In this article, we’re going to discuss the things that can be done to make the draw process go more smoothly for everybody that’s involved. Because of the contract that we enter into with lenders and owners we’re obligated to do a number of things and there is some documentation that needs to be provided on a consistent basis to help us do that.
1. Project Budget
The owner needs to provide a project budget, often called a “sources and uses” statement, which should also include a listing of the sources of funds that will be used to pay for all costs related to the project. This is important because the owner, lender and title company all need to understand the full scope of costs related to the project to verify that sufficient funds will be available to pay for all of the construction.
This project budget goes beyond the obvious costs of construction like the construction contract and needs to include all of the costs related to the improvement including planning, such as architectural fees, engineering fees, permits, and surveys, as well as transactional costs, such as attorney’s fees, lender’s fees, and costs related to closing. Soft costs may also encompass developer fees, as well as costs such as plat dedication fees or municipal charges related to the planned construction project. As costs change throughout the project, this budget needs to be updated as well.
2. Draw Request
The next piece of information is the draw request. That can come in a number of forms but the most prominent is probably the AIA G702/703 forms, the payment application. That’s a breakdown of the cost of the construction of a variety of categories. If this form, which is provided by the contractor is used, it needs to be supplemented by the Owner’s request for soft costs, which are generally not included on the AIA forms.
3. Sworn Construction Statement
The third piece of information that’s very important is the sworn construction statement. This is a breakdown of those costs showing the portion of each of those categories that’s allocated to the general contractor or to one or more subcontractors. We call it a sworn construction statement because this is where the contractor tells us everybody else that’s out there doing work that we need to be aware of and that the owner needs to be aware of.
That’s very important because as we go through the process we’re tracking lien waivers to make sure that everybody is getting paid the amount they’re owed, and that’s a lot easier if we actually have that breakdown. One of the reasons that we ask for this with every draw is as you go through the project sometimes subcontractors are replaced or traditional subcontracts are entered into and we need to see all of those changes as they happen to keep up with what’s going on.
4. Copies of Lien Waivers
With each draw request that’s being submitted, we need to receive copies of all of the lien waivers for any payments that have previously been made. The waiver needs to be signed by the subcontractor for whom payment was advanced. That’s very important because that’s confirmation that each person on the project has received the payment to which they’re entitled.
5. Change Orders
Finally, we need are any applicable change orders. As we’re going through we find from time to time on a construction project that there are change orders that come into play. We need to see those while they’re being negotiated and once they’re finalized because that’s an indicator that the value of the project or the costs of the project may be changing.