Construction Loan Draw Schedule: How Draws, Inspections and Retainage Work in 2026

Retainage is withheld from each draw until substantial completion. On a $12M commercial construction loan, you might see six draws over 14 months, with 10% retainage held back on each draw. Your cash planning depends on this schedule because costs hit before reimbursement. That gap, more than the note rate, shapes how much liquidity your project needs. Commercial construction loans follow this structure across property types, including retail, industrial, and hotels.

Key takeaways

• Draws release in stages, tied to inspected progress.
• Each draw needs a requisition, inspection, title update, and lien waivers.
• Retainage usually runs 5-10% per draw until substantial completion.
• Interest accrues only on funded balances, and carry rises with each draw.
• Complete draw requests fund in 5 to 10 business days.

FDIC construction and land development guidance says building and loan agreements require disbursement of funds as work progresses, on-site inspections, lien waiver forms from subcontractors prior to disbursement, and that a portion of loan proceeds be retained pending satisfactory completion.

Why do lenders fund in draws instead of a lump sum?

Lenders fund in draws to control construction risk. A half-built property is worth far less than a finished one, so the lender needs proof that loan proceeds are turning into completed work. Staged funding creates that checkpoint.

The FDIC's guidance on construction and land development lending tells examiners to look for on-site inspections, disbursement of funds as work progresses, lien waivers before disbursement, and retention of a portion of proceeds until satisfactory completion. That is the backbone of the process you deal with as a borrower.

The practical issue is timing. You pay contractors before the lender reimburses the work, so your project has to carry that gap.

How does a draw work step by step?

A draw moves through five checkpoints: requisition, inspection, title update, lien waivers, and lender approval.

Step 1: You submit the requisition package. Many lenders use AIA G702 and G703 forms, or an equivalent. The package lists completed work, percent complete by line item, and the dollars requested.

Step 2: A third-party inspector verifies progress. The lender sends an independent inspector to confirm the work exists on site. FDIC research on construction monitoring analyzed nearly 30,000 multiple-draw construction loans and describes bank-contracted third-party inspections of the construction project.

Step 3: Title gets a date-down endorsement. This confirms no new liens attached to the property since the last draw.

Step 4: You collect lien waivers. Your GC and key subcontractors confirm they were paid on the prior draw and waive lien rights on that amount.

Step 5: The lender approves and funds. Once the file is complete, funds release within about 5 to 10 business days.

Milestone: submit the requisition the same week work hits the draw threshold.

How much retainage do lenders hold back, and when is it released?

Retainage is the share of each draw your lender withholds until substantial completion. Many commercial construction loans hold back 5-10% per draw until substantial completion, and the FDIC's core analysis procedures for construction lending direct examiners to confirm that a portion of the loan proceeds be retained pending satisfactory completion of the construction.

On the $12M example above, total retainage is $1,200,000 across six draws. You do not receive that money until final inspection passes, the certificate of occupancy is issued, and punch-list work is closed out.

Your GC contracts mirror that structure. If the lender holds 10%, your contractor payment structure does too.

Milestone: retainage releases at substantial completion, not when the final draw is first approved.

How does the interest reserve work as draws increase?

The interest reserve is the part of the loan budget that covers interest during construction. You pay interest only on the balance already disbursed, not on the full commitment from day one.

On the $12M project, the funded balance starts at $1,800,000 after the first draw and rises to $12,000,000 after the sixth. At an 8.5% interest-only rate during construction, the upper end of today's bank and debt fund band, the interest reserve needed across the 14-month draw period runs approximately $645,000.

• Draw 1 outstanding: $1,800,000
• Draw 3 outstanding: $6,600,000, monthly interest cost approximately $46,750 at 8.5%
• Draw 6 outstanding: $12,000,000, monthly interest cost approximately $85,000 at 8.5%
• Blended interest reserve across 14 months: approximately $645,000

Construction pricing in this guide is as of September 15, 2026: 30-day average SOFR 3.65% plus bank and debt fund spreads of 250 to 500 basis points, or about 6.25% to 8.75% all-in, floating.

This is why two loans with the same face amount and rate can carry very different costs. If your draws front-load, your balance stays higher for longer.

