A commercial construction loan does not fund at closing: it funds in monthly installments called draws, each released only after the lender verifies the work in place, and the lender typically holds back 10 to 20 percent of every payment until completion, per the OCC. To see whose draw terms fit your build, submit the deal once.
The draw schedule is the contract that governs when each installment is earned. Every cycle runs the same loop: the general contractor submits a pay application against the schedule of values, the borrower assembles a draw package with lien waivers and invoices, a third-party inspector verifies percent-complete on site, the lender confirms the loan is still "in balance," and money wires out less retainage. On commercial projects the bank "normally retains, or holds back, 10 to 20 percent of each payment to cover project cost overruns or outstanding bills from suppliers or subcontractors," per the OCC's Comptroller's Handbook booklet on commercial real estate lending.
What is a construction draw schedule?
A construction draw schedule is the disbursement plan inside the loan agreement that sets what triggers each funding, what documents are required, who inspects, how much is held back, and whether loan proceeds or sponsor equity are spent first. On larger projects, commercial lenders normally use a progress payment plan, releasing funds as phases complete.
Lenders disburse either on a standard payment plan, where fixed installments follow predetermined stages, or on a progress payment plan, where funds are released as phases complete. The OCC's handbook notes that the progress payment plan "is normally used for commercial projects," and that under either approach "the amount of each construction draw is commensurate with improvements made as of the date of the inspection."
Two structural rules shape everything else. Most construction loans are equity-first or pari passu, so the sponsor's cash goes in before or alongside loan proceeds. And the loan has to stay in balance for its entire life, which is the provision that turns a cost overrun into a capital call rather than a lender problem.
Typical leverage ceiling: the interagency guidelines set a supervisory loan-to-value limit of 80% for commercial, multifamily, and other nonresidential construction, per the Federal Reserve's Interagency Guidelines for Real Estate Lending Policies. Most construction lenders size to a cost-based number below that ceiling, which is why loan-to-cost, not loan-to-value, is the sizing constraint you negotiate.
How does an $8M construction loan fund on a 48-unit multifamily project?
On an illustrative garden-style, 48-unit ground-up deal with $11.43M of total development cost, an $8.0M loan at 70% loan-to-cost funds after or alongside the sponsor's $3.43M of equity, then pays hard costs, soft costs, interest, and contingency across roughly 18 monthly draws plus a final retainage release. All figures here are illustrative arithmetic, not market averages.
| Budget line | Amount | How it funds |
|---|---|---|
| Budget line Land and acquisition | Amount $1,400,000 | How it funds Sponsor equity, funded at closing |
| Budget line Hard costs (GC contract) | Amount $7,950,000 | How it funds Monthly loan draws, subject to retainage |
| Budget line Soft costs (A&E, permits, legal, insurance, fees) | Amount $1,090,000 | How it funds Loan draws against invoices |
| Budget line Interest reserve | Amount $690,000 | How it funds Loan draws, swept monthly by the lender |
| Budget line Contingency | Amount $300,000 | How it funds Loan draws, lender-controlled reallocation |
| Budget line Total development cost | Amount $11,430,000 | How it funds — |
| Budget line Construction loan (70% LTC) | Amount $8,000,000 | How it funds — |
| Budget line Sponsor equity (30%) | Amount $3,430,000 | How it funds — |
How many draws is that? The U.S. Census Bureau's Survey of Construction reports that privately owned residential buildings with 20 or more units started in 2022 averaged 18.1 months from start to completion. On a monthly cadence, an 18-month build means roughly 18 funding cycles plus a final draw that releases retainage — 18 chances for the lender to slow you down.
What does one draw cycle look like, step by step?
One draw cycle runs seven stages in order — pay application, draw package, third-party inspection, in-balance test, title date-down, funding less retainage, and payment down the chain — and a stall at any one of them holds the whole month's money. The sequence below reflects our example deal; cycle length is negotiated, so check your own loan documents.
