Banks generally disburse construction loan funds by way of a standard payment plan or a progress payment plan.
Under a standard payment plan, funds are disbursed based on construction costs incurred during each period. The Construction Disbursement Schedule Voucher Plan can be used in conjunction with a Construction Loan Agreement to document this disbursement plan. A sample form is located at the end of this Chapter.
Under a progress payment plan, funds are disbursed based on a percentage of the construction’s completion as determined by the Bank or its consulting architect. The Construction Disbursement Schedule Progress Payment Plan can be used to document this disbursement plan. A form is located at the end of this Chapter.
Both plans should be structured so that the amount of each construction draw is commensurate with improvements made to date. The Bank should not advance funds unless they are to be used solely for the project being financed and as stipulated in the draw request. Moreover, a construction lender must monitor the funds being disbursed and must be assured, at every stage of construction, that sufficient funds are available to complete the project.
The progress payment plan is normally used for commercial projects. Under a progress payment plan, the Bank releases funds as the borrower completes certain phases of construction. The Bank normally retains, or holds back, 10 percent to 20 percent of each payment to cover project cost overruns or outstanding bills from suppliers or subcontractors.
Under a progress payment plan, the borrower requests payment from the Bank in the form of a “construction draw” request or “certification of payment” which sets forth the funding request by construction phase and cost category. The borrower also certifies that the conditions of the loan agreement have been met, e.g., that all requested funds are being used for the project, and that suppliers and subcontractors are being paid. The construction draw request should include waivers from the project’s subcontractors and suppliers indicating that payment has been received for the work completed. After reviewing the draw request and independently confirming the progress of work, the Bank then disburses funds for construction costs incurred, less the holdback.