Construction draw requests are a routine part of the lending process, but not every request is as straightforward as it appears.
A draw package may include invoices, contractor applications for payment, change orders, lien waivers, stored material requests, and other supporting documentation. Reviewing those materials carefully can help lenders identify inconsistencies before funds are advanced.
While no single issue automatically means there is a problem, certain patterns may warrant additional review.
Here are five red flags lenders should watch for when evaluating a construction draw request.
1. The Percentage Billed Does Not Match Observed Progress
One of the most important comparisons in a draw review is the amount being billed versus the actual work completed on-site.
For example, a contractor may request payment showing a trade as 80% complete, while site observations indicate that substantially less work has been installed.
This discrepancy may result from timing differences, inaccurate billing, materials stored off-site, or other factors. Regardless of the cause, the gap should be understood before additional funds are released.
Lenders may want to look closely at:
- Percent complete by trade
- Work visibly installed on-site
- Previously funded amounts
- Stored materials
- Remaining contract balance
- Changes since the prior inspection
The goal is to determine whether the amount requested is reasonably supported by current project progress.
2. Large or Unexplained Change Orders
Change orders are common in construction, but frequent or significant changes can have a major impact on project cost.
A draw request that suddenly includes a large increase to a trade contract, or multiple new change orders without supporting documentation, may deserve additional attention.
Lenders should understand:
- What caused the change
- Whether the work is necessary
- Whether the change has been approved
- How it affects the overall project budget
- Whether adequate contingency remains
Repeated change orders can also be an early sign that the original construction budget was incomplete or that the project is experiencing scope, design, or cost issues.
3. Significant Stored Materials or Deposit Requests
Construction draws sometimes include materials that have not yet been installed on-site.
These may include stored materials, equipment deposits, or advance payments for long-lead items.
While these requests may be legitimate, they can introduce additional risk because lender funds are being advanced before the materials are incorporated into the project.
Before funding, lenders may want to confirm:
- Where the materials are located
- Whether they have actually been purchased or manufactured
- Who owns them
- Whether they are insured
- Whether they are specifically designated for the project
- When they are expected to be delivered
- Whether prior deposits are being credited appropriately
Large deposits with limited documentation may be particularly important to review.
4. The Project Is Falling Behind Schedule
Construction delays do not always indicate financial trouble, but they can increase risk when they begin to accumulate.
If a project repeatedly shows limited progress between draw inspections, lenders may want to understand what is causing the delay.
Potential reasons can include:
- Labor shortages
- Material delays
- Permitting issues
- Design changes
- Contractor performance
- Weather
- Funding issues
- Disputes among project participants
Schedule delays can also create additional costs, especially when they lead to extended general conditions, higher financing costs, or additional contractor expenses.
When progress begins to slow, lenders should consider both the construction schedule and the remaining budget.
5. The Remaining Budget Appears Insufficient to Complete the Project
Perhaps one of the most important warning signs is when the remaining loan or construction budget no longer appears sufficient to finish the work.
This can happen when project costs increase faster than expected, contingency is depleted, or work has been underbudgeted.
For example, a project may appear substantially complete from a funding perspective while significant physical work remains.
Lenders should compare:
- Total project budget
- Amount funded to date
- Remaining contract balances
- Remaining work
- Approved and pending change orders
- Contingency
- Anticipated future costs
A project can continue progressing physically while becoming increasingly strained financially. Identifying that imbalance early gives lenders more time to understand the situation and determine what additional information may be needed.
One Red Flag Does Not Always Mean There Is a Problem
Construction projects are complex, and unusual items in a draw request are not necessarily signs of misuse or financial distress.
A large deposit may be necessary for specialized equipment. A schedule delay may be temporary. A change order may result from a legitimate design modification.
The important question is whether the documentation, site progress, and project budget support the request.
Patterns can be particularly important.
A project experiencing rising change orders, slowing progress, increasing deposits, and declining contingency at the same time may warrant more attention than any of those issues individually.
How Construction Monitoring Can Help
Construction monitoring provides lenders with an independent view of project progress and draw activity.
Through site observations and document review, a construction monitor can help compare requested funding with work completed, identify material changes to the budget, review stored materials and deposits, and highlight items that may require clarification before funding.
The objective is not to make lending decisions on behalf of the lender, but to provide additional visibility into the project so those decisions can be made with better information.
Final Thoughts
Construction draw requests contain more than just payment information. They can also provide valuable insight into the overall health of a project.
By watching for discrepancies between billing and physical progress, unexplained change orders, significant deposits, schedule delays, and budget shortfalls, lenders may be able to identify potential concerns earlier in the construction process.
Careful draw review, supported by consistent construction monitoring, can help lenders maintain greater visibility from the first draw through project completion.
NWM Risk Management provides construction monitoring and due diligence services for lenders nationwide. Our team helps lenders evaluate construction progress, draw requests, project budgets, and other construction-related risks throughout the life of a loan. Contact NWM Risk Management to learn more about our construction monitoring services.