| Stage | What happens | Who drives it | What stalls it |
|---|---|---|---|
| Stage 1. Pay application | What happens GC submits a pay app against the schedule of values showing percent complete by line item | Who drives it General contractor | What stalls it SOV lines that do not tie to the lender-approved budget |
| Stage 2. Draw package | What happens Borrower assembles the signed draw request, invoices, updated SOV, and lien waivers | Who drives it Borrower | What stalls it One missing subcontractor waiver holds the whole package |
| Stage 3. Inspection | What happens Lender's construction consultant or inspecting architect verifies work in place against claimed percentages | Who drives it Third-party inspector | What stalls it Inspector's percent-complete comes in below the pay app |
| Stage 4. In-balance test | What happens Lender confirms remaining loan plus remaining equity still covers cost to complete | Who drives it Lender's construction loan administration | What stalls it A revised cost-to-complete that exceeds availability |
| Stage 5. Title date-down | What happens Title company issues an endorsement confirming no intervening mechanic's liens | Who drives it Title company | What stalls it A recorded lien or an unreleased notice of commencement |
| Stage 6. Funding | What happens Lender advances the approved amount, less retainage, into the borrower's controlled account | Who drives it Lender | What stalls it Any unsatisfied condition above |
| Stage 7. Payment down the chain | What happens Borrower pays the GC, the GC pays subs, unconditional waivers are collected for next month | Who drives it Borrower and GC | What stalls it Slow payment to subs, which restarts the waiver problem |
Stages 3 and 5 are lender-side and invisible from the field. The OCC handbook is explicit that banks "typically require architect or engineering inspection reports with each draw," and that "the lender's title policy should be updated with each draw" because mechanic's liens "can take priority over the bank lien" in some jurisdictions.
How much retainage does a construction lender hold back?
A construction lender normally holds back 10 to 20 percent of each draw under a progress payment plan, per the OCC, and that lender holdback is separate from the contract retainage, most often 10% in the United States, that the owner withholds from the general contractor. Borrowers routinely conflate the two.
| Feature | Contract retainage | Lender holdback |
|---|---|---|
| Feature Who withholds, from whom | Contract retainage Owner from the GC; GC from subcontractors | Lender holdback Lender from each loan draw |
| Feature Typical amount | Contract retainage 10% most often in the US, sometimes stepping down to 5% at 50% complete | Lender holdback 10 to 20 percent of each payment under a progress payment plan |
| Feature What governs it | Contract retainage Construction contract, subject to state statute | Lender holdback Loan agreement |
| Feature Released when | Contract retainage Work is substantially or fully complete | Lender holdback Lien waivers, final inspection report, and certificate of occupancy are in hand |
Contract retainage is what the owner withholds from the general contractor, and what the GC withholds from subs, until the work is substantially or fully complete. In the United States, and subject to state statutory requirements, "10% is the retainage amount most often used by contracting parties," according to Wikipedia's overview of retainage, which also describes a common variant that starts at 10% and steps down to 5% once the project is 50% complete. (The same source puts the typical retention rate in the United Kingdom at around 5% — a different market convention that does not govern US commercial construction.) Many states cap the percentage by statute for private work, so the contract number and the statutory number must be reconciled before closing.
Lender holdback is what the bank withholds from each draw. The OCC handbook states that under a progress payment plan the bank "normally retains, or holds back, 10 to 20 percent of each payment." Applied to our example: a $600,000 hard-cost draw at a 10% holdback funds $540,000 and leaves $60,000 with the lender. Across $7.95M of hard costs, that is roughly $795,000 sitting in the lender's hands until the end.
That final tranche is not released casually. Before disbursing the holdback, the OCC lists three controls: all lien waivers or releases obtained from contractors, subcontractors, and suppliers; a final inspection report confirming completion to specification; and a certificate of occupancy from the governing building authority.
How is the interest reserve sized, and how fast does it burn?
An interest reserve is "a reserve account established by the lender and used by the borrower to cover loan interest during construction and lease-up," typically funded as a budget line item inside the construction loan itself, per the OCC handbook. It exists because a building under construction produces no income.
Sizing, illustratively: with an average outstanding balance of roughly $4.0M across an 18-month build and roughly $7.6M across a six-month lease-up, a 7.00% all-in rate — an assumption for this example, not a quote — implies about $420,000 of construction-period interest and about $266,000 of lease-up interest, the $690,000 reserve line in the budget above.
Index check: construction loans almost always float over a short-term index, so the reserve is only as good as the rate assumption behind it. SOFR was 3.85% on the 2026-09-21 observation date and the Bank Prime Loan Rate was 7.00% on the 2026-09-18 observation date, per FRED, following the FOMC's September 16, 2026 decision to raise the federal funds target range by 1/4 percentage point to 3-3/4 to 4 percent. A loan priced at any spread over prime would carry more than the 7.00% assumed here. On this example, every 100 basis points of all-in rate adds roughly $98,000 of interest ($60,000 during construction, $38,000 during lease-up), about 14% of the reserve, so on a floating loan that quarter-point increase alone adds roughly $24,500 across the term. Current index levels are on the rates page.
Two burn rules catch sponsors off guard. First, the reserve is not yours to spend: the OCC notes that during lease-up "any cash flow from the project is ordinarily applied to pay interest before interest reserves are applied," and once cash flow covers interest, "no further draws on the reserve should be permitted." Second, a depleted reserve is a credit event, not a paperwork issue. When the reserve runs dry before completion, the bank "generally requires the borrower or guarantor to provide additional cash," and topping the reserve up with new debt — repacking — is described in the handbook as "a red flag indicating possible credit deterioration."
