A commercial construction loan does not fund at closing. It funds in installments called draws, released only as verified work goes in the ground, and 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 draw schedule is the disbursement plan inside the loan agreement: what triggers a funding, what documentation is required, who inspects, how much is held back, and in what order loan proceeds and sponsor equity are spent. 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.
A worked example: an $8M loan on a 48-unit multifamily project
Assume a garden-style multifamily ground-up deal with $11.43M of total development cost and an $8.0M construction loan at 70% loan-to-cost. All figures below are illustrative arithmetic for this hypothetical, not market averages.
| Budget line | Amount | How it funds |
|---|---|---|
| Land and acquisition | $1,400,000 | Sponsor equity, funded at closing |
| Hard costs (GC contract) | $7,950,000 | Monthly loan draws, subject to retainage |
| Soft costs (A&E, permits, legal, insurance, fees) | $1,090,000 | Loan draws against invoices |
| Interest reserve | $690,000 | Loan draws, swept monthly by the lender |
| Contingency | $300,000 | Loan draws, lender-controlled reallocation |
| Total development cost | $11,430,000 | — |
| Construction loan (70% LTC) | $8,000,000 | — |
| Sponsor equity (30%) | $3,430,000 | — |
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?
The sequence below reflects the loan agreement terms in our example deal. Cycle length is negotiated, not standardized, so check what your own documents require before you build a cash-flow model around it.
| Stage | What happens | Who drives it | What stalls it |
|---|---|---|---|
| 1. Pay application | GC submits a pay app against the schedule of values showing percent complete by line item | General contractor | SOV lines that do not tie to the lender-approved budget |
| 2. Draw package | Borrower assembles the signed draw request, invoices, updated SOV, and lien waivers | Borrower | One missing subcontractor waiver holds the whole package |
| 3. Inspection | Lender's construction consultant or inspecting architect verifies work in place against claimed percentages | Third-party inspector | Inspector's percent-complete comes in below the pay app |
| 4. In-balance test | Lender confirms remaining loan plus remaining equity still covers cost to complete | Lender's construction loan administration | A revised cost-to-complete that exceeds availability |
| 5. Title date-down | Title company issues an endorsement confirming no intervening mechanic's liens | Title company | A recorded lien or an unreleased notice of commencement |
| 6. Funding | Lender advances the approved amount, less retainage, into the borrower's controlled account | Lender | Any unsatisfied condition above |
| 7. Payment down the chain | Borrower pays the GC, the GC pays subs, unconditional waivers are collected for next month | Borrower and GC | 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?
There are two separate holdbacks and borrowers routinely conflate them.
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% assumed all-in rate 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. Construction loans are almost always floating over a short-term index, so the reserve is only as good as the rate assumption behind it; for scale, the Federal Reserve's H.15 release put the effective federal funds rate at 3.63% for the week ending August 21, 2026.
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?
In-balance provisions are the single most consequential clause in a construction loan agreement. The test is simple: undisbursed loan proceeds plus undisbursed equity must be greater than or equal to the remaining cost to complete. The OCC handbook describes this as standard practice, noting that banks "typically confirm that the budget remains in balance with sufficient funds available to fund completion."
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 lien waivers gate every dollar
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?
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.
Getting the draw terms right before you sign
Retainage percentage, in-balance cure periods, reallocation rights, inspection turnaround, and interest reserve sizing are all negotiated, and they vary far more between lenders than headline pricing does. That is the comparison worth running. YieldStack is the brokerage layer that runs it: borrowers submit once in about five minutes, the platform matches the deal against 5,000+ loan programs and typically returns 5–8 matches, with a median first offer in under an hour. There is $0 upfront, and the fee is 0.50–1.00% paid at closing. If you are sizing a ground-up or heavy-rehab deal, start at /tools/lender-match or go straight to /pre-submit.
The bottom line
A construction draw schedule is a monthly audit, not a payment plan. Each cycle asks the same three questions: is the work actually in place, has everyone downstream been paid, and does the money left cover the cost left. Get the retainage percentage, the in-balance cure mechanism, and the interest reserve assumptions right at closing, because all three are nearly impossible to renegotiate 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.