A construction loan is not paid out all at once. The lender releases it in pieces, called draws, as the work gets done. Each draw is a small audit: you show what was built and what it cost, the lender checks it, and only then does money move.
When the paperwork is clean, draws are routine. When it isn't, a missing lien waiver or an unapproved change order can hold up a payment your subcontractors are waiting on. This guide walks through the process from the owner's and developer's side, with notes for general contractors and the Texas rules that matter.
What a construction draw is
Before closing, you and the lender agree on a construction budget, sometimes called the draw schedule or sources and uses. It breaks the project into line items: land, site work, foundation, framing, MEP, finishes, soft costs like permits and design, a contingency and often an interest reserve.
Each month (or at set milestones) you request money against those lines based on work completed. The lender pays only for work it can verify, and you pay interest only on what has been disbursed, not on the full loan amount.
The budget you agree on at closing is the yardstick for every draw. If a cost isn't in a budget line, or a line is already used up, the lender will push back until a change order or a budget reallocation is approved.
The draw process, step by step
- Pay application from the contractor. The general contractor bills for work completed in the period, usually line by line with a percentage complete. Many use the AIA G702/G703 format: the G702 summarizes the amount due, and the G703 shows each line's scheduled value, work to date, retainage and balance.
- Owner review. You check the percentages against what is really on site, confirm change orders are approved, and collect invoices for owner-paid costs such as design, permits or materials you bought directly.
- Draw package to the lender. The request goes in with the pay application, invoices, lien waivers, updated budget and any change orders.
- Inspection. The lender sends an inspector to confirm the percentage of completion. If the inspector sees less progress than you claimed, the draw is cut back to match.
- Title update. The title company checks that no new liens have been filed since the last draw. In Texas, title companies often handle the actual disbursement.
- Funding. The money goes to you, straight to the contractor, or through the title company, depending on the loan. Keep the lender's draw statement: it is your source document for the bookkeeping.
What goes in a draw package
Lenders vary, but a complete package almost always includes:
| Document | Why the lender wants it |
|---|---|
| Draw request form | The amount requested by budget line, signed by the borrower |
| Contractor pay application (G702/G703 or similar) | Shows the work completed and the retainage held by line item |
| Invoices and receipts | Backs up owner-paid costs such as design, permits and materials |
| Lien waivers | Proves the contractor and subcontractors were paid for the prior draw |
| Approved change orders | Explains any change to a budget line |
| Updated budget | Shows the original budget, drawn to date and remaining for every line |
| Photos or progress notes (if requested) | Helps the inspector confirm progress |
Texas rules that affect every draw
These are the two points that most often slow down draws on Texas projects. They are summarized here so you know what to ask about; your attorney or title company should confirm how they apply to your contract.
Lien waivers must follow the statutory forms
The Texas Property Code (Chapter 53, Subchapter L) sets out four waiver and release forms: conditional and unconditional, each for progress payments and final payment. A waiver that doesn't substantially comply with the statutory form isn't enforceable. Also, nobody can be required to sign an unconditional waiver until the payment has actually been made.
In practice: collect conditional progress waivers with the draw request, and unconditional waivers once the subcontractor's check has cleared. Missing waivers from the last draw are one of the most common reasons a new draw gets held.
Owners are expected to hold back retainage
Texas law generally requires the owner to withhold 10% of the contract price, or of the value of the work completed, during the project and for 30 days after completion. The 2022 amendments call these "reserved funds." Holding back retainage protects the owner from subcontractor lien claims, so the money stays in your books as a liability until it is released.
How to record a draw in your books
The most common mistake we see on developer books is recording the draw deposit as income. For the owner, a draw is loan money: it increases what you owe, and the costs it pays for become part of the project.
Say the contractor bills $100,000 of work this month and you hold back 10% retainage. The lender funds $90,000 and you pay the contractor:
| Entry | Account | Debit | Credit |
|---|---|---|---|
| 1. Contractor pay app approved | Construction in Progress – Project A | 100,000 | |
| Accounts Payable – General Contractor | 90,000 | ||
| Retainage Payable – Project A | 10,000 | ||
| 2. Lender funds the draw | Cash – Project A account | 90,000 | |
| Construction Loan Payable – Project A | 90,000 | ||
| 3. You pay the contractor | Accounts Payable – General Contractor | 90,000 | |
| Cash – Project A account | 90,000 |
If the lender pays the contractor directly, skip the cash steps: debit Accounts Payable and credit the loan. Either way the books end up showing $100,000 of project cost, $90,000 owed to the lender and $10,000 of retainage still owed to the contractor.
