A construction disbursement is a staged release of money from a construction loan, paid out in increments as the project hits verified milestones rather than handed over in a lump sum at closing. The arrangement protects the lender from funding work that never happens, protects the owner from paying twice for the same task, and gives the contractor a predictable path to getting paid. Each release — called a draw — moves only after paperwork, inspection, and a lien check line up.
The Draw Schedule and Schedule of Values
Before construction starts, the lender and borrower agree on a draw schedule that sets out when loan funds will come out. It rests on a document called the schedule of values, which is an itemized list of every task required to finish the project paired with the dollar amount assigned to each. Site grading, foundation, framing, roofing, plumbing rough-in, electrical, drywall, finish work: each gets a line and a cost. The line items must total the full contract amount.
Draw schedules can follow different patterns. Some release funds at fixed milestones, such as foundation complete or dried-in. Others run on a monthly cycle, where the contractor requests payment for whatever percentage of each line item was completed during the month. The loan agreement spells out which approach applies, how many draws are permitted, what documentation triggers each release, and whether retainage will be withheld from each draw and at what rate.
What a Draw Request Includes
Every draw starts with paperwork. The two forms most widely used in the industry are AIA Document G702, the Application and Certificate for Payment, and AIA Document G703, the Continuation Sheet. G702 is the summary page: original contract sum, approved change orders, retainage, previous payments, and the amount being requested now. G703 breaks that down line by line, showing the percentage of each task completed and the associated cost. The two documents have to tie out exactly, or the lender sends the package back.
Lien waivers are the other non-negotiable piece. A lien waiver is the contractor’s or subcontractor’s written agreement to give up the right to file a legal claim against the property for the payment covered by the waiver. There are four basic types: conditional and unconditional versions for progress payments, and conditional and unconditional versions for final payments. A conditional waiver only takes effect once the money actually clears; an unconditional waiver takes effect immediately upon signing, regardless of whether the check has been deposited. Lenders almost always require conditional waivers with each progress draw and unconditional waivers for amounts already paid in prior draws.
The lender also expects current certificates of insurance. Builder’s risk coverage must be in place for the full value of the construction, with the lender listed as loss payee. Because builder’s risk does not cover liability, a separate general liability policy is required. Workers’ compensation certificates for every trade actively working on site round out the insurance package.
If any change orders have been approved since the last draw, documentation for them has to be included. A change order that raises the contract amount needs lender sign-off before the added cost can appear in a draw request. The lender wants the signed change order, a revised schedule of values reflecting the new scope, and confirmation that the total project cost still fits within the appraised value of the finished property.
Inspection, Title Check, and Funding
Once the draw package reaches the lender, a review cycle starts. The lender (or a third-party title company) checks the paperwork for completeness, confirms the math ties, and verifies that waivers and insurance are current. Anything missing or inconsistent gets kicked back before an inspector visits the site.
If the paperwork passes, the lender orders a site inspection. An inspector walks the job and verifies that physical progress matches the percentages in the request. If G703 says framing is 80% complete, roughly 80% of the framing needs to be standing. The inspector’s report goes back to the lender with a completion assessment, and the lender uses it to decide whether to release the full requested amount or scale it back.
The title company also runs a lien search at each draw to confirm no new mechanic’s liens or other claims have been filed since the last disbursement. A surprise lien can freeze the whole draw until the issue clears, which is why waivers from the prior draw matter.
Inspection fees are paid by the borrower and typically run a few hundred dollars per visit. On a project with six or eight draws, inspections add up to a real line item worth budgeting for at the start. Some lenders bill the fee directly; others deduct it from the draw proceeds.
After the inspection report clears and the title search comes back clean, the lender authorizes payment. Funds move by wire or check, depending on the loan agreement. From submission to funding, the cycle commonly takes five to ten business days when the documentation is clean. Sloppy paperwork or inspection discrepancies can easily double that.
Hard Costs, Soft Costs, and Stored Materials
Not every dollar in a construction loan goes toward physical building. Lenders usually split the budget into hard costs and soft costs, and the rules differ.
Hard costs cover the physical construction: labor, lumber, concrete, roofing, mechanical systems, anything that becomes part of the finished structure. These are the line items verified through site inspection.
Soft costs include expenses that support the project but produce no physical work: architectural and engineering fees, permit costs, legal fees, survey work, and interest reserves. Lenders often disburse soft costs early in the project or on a reimbursement basis after the borrower submits invoices.
Materials bought but not yet installed are their own category. When a contractor buys a large quantity of steel or custom windows and stores them at a warehouse before installation, the draw request may include those stored materials. Lenders treat off-site storage with extra caution because the materials are not yet attached to the property that secures the loan. Expect requirements for proof of ownership, insurance covering theft and damage, evidence that the materials are stored separately from other projects, and sometimes photographs. On-site stored materials are easier, but the inspector still needs to see them and confirm they match the request.
Why Draws Get Denied or Reduced
Denials happen more often than borrowers expect, and they almost always trace to a short list of problems. The most common is a mismatch between the claimed completion percentage and what the inspector actually sees. Contractors sometimes get optimistic about how far along a trade is, especially when cash flow is tight. The inspector does not share that optimism.
Other frequent causes: missing or expired insurance certificates, lien waivers that were not submitted for prior draws, unapproved change orders that increased the project cost, and work that does not conform to the approved plans. If the project has gone over budget and the remaining loan balance will not cover the cost to complete, the lender may freeze draws entirely until the borrower injects more equity.