What does "the loan must remain in balance" mean?
A construction loan is in balance when undisbursed loan proceeds plus undisbursed equity are greater than or equal to the remaining cost to complete, and if it fails the lender stops funding draws until the sponsor deposits the shortfall. The OCC handbook notes banks "typically confirm that the budget remains in balance with sufficient funds available to fund completion."
In-balance provisions are the single most consequential clause in a construction loan agreement. Run it on the example at month 11. Say the lender's consultant agrees that cost to complete is now $4.60M, while remaining loan availability is $4.05M and remaining equity is $200,000. Total availability is $4.25M against $4.60M of cost, so the loan is $350,000 out of balance. The lender's remedy is not to fund more; it is to stop funding until the sponsor deposits $350,000 in cash or an approved letter of credit. Until that deposit lands, draw requests sit unfunded, subs go unpaid, and lien exposure builds.
Line-item reallocation is the pressure valve: most agreements let savings from a completed line move into a deficient one, and let the borrower request contingency reallocation with lender consent. Negotiating a workable reallocation mechanism at closing is worth more than shaving a few basis points off the spread.
Why do lien waivers gate every construction draw?
Lien waivers are how the lender proves that the money it advanced last month actually reached the people who did the work. The OCC handbook is direct: the construction draw request "should include waivers from the project's subcontractors and suppliers indicating that payment has been received for the work completed."
Four forms are in general use, per Wikipedia's overview of lien waivers: conditional and unconditional waivers on progress payment, and conditional and unconditional waivers on final payment. The conditional forms take effect only once payment actually clears, which is why they are the safest for claimants; the unconditional final waiver releases lien rights outright and is the safest for owners. The standard rhythm is conditional waivers with the current draw and unconditional waivers for the prior draw, so the lender is always one cycle behind in confirming payment. Several states prescribe statutory forms, and a non-conforming waiver can be unenforceable.
What happens when the project runs over budget?
When a construction project runs over budget, the loan's contingency line covers only reasonable but unexpected cost increases, while overruns caused by poor projections or management ordinarily fall on the borrower as new cash, per the OCC; once an overrun exhausts contingency, the loan goes out of balance and draws stop until the sponsor cures it.
Contingency is designed for a narrow set of surprises. The OCC handbook explains that contingency amounts "are intended to cover reasonable but unexpected increases in construction costs," such as material price increases, overtime from shipment delays, or adverse weather. But it draws a hard line on the rest: where cost overruns "may also be the result of poor projections or management," the increased cost "would ordinarily be covered by the borrower rather than by a draw-down on the loan amount budgeted for contingencies."
Escalation is a live risk in the current market. JLL's mid-year 2026 US construction perspective reports that final-cost indices including contractor margins are already running roughly 5% year-over-year, with a meaningful probability of reaching an 8% ceiling for the full year. A 5% overrun on $7.95M of hard costs is roughly $400,000, which would exhaust the $300,000 contingency in the example budget and put the loan out of balance on its own.
Lenders also watch for front loading from the first draw — the handbook describes it as a builder deliberately overstating "the cost of the work to be completed in the early stages of construction," and warns that if it is not caught early, "there will almost certainly be insufficient loan funds to complete construction if there is a default." An aggressive early pay app costs you credibility for every remaining cycle.
Which construction draw terms should you negotiate before you sign?
Negotiate the retainage percentage, in-balance cure periods, line-item reallocation rights, inspection turnaround, and interest reserve sizing before you sign, because these draw terms vary far more between lenders than headline pricing does and are hard to change once construction starts. That lender-by-lender comparison is the one worth running.
YieldStack is a commercial mortgage brokerage: it runs that comparison on the borrower's side, every credit decision is made by the lender, and no loan, rate, or closing is guaranteed.
- Upfront cost: Zero upfront — it costs nothing to submit a deal and review offers.
- Broker fee: 0.50–1.00% of the loan amount, paid only at closing.
- Speed: median offer in under an hour, from an institutional lender.
- Matching: 5–8 matched lenders per deal, drawn from 20,000+ loan programs.
If you are sizing a ground-up or heavy-rehab deal, review how construction loans are structured, then start at /tools/lender-match.
What is the bottom line on construction draw schedules?
A construction draw schedule is a monthly audit, not a payment plan: each cycle asks whether the work is actually in place, whether everyone downstream has been paid, and whether the money left still covers the cost left. Settle retainage, the in-balance cure, and the interest reserve at closing; they rarely change once steel is up.
Model the leverage before you shop it with the underwriting calculator, get precise on how lenders define your sizing constraint in the loan-to-cost and loan-to-value entries, and if your project is closer to stabilization than to a shovel, compare the mechanics against a commercial bridge loan, where proceeds fund at closing and there is no draw process at all.