Interest during construction
Record each month's interest even when it is paid from an interest reserve. Whether construction-period interest is capitalized into the project cost or deducted depends on tax rules (including IRC §263A and its small-business exception) and on how your financial statements are prepared. Keep it in its own account per project so your CPA can choose the correct treatment without you having to rebuild anything.
If you are the general contractor
From your side, each pay application is a progress billing. Record the full billed amount, with retainage in a separate Retainage Receivable account rather than mixed into regular receivables. Your billings to date also feed the work-in-progress (WIP) schedule, which compares what you have billed with what you have earned.
Track every draw against the budget
Keep one schedule per project that you update with each draw. It should match the lender's draw statement to the dollar:
| Budget line | Budget | Prior draws | This draw | Remaining | % used |
|---|---|---|---|---|---|
| Site work | 60,000 | 60,000 | 0 | 0 | 100% |
| Foundation | 85,000 | 85,000 | 0 | 0 | 100% |
| Framing | 140,000 | 56,000 | 70,000 | 14,000 | 90% |
| Soft costs | 45,000 | 31,000 | 4,000 | 10,000 | 78% |
| Contingency | 30,000 | 0 | 0 | 30,000 | 0% |
Two warning signs to watch: a line that is further along in dollars than in real progress (it will run out before the work is done), and a contingency being used early in the project. Spotting either one a month early gives you time to talk to the lender before it becomes a funding gap.
Common mistakes that delay draws
- Missing lien waivers from the previous draw, or waivers that don't follow the Texas forms.
- Change orders not approved by the lender before the work is billed.
- Percent complete claimed ahead of the work, so the inspector cuts the draw.
- Several projects in one bank account, which makes it hard to show where loan money went.
- Books that don't match the lender's statement, so every draw starts with a reconciliation fire drill.
- Draw deposits booked as revenue, which overstates income and confuses your CPA at year-end.
A monthly draw checklist
- Get the contractor's pay application and walk the site (or review photos) against the claimed percentages.
- Collect conditional waivers for this draw and unconditional waivers for the last one.
- Confirm every billed change order is approved.
- Update the budget schedule and check that each line still has room.
- Submit the package and note the inspection date.
- When funds arrive, record the draw from the lender's statement and reconcile the project bank account.
- Record retainage held and the month's interest, then file everything in the project folder.
Frequently asked questions
Is a construction draw income?
Not for the owner or developer. A draw is loan money, so it increases what you owe the lender; the costs it pays for go to the project, usually as construction in progress. For the general contractor who gets paid from the draw, the payment settles work it billed, and it is revenue under the contractor's own accounting method.
How long does a construction draw take?
It depends on the lender. The usual steps are your request, a site inspection, a title update and the release of funds, which commonly takes from several days to a couple of weeks. Complete paperwork, especially lien waivers and approved change orders, is what keeps it on the short end.
What is an interest reserve?
An interest reserve is a line in the loan budget set aside to pay the loan's interest during construction. Each month the lender draws from that line to pay itself, so you still need to record the interest even though no money leaves your bank account.
Do I need lien waivers for every draw in Texas?
Lenders and title companies usually ask for them with each draw. In Texas, a waiver and release is enforceable only if it substantially complies with the statutory forms in the Property Code, and an unconditional waiver can't be required before the payment is actually made. Your attorney or title company can confirm exactly what your lender needs.
Should each project have its own bank account?
Yes, whenever you can. One account per project, or per project LLC, makes it far easier to match lender disbursements to invoices, prove where loan money went and close each month without guesswork.
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This guide is general information for business owners, not tax or legal advice. R&J Consultants provides bookkeeping and does not prepare IRS returns; confirm tax and legal treatment for your situation with your CPA or attorney.