Lender draw requests and the GMP position they depend on

A construction lender funds the project in monthly draws. Each draw request carries the pay application, lien waivers, an inspection report and, under most loan agreements, the borrower's statement of cost to complete. The lender compares the cost to complete against the undisbursed loan balance plus any remaining equity. If the remaining cost exceeds the remaining funds, the loan is out of balance and the lender can require the borrower to deposit the difference before funding.

Cost to complete is not a number on the G702. It is the anticipated final cost less cost to date. Which means every draw depends on the owner's anticipated final cost, and on the registers behind it. A developer whose AFC is a month behind is submitting a cost to complete that the lender's inspector may not accept.

What the lender's inspector checks

The lender's construction consultant or inspector visits the site, reviews the pay application, and forms a view on percent complete and on whether the remaining budget covers the remaining work. They look at change orders, pending and executed, because each one changes the remaining cost. They look at contingency, because a fund that is nearly exhausted with half the work remaining means the cost to complete is understated. They look at allowances and buyout, because an unbought package is a cost that is not yet known.

In other words, the inspector rebuilds the owner's GMP position from the documents available. An owner who hands over a current, consistent position, with the waterfall from GMP to AFC and the registers behind it, shortens that review. An owner who hands over last month's spreadsheet invites questions that delay funding.

Where draws go wrong

The most common problem is a change order that the contractor has priced and the owner has verbally accepted but nobody has entered in the register. The inspector sees it in the contractor's log, the borrower's cost to complete does not include it, and the draw is held until the figures reconcile. The second most common is contingency. The owner's report shows contingency remaining. The inspector asks for the draw log and finds approved draws that have not yet hit a pay application. Remaining is lower than reported.

A fictional $82 million mixed use development illustrates both. In month fourteen the developer submits cost to complete of $31.2 million against undisbursed loan of $31.9 million. The inspector adds two pending change orders totaling $600,000 and three approved contingency draws not yet billed, and arrives at a cost to complete of $32.1 million. The loan is out of balance by $200,000. The draw is delayed two weeks while the developer funds the difference.

Interest and the delayed draw

A delayed draw delays payment to the contractor, which under most AIA A133 based agreements can accrue interest and, if prolonged, give the contractor the right to suspend. Check your contract. The cost of a late draw is rarely the amount in dispute. It is the schedule.

What the owner should send with each draw

The pay application and its certification. The current GMP position on one page: GMP as amended, AFC, contingency in both funds with exhaustion dates, pending change orders with expected value, open allowances and unbought packages. The change order register, so the inspector can reconcile against the contractor's log without asking. The contingency log with approved draws whether or not billed. A cost to complete that is derived from the AFC, with the derivation shown.

Sending the same package every month in the same format does something beyond speeding the review. It builds the inspector's confidence that the owner's numbers are the controlling numbers. When the contractor's log and the owner's register differ, an inspector who has seen twelve consistent owner reports will ask the contractor first.

Keeping the position current for the draw

The draw cycle forces discipline that a board cycle does not. The lender will not fund until the figures reconcile, so the owner's registers have to be current by the draw date, every month. That is a good reason to run the monthly owner report on the draw schedule rather than the board schedule, and to take the stored snapshot on the day the draw package is sent.

Costwitness produces the draw package figures from the same snapshot as the owner's report: the AFC waterfall, the contingency ledger with approved but unbilled draws, the change order register with pending items at expected value, and a cost to complete derived from them. The lender's inspector sees one consistent position. The owner's team still answers the inspector's questions about why each bar moved.

In the product

Anticipated final cost, Contingency ledger, Change order register. Free tool: Contingency Runway, Change Order Exposure.

Keep reading

Earlier: Flags raised and flags closed: a monthly list the board can act on. Later: Retainage and the owner's ledger: recording what is held and when it releases. All articles on owner reporting.