All construction lenders have one thing in common, adversity to risk. How that risk can be mitigated varies by lender and project. General consensus among the financial industry centers around the use of a robust due diligence program facilitating an exposure reduction in all phases of a project. A draw inspection is one way you can lower your risk.
About Draw Inspections
The main tool used to aid in this undertaking involves the usage of a periodic draw inspection. Draw inspections are a multi-step process that collects project-related documentation and performs an analysis of all key components to ultimately provide lenders with an approved dollar value for work completed to date.
As the procedure, documentation and report deliverable are critical pieces to this approval, we will take a deeper dive into these items along with discussing the inner workings of a draw inspection to shed light on common pitfalls that can derail the lender’s draw process.
The Draw Inspection Process
Intrinsic to seamless draw inspection is the thorough knowledge of the overall process. This process can be altered to meet the needs of the interested parties but often follows a standard progression. This progression includes:
Request for Funding
The request is sent from the borrower to the lender and includes documentation to substantiate the request. At the time of the request the lender will decide if competent ‘in-house’ staff will be performing the remainder of the process or if it will be handled by a 3rd party consultant.
Pitfall
Often a lender over estimates the competency of in-house staff to perform the remainder of the process. This opens the lender up to a greater risk exposure as the staff performing the draw inspection doesn’t have the experience and training necessary to identify current or potential issues.
Pre-Field Inspection Analysis
Provided documentation is reviewed by the the field inspector to gather a general impression of what has progressed on the project site to date. Any missing documentation necessary to perform the field inspection will be requested at this time.
Pitfall
This step can be overlooked in its entirety causing confusion during the actual field inspection. This confusion can lead to inaccuracies in the approval or delay in the funding due to a greater need for due diligence after the field inspection.
Field Inspection
Qualified staff will perform a field inspection of the project location. The inspection will include photo documentation all areas of the project but will ultimately focus on items being billed in the current request. The inspection should be guided by on-site personnel, include safe access to all areas and have enough time allotted for a thorough documentation of the current conditions.
Pitfall
It is easy to rush through the inspection and under-document what is currently occurring on a site. This is the most critical part of the draw inspection process. Often, items not identified in the physical inspection can be observed if the photo documentation necessary to verify the request.
Post-Field Inspection Analysis
A comprehensive review of the documentation submitted with the request and field inspection information is performed. The reviewer looks for inconsistencies between the request and inspection and ultimately may request further documentation to substantiate the request.
Pitfall
When the request documentation and inspection information does not agree with each other lenders frequently waive the need for the additional information to expedite the request. This usually amplifies the current issues and proliferates confusion in subsequent requests.
Report Generation
Both in-house staff and consultants should generate a final report detailing the findings of the inspection. This report includes an approval of the requested funding amount, either partially or complete. The report can also include documentation of other project related items such as schedule, change orders, permits, photographs, etc.
Pitfall
Most lenders require this report to fund the request. It’s easy to try and expedite the process to ultimately fund the request but proper time is necessary to fully vet the request. Don’t skip steps in the vetting process to placate a borrower. This will ultimately affect the accuracy of the report.
Documentation
Every project is unique to itself. As such, project-specific documentation is required to facilitate a seamless draw request. The level of documentation required to process a draw request varies based on project size, scope, and complexity. As a rule of thumb, the following items should be provided allowing for a thorough draw request analysis:
- Invoice (preferably AIA format)
- Schedule
- Change orders
- Project drawings
- Building permits
- Deposit request backup documentation (subcontractor/supplier invoice)
- Stored material backup documentation (subcontractor/supplier invoice, insurance, photographs)
- Lien waivers
Any items not provided during the draw process can lead to inaccuracies in the request process.
LCS recommends that even if it delays the final report, all pertinent documentation is acquired prior to finalizing the report.
Deliverable
In the end, when the field inspection is completed and a full project analysis has occurred, a final draw inspection report is authored. The report will include how much of the request is being approved while also commenting on deficiencies in the documentation items provided for review. It’s imperative that the entire report is reviewed as the items included in the summation section is only a fraction of the pertinent information identified during the process.
Get a Thorough Draw Inspection
LCS listens to your needs to develop products that are right for your transaction. Whether that be an individual appraisal, environmental or construction report, or a combination of services; LCS will meet your needs in the most efficient, effective way possible.
To learn more, reach out to Liz Mahoney, Director of Sales & Business Development today.