, the full milestone payment waits until the milestone is fully complete. This incentivizes the builder to reach clear completion at each milestone rather than leaving partial work to be picked up later.
Who verifies that milestones are complete?
On construction loan projects, the lender's inspector typically verifies. On cash-paid projects, the client may hire an independent inspector for some or all milestones, or the architect may serve as the verifying party, or the client may rely on visual inspection. An independent verifier adds confidence on larger projects.
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