Construction Lending Basics: Draw Inspections

Updated: 9/19/2022

You’ve made a construction loan and the project is now underway. If all goes well, your builder will send draw requests for labor and materials according to your draw schedule, make steady progress, and complete the project on time and within budget. But, while many lenders are exceptional at managing credit risk, construction loans require intense attention.

A construction lending best practice used by most lenders to limit this risk is ordering draw inspections to validate progress in conjunction with disbursing funds.

Reduce risk with draw inspections

The simplest argument for why draw inspections are important is risk. For starters, they hold the builder accountable and organized. Their funds aren’t distributed until the inspection is approved. By performing inspections, you can ensure the loan proceeds are going into the collateral on the loan, and identify problems as early as possible.

Let’s say a builder falls behind. You risk disbursing money for work that hasn’t yet been completed, or worse, won’t ever be completed. The sooner you’re made aware, the sooner you can take corrective action and work with that builder to remedy the situation. Draw inspections also prevent horror stories like a builder accidentally building on the wrong lot or requesting funds on a project that isn’t actually under construction. These are expensive mistakes that you don’t want to make.

You can mitigate these risks by scheduling regular draw inspections with experienced draw examiners who become your eyes and ears on the job site. During a draw inspection, they will determine if the builder has completed work according to what has been requested and select the appropriate funds to be released.

What to expect from draw inspections

Draw inspectors visit the work site to evaluate current progress against what has been reported. They’re looking specifically to validate that all work items and materials included in a draw request are, in fact, in place. Then, they assist in determining the appropriate release of funds. A quality draw inspector will work with you to understand your project and report on several items, including: 

• Tracking that each line item or stage of construction is complete, as reported, by percentage
• Line-by-line accounting of all cost statements and funding analysis
• Photographing materials present on-site and work put in place
• Reviewing change orders and ensuring they’re in step with the project timeline
• Relaying builder questions or needs to lenders/owners
• Providing payment recommendations

And on more sophisticated projects (usually commercial in nature):

• Verifying permits, zoning, licenses, taxes, and insurance or bonding for the project/builder
• Assessing the quality of work, noting any concerns
• Tracking invoices versus the work put in place and materials

Work with your inspector to make sure they report on the items that matter to you. As a final note, regular inspections can also be helpful even when no draw is requested to keep a pulse on how well the project is progressing. Some lenders make it their practice to schedule monthly draw inspections on all projects.

Finding the right draw inspector

There are plenty of knowledgeable draw inspectors and draw inspection companies throughout the country. The right one(s) for you could depend on many factors:

• Type of construction: Single-family, residential or commercial
• Territory: Single market or covering the entire country
• Frequency: One-time event or is construction lending going to be a fixture of your portfolio
• Sophistication: How knowledgeable is your team on construction
• Speed: Some draw inspectors are faster than others and this will impact your draw turnaround time and likely your client satisfaction
• Redundancy: Many lenders want a few options in case they are in a pinch or their inspector isn’t available

Tip: Referrals are the name of the game. We recommend reaching out to other lenders in your area for referrals. Also, feel free to contact us at Built to see if we can make the right introductions.

How Technology Has Changed Draw Inspections

In the past, lenders have played “traffic cop” managing the coordination between builders and project owners: Requesting draws, scheduling draw inspections, reviewing draw inspections, calculating the appropriate amount to disburse, getting documented approvals on the funds to be disbursed, getting the title company involved where applicable, actually disbursing funds, and ensuring the project budget remains in-balance with all systems and spreadsheets through completion. This process is extremely labor intensive and prone to human error, but it no longer has to be.

Built has modernized these processes throughout the platform. Gaining access to Built’s product suite not only services lenders, but borrowers, contractors, and yes, even inspectors.

How Built Supports Draw Inspections

The tedious nature of organizing, processing, and performing draw requests and inspections creates the possibility of massive financial headaches. To solve these pain points, Built recently released a suite of products catered to simplifying the inspection process. 

For example, utilizing Built’s Project Snapshot, anybody associated with a particular project can efficiently monitor its development remotely through geolocation verified photo evidence at no additional cost. Once they are taken, progress images are immediately uploaded to the Built platform where you may review them or send them to a different inspector. You have constant visibility into your project thanks to pre-scheduled inspections every 30-45 days reinforced with remote monitoring tools like Project Snapshots, thereby lowering the risk of default.

Similarly, with Built’s Verified Inspector Network, you can easily access a pool of local inspectors that have already been pre-screened, saving you the time and effort of having to find inspectors for each project individually. Mitigate risk by monitoring inspector performance throughout the project, making it simple to identify inspectors who are problematic. The best part about using Built’s Inspector Network? It frees up all the time you waste on billing, thanks to a predetermined flat charge for each inspection. 

Built was originally founded on the pain points of draw requests and inspections. Historically, this process has been extremely manual. The Construction Loan Management (CLA) platform within Built streamlines operations and centralizes loan information with efficiency and clarity. This leads to more loans able to be processed without having to increase workload. Perhaps most importantly, digitizing the draw request process can reduce common errors to practically zero.