Hotel-specific draws: FF&E, OS&E and pre-opening funding

Hotel construction loans add categories a standard commercial build does not: FF&E, OS&E, and PIP compliance draws. FF&E and OS&E fund in the final 60-90 days before opening, once the shell and MEP systems are substantially complete.

If your project is a brand conversion, you also deal with PIP draws tied to the brand-mandated renovation scope. Brand inspectors, separate from the lender's inspector, verify PIP work before that draw funds. You may need two sign-offs on the same milestone.

Pre-opening draws also cover training costs, initial inventory, and other startup expenses treated as part of the construction budget. For a deeper look, see hotel construction loan requirements for 2026.

Milestone: order FF&E and OS&E early enough that delivery does not push your opening past the interest reserve window.

What goes in a complete draw request package?

A complete package is the fastest way to a 5-to-10-day funding turnaround. Lenders return incomplete requisitions rather than fund them partially, so treat this as a checklist, not a guideline.

• Pay application on AIA G702/G703 or the lender's form, signed by the GC and certified by the architect, with percent complete by line item against the approved schedule of values.
• Inspection report from the lender's third-party inspector confirming the work claimed is in place and matches the percent complete.
• Title date-down endorsement showing no new mechanics' liens since the prior draw.
• Conditional lien waivers for the current draw and unconditional waivers from the GC and major subcontractors for the prior draw.
• Invoices and proof of payment for soft costs, stored materials, and any owner-direct purchases such as FF&E deposits.
• Budget reconciliation showing the approved budget, amounts funded to date, this request, and cost to complete, so the lender can confirm the loan is still in balance.
• Approved change orders for any scope or budget movement since the last draw.

Milestone: assemble the package during the last week of each milestone so it lands the day the inspector signs off.

What delays a draw?

Four issues drive most draw delays: change orders, missing lien waivers, budget reallocations, and an out-of-balance loan.

Change orders. Any change to approved scope or budget needs lender sign-off before the affected draw funds.

Missing lien waivers. If a subcontractor has not signed for the prior draw, the next draw stops.

Budget reallocations. Moving dollars between line items needs approval, even if total cost stays the same.

Out-of-balance loans. If cost to complete exceeds the undisbursed balance, the lender requires more equity before releasing another draw.

Choose tighter draw administration if:

• Your scope is changing in real time
• Your budget lines are moving month to month
• Your GC is slow collecting waivers
• Your equity cushion is thin against overruns

How does the draw schedule connect to the takeout?

Your final draw is the handoff to permanent financing.

Once the building reaches substantial completion and receives its certificate of occupancy, you move into lease-up or stabilization. That period builds the operating history a permanent lender needs. Many construction loans convert into permanent debt or a mini-perm, often three to five years, before a later refinance.

On the $12M example, the final $1,320,000 draw covers FF&E and closeout costs, bringing total funding to $12,000,000. From there, the loan either converts or refinances based on stabilized net operating income instead of project cost.

Worked example: $12M commercial construction loan draw schedule

You close a $12M construction loan against a $20M ground-up commercial project, a 60% loan-to-cost ratio. The loan funds across six draws over 14 months, from site work through FF&E and final completion.

Each draw holds 10% retainage, totaling $1,200,000 until substantial completion. Draws fund 5 to 10 business days after the lender receives a complete requisition, inspection report, updated title, and signed lien waivers.

Your outstanding balance climbs from $1,800,000 after the first draw to $12,000,000 after the sixth. A $645,000 interest reserve, built into the loan at closing, covers carry across the 14-month period at an 8.5% interest-only rate.

If you are comparing structures, see how the draw schedule sits inside the full commercial construction loan and how hotel construction financing layers C-PACE and mezzanine beneath the senior draw without changing the draw mechanics.

When is this the wrong tool?

A draw-based construction loan is the wrong tool when the staged funding process creates more friction than value.

Avoid a draw-based construction loan if:

• Your renovation is under about $200,000 and does not justify inspection and paperwork overhead
• You do not have a licensed general contractor to support certified pay applications
• You need lump-sum cash upfront rather than milestone reimbursements
• You are buying a stabilized property with no construction scope
• Your scope keeps shifting and frequent change orders will disrupt each draw

Request financing →