Construction draws are rarely limited to work that is already installed and visible onsite. As a project progresses, borrowers may request reimbursement for materials stored offsite, deposits paid to vendors, or equipment that has been ordered but not yet delivered.
These requests are common, but they also require additional review.
Unlike completed work that can be observed during a site inspection, offsite materials and deposits may involve funds tied to items that have not yet reached the project. Before approving a draw that includes these costs, lenders should understand what is being requested, what documentation supports the request, and what risks may still remain.
What Are Offsite Materials and Deposits?
Offsite materials are construction materials that have been purchased or fabricated for a project but are currently being stored somewhere other than the project site. Examples may include cabinetry, windows, structural components, mechanical equipment, or other materials being held at a warehouse, fabrication facility, or supplier location.
Deposits are payments made to vendors or suppliers before materials or equipment are delivered. These may be required to reserve products, begin fabrication, secure long-lead items, or place specialized orders.
Both can be legitimate project expenses. However, because the lender may be advancing funds before the materials are installed—or sometimes before they are physically delivered—they can carry additional risk.
Why These Requests Require Additional Review
When completed construction is included in a draw request, a site inspector can generally compare the amount requested with the work observed onsite.
Offsite materials and deposits are different.
The lender may need to determine whether the documentation provided gives enough confidence that the requested funds relate directly to the project and that the borrower has a legitimate claim to the materials.
Depending on the circumstances, questions may include:
- Have the materials actually been purchased?
- Are the materials specifically intended for this project?
- Where are they currently being stored?
- Has the borrower already paid the vendor?
- Is the request a deposit, partial payment, or full payment?
- Are the materials insured while being stored?
- Does the borrower have ownership or title to the materials?
- Could the supplier use or sell the materials elsewhere?
- When are the materials expected to arrive onsite?
The answers can help the lender evaluate whether the requested amount should be funded.
Documentation Matters
One of the most important elements of reviewing offsite materials and deposits is the supporting documentation.
A draw package may include invoices, receipts, purchase orders, proof of payment, vendor agreements, storage information, photographs, or other supporting records.
However, receiving a document does not automatically mean the request should be approved.
The documentation should be reviewed in the context of the construction budget, the amount being requested, the status of the project, and the lender’s own funding requirements.
For example, an invoice may confirm that materials were ordered, but the lender may still want additional information confirming whether the invoice has been paid, where the materials are stored, or whether they are clearly allocated to the project.
The Borrower’s Explanation Is Only One Part of the Review
A common situation occurs when a third-party draw review identifies a potential offsite material or deposit and the lender then asks the borrower for clarification.
The borrower may respond that the material has been purchased, is being stored at a specific location, or will arrive onsite within a certain timeframe.
That information can be helpful, but it does not necessarily resolve the lender’s risk on its own.
The lender should consider the borrower’s explanation together with the supporting documentation and the requirements established by the loan documents or internal lending policies.
Ultimately, the decision to approve or decline the requested funds remains with the lender.
How Third-Party Draw Reviews Help
A third-party construction draw review can help lenders identify items in a draw request that may require additional attention.
During a review, the consultant may compare the draw request against the approved project budget, review supporting documentation, evaluate reported construction progress, and identify materials or deposits that appear to be associated with work that has not yet been installed onsite.
The purpose is to give the lender additional visibility into the request.
For example, a draw report may note that certain materials appear to be stored offsite or that a requested amount appears to represent a vendor deposit. The lender can then determine whether additional documentation or clarification is needed before releasing funds.
Importantly, the third-party consultant works for the lender. While the consultant can identify missing information or potential concerns, communication regarding funding decisions and required borrower documentation should generally remain between the lender and the borrower.
This helps maintain a clear division of responsibilities throughout the draw process.
Establish Expectations Early
Offsite material requests are easier to manage when expectations are established before they appear in a draw.
At the beginning of a construction loan, lenders may want to establish:
- Whether offsite materials are eligible for reimbursement
- Whether vendor deposits can be funded
- What documentation will be required
- Whether proof of payment is necessary
- Whether storage locations must be verified
- Whether insurance documentation is required
- Whether there are limits on the amount that can be advanced before delivery or installation
Establishing these requirements upfront can reduce confusion later in the project and help borrowers prepare more complete draw packages.
A More Informed Draw Approval Process
Offsite materials and deposits are a normal part of many construction projects, particularly when projects involve custom fabrication or long-lead materials.
They should not automatically be viewed as a problem. However, they should be treated differently from completed work that can be directly observed during an inspection.
A thorough review gives lenders the information they need to evaluate the request, ask appropriate follow-up questions, and make a more informed funding decision.
NWM Risk Management supports lenders throughout the construction process with budget reviews, construction draw inspections, and third-party project monitoring. By identifying potential discrepancies, reviewing supporting documentation, and providing independent reporting, NWM helps lenders maintain greater visibility into how construction loan proceeds are being used.