Partial denials, where the lender funds some line items but reduces or rejects others, are more common than outright rejection. The borrower or contractor can usually cure the deficiency by submitting corrected documentation or waiting until the disputed work reaches the claimed completion level. Full denials that cannot be cured through paperwork typically require renegotiating the loan terms or a formal dispute process, which can stall a project for weeks.
Retainage and the Final Disbursement
Throughout the project, the lender or owner holds back a percentage of each progress payment as retainage. The held-back amount creates a financial incentive for the contractor to finish every last detail rather than moving on once the big work is done. Retainage rates typically run 5% to 10% of the contract value, though many states require the rate to drop to 5% once the project reaches 50% completion. The federal government has eliminated retainage on its own construction contracts.
Releasing retainage is the final act of the disbursement process, and it carries more documentation than a standard progress draw. The architect or owner must sign off that the project has reached substantial completion, meaning the building can be occupied and used for its intended purpose even if minor punch-list items remain. The contractor typically needs a certificate of occupancy from local building authorities confirming the structure meets safety and zoning codes.
The contractor also submits a final affidavit of payment, a sworn statement that all subcontractors and material suppliers have been paid in full. That protects the owner from mechanic’s lien claims surfacing after closeout. The lender conducts a final inspection that tends to be more thorough than the progress inspections, because the finished asset needs to match the appraised value that justified the loan.
Payment Timing Rules That May Apply
On federal government construction projects, the Prompt Payment Act sets specific deadlines that run tighter than the general federal rule. Once an agency receives a proper progress payment request on a construction contract, interest penalties begin accruing if payment remains unpaid for more than 14 days.1Office of the Law Revision Counsel. 31 U.S. Code 3903 – Regulations For standard non-construction federal contracts, the deadline is 30 days after receipt of a proper invoice.2Acquisition.GOV. FAR Subpart 32.9 – Prompt Payment
The interest rate for late federal payments is set by Treasury and published in the Federal Register twice a year. For January through June 2026, the rate is 4.125% per year.3Bureau of the Fiscal Service. Prompt Payment That rate applies from the day after the payment was due through the date the agency actually pays.4Office of the Law Revision Counsel. 31 U.S. Code 3902 – Interest Penalties
The Act also reaches down to subcontractors. Every federal construction contract must include a clause requiring the prime contractor to pay subcontractors within seven days of receiving payment from the agency. If the prime misses that window, the same Treasury interest rate applies to the late amount.5Office of the Law Revision Counsel. 31 U.S. Code 3905 – Payment Provisions Relating to Construction Contracts That seven-day flow-down requirement must be replicated in every tier of subcontracts on the project.
Private construction projects are not covered by the federal Prompt Payment Act. Most states have enacted their own prompt payment statutes for private work, and these vary considerably in deadlines, interest rates, and enforcement. Some require payment within 14 days of an approved application; others allow up to 30. On a private project, the applicable state statute and the specific contract language together set the timeline.
How quickly a subcontractor actually sees money after a draw clears often turns on one clause in the subcontract. A pay-when-paid clause means the general will pay the sub within a reasonable time after the general receives payment from the owner; if the owner is slow, the sub waits longer, but the obligation to pay remains. A pay-if-paid clause is more aggressive: it makes the owner’s payment a condition that must be satisfied before the general owes the sub anything, so if the owner goes bankrupt the sub may have no contractual right to collect. Courts in many states view pay-if-paid clauses with skepticism and will enforce them only where the contract language is unmistakably clear that the owner’s payment is a true precondition. Vague language gets read as pay-when-paid. Some states have banned pay-if-paid clauses outright. Subcontractors reviewing a new contract should look for the words “condition precedent” in the payment section; if those words appear alongside references to the owner’s payment, the clause is almost certainly pay-if-paid.
After the Final Draw
Many borrowers finance their projects with a construction-to-permanent loan that converts to a standard mortgage once the final disbursement is complete. In a single-closing structure, the borrower signs all loan documents at the beginning of construction, and the loan converts to permanent financing when the building is finished without a second closing.6Fannie Mae. Conversion of Construction-to-Permanent Financing Single-Closing Transactions
During construction, the borrower typically makes interest-only payments on the amount disbursed so far. Once the project is complete and the final draw (including retainage release) has been processed, the loan begins amortizing as a conventional mortgage. If the final construction cost differs from the original estimate, the permanent loan amount may be adjusted, though any increase must be supported by documentation and the property’s appraised value.6Fannie Mae. Conversion of Construction-to-Permanent Financing Single-Closing Transactions The lender may also build a contingency reserve of up to 10% of construction costs into the loan to cover unexpected expenses or change orders.7USDA Rural Development. Combination Construction to Permanent Loans
Disbursements also trigger tax reporting that catches some owners off guard. If you pay $2,000 or more to any individual subcontractor or unincorporated service provider during the calendar year, you must file a Form 1099-NEC with the IRS reporting that payment. This threshold rose from $600 to $2,000 for payments made on or after January 1, 2026, and the amount will adjust for inflation annually starting in 2027.8Internal Revenue Service. Publication 1099 (2026) General Instructions for Certain Information Returns
The obligation falls on whoever makes the payment, which on most projects is the general contractor paying subs. An owner-builder who hires individual trades directly is on the hook for issuing those forms as well. Collect a W-9 from each payee before making the first payment, and file 1099-NEC forms with the IRS and furnish them to each payee by January 31 of the following year.8Internal Revenue Service. Publication 1099 (2026) General Instructions for Certain Information Returns Late filing penalties increase the longer the forms are overdue.