Two types of draw schedules are commonly used in construction and residential remodeling. Milestone draws are based on receiving payment at the beginning or end of each scope of work related to a specific CSI construction division.
CSI is an acronym for the Construction Specifications Institute, whose MasterFormat system divides construction projects into 50 phases of work or divisions. The other type of draw schedule is based on a schedule of values (SOV). There are pros and cons to each type of draw schedule, which I cover broadly in this column.
Understanding the right draw schedule for the job is very important to your firm’s cash flow. It is also important to have a clear billing regimen established with the client in advance. This minimizes potential client pushback and misunderstanding.
Milestone Draws
Milestone draws are best used on smaller jobs, or specialty jobs less than $100,000 on up to $200,000. These are the types of jobs that typically take a month or two to complete. A good example of a specialty job would be a window project with many openings. This type of project could have as few as three draws.
Generally, it’s best to schedule draws for the beginning of a particular CSI phase such as framing or drywall. The reason: It’s hard to dispute. Starting something can’t be contested, but finishing a phase can be less clear. How often is some drywall left open for late product or last-minute systems work?
You must also consider the sequence of phases as to when they will be started and completed on each specific job. Too often there’s the tendency to use a boilerplate draw schedule in contracts without thinking through the specific sequence of work for the job to be contracted. Oftentimes different scopes of work are done out of their normal sequence due to the availability products or due to the schedules of various trade partners.
Some of you might remember two years ago when windows were on back order for six months or longer. At our company during that timeframe, when we’d be having our ‘close-in’ inspections, we’d often be drywalling as we installed widows. Your contract should allow you the wiggle room to get milestone draws out of sequence.
Another factor to consider is you generally don’t want to specify more than 6 to 10 draws on smaller jobs. This might have the unintended consequence of necessitating the combination of several scopes of work to be started. Be strategic in how you do this. If one scope of work has not started, will It hold up the whole draw?
Schedule of Values
A schedule of values (SOV) type of draw schedule should be considered for large jobs. SOV-type draws are based on a percentage of project completion. Each scope of work that exists in your estimate should, at any given point in time, be shown as representing some percentage complete for the overall project.
The benefit of SOV draws is that every two, three or four weeks the percentages of work completed grows. This facilitates a steady, predictable cash flow.
Another key benefit of the SOV process is it doesn’t allow clients the opportunity to hold up a payment for small items that might not be complete. In my view, after more than 30 years in business, it is the fairest way to invoice for work.
On their weekly walk-throughs with clients, your project managers should review the percentage completion for different scopes of work that are in progress on the job. As these updated percentages are noted for each scope of work, they should be added to a project spreadsheet so a new balance due can be calculated.
You might want to stipulate your draw schedule as part of your initial construction schedule. This construction schedule should be shared with the client and should become part of your contract. We insert the following language into our contracts for our SOV projects:
Payment schedule: Deposit of $___ is due at signing. Invoices will be provided every two weeks on a percentage-of-work completed basis according to a schedule of values, which will be produced after the contract is signed. Payment is due upon receipt of invoice.
One primary con associated with an SOV payment schedule is it’s more difficult to front-load the payments versus a draw schedule. Another possible drawback of an SOV payment schedule occurs when a remodeler uses lump-sum pricing, or one number for the entire job. In those circumstances, the SOV breakdown can create issues.
If a client is getting a bank loan with bank-defined draws, you will need to assess whether the bank draws align with your needs. If not, you will need to negotiate with the bank and ideally substitute your draw schedule or something close to it.
Many banks discourage deposits at the beginning of the job. Some states such as California also severely limit the amount of a deposit at signing. Always check on your state laws. QR
Christopher K. Landis, AIA, owns Landis Architects/Builders with his brother Ethan in Washington, D.C. He brings 43 years of remodeling design, construction and management experience to this series of columns for the magazine. You can reach him at chris@landisconstruction.com.