When reviewing a construction draw request, one area that deserves close attention is how general conditions and contractor profit are being billed.
While these costs are legitimate parts of a construction budget, paying them entirely upfront can create unnecessary risk for lenders, owners, and other project stakeholders. Instead, they are typically better aligned with the progress of the project.
What Are General Conditions?
General conditions are the indirect costs associated with managing and supporting a construction project. They may include items such as:
- Project supervision
- Temporary facilities
- Site security
- Utilities
- Safety measures
- Office expenses
- Equipment and communications
- Project management personnel
Unlike direct construction costs, such as concrete, framing, or roofing, general conditions often extend throughout the duration of the project.
Because these expenses are incurred over time, paying the full amount at the beginning of construction may not accurately reflect the work completed to date.
Why Upfront Payment Can Create Risk
Paying a large portion of general conditions or contractor profit early in the project can result in the contractor being paid ahead of actual construction progress.
This can become a concern if the project experiences delays, budget issues, contractor performance problems, or an unexpected change in the construction team.
If too much has already been disbursed, there may be less money remaining in the construction budget to complete the project.
From a risk management perspective, construction disbursements should generally remain aligned with the percentage of work completed.
General Conditions Should Follow Project Progress
Because many general conditions costs continue throughout construction, they can often be distributed proportionally over the anticipated project duration.
For example, if a project is approximately 25% complete, a reviewer may expect the amount billed for ongoing general conditions to be reasonably consistent with that level of progress, depending on the specific budget and project structure.
This approach helps maintain sufficient funds in the budget for the remainder of the project.
It also provides a clearer picture of whether project spending is keeping pace with actual construction activity.
Contractor Profit Should Also Be Earned Over Time
Contractor profit is another line item that should be reviewed carefully.
Although the contractor is entitled to earn a profit on the project, releasing the entire profit amount at the beginning of construction can reduce the financial incentive to successfully complete the remaining work.
Instead, contractor profit is often paid proportionally as construction progresses.
This keeps the contractor’s compensation aligned with performance while preserving funds within the project budget until the work is completed.
The Importance of Proper Draw Review
A construction draw review is not simply about confirming invoices.
It also involves evaluating whether the amount requested is reasonable based on the actual progress observed at the project.
Reviewers may compare:
- Current construction progress
- Previous draw requests
- Remaining contract balances
- General conditions billed to date
- Contractor profit billed to date
- Stored materials
- Change orders
- The overall percentage of project completion
If certain budget categories appear significantly ahead of construction progress, additional documentation or clarification may be appropriate before funds are released.
Protecting the Remaining Construction Budget
The goal is not to prevent contractors from being paid.
It is to make sure payments remain reasonably aligned with the work performed and the costs incurred.
By distributing general conditions and contractor profit throughout the construction schedule rather than paying them entirely upfront, lenders and owners can better protect the remaining construction budget and reduce the risk of overfunding early in the project.
At NWM Risk Management, our construction monitoring services help lenders and project stakeholders evaluate construction progress, draw requests, budget activity, and potential project risks throughout the life of a development.
