The Draw Schedule That Outran the Work
A contractor is managing a $1.2 million commercial fit-out on a 6-month schedule with a 10% retainage held on each progress payment. The owner's lender requires monthly draw requests supported by a schedule of values. By month 4, the contractor has billed 70% of the contract value but the project manager's cost report shows only 58% of the work installed. Cash is tightening; the contractor has been using early draws to cover overhead on another job. The owner's representative questions the next draw, noting the billed-versus-installed gap. The contractor's PM proposes billing the next draw at 80% to "catch up on cash" and to bill stored materials not yet delivered to the site.
1. What is wrong with the proposed approach, and what risks does it create?
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Billing ahead of installed work - and billing materials not yet delivered - misrepresents project status. Risks include:
- Fraud/breach exposure. Draw requests certified as accurate that overstate completion can expose the contractor to claims by the owner and lender, and potentially to criminal exposure for false certification.
- Retainage and cash-flow spiral. Overbilling front-loads cash that must later be "earned back," creating a cash hole in the final months when retainage is also withheld.
- Cross-subsidization. Using draws from this job to fund overhead on another job is commingling of project funds and a serious management failure; it can leave this project underfunded if the other job fails.
- Loss of credibility. Once the owner catches the gap, every subsequent draw is scrutinized and may be delayed, worsening cash flow.
2. What should the contractor do to restore the draw schedule and cash position?
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- Reconcile the schedule of values to installed work. Rebuild the billing to match the PM's cost/percent-complete report (58%). Bill the next draw at actual installed value, not 80%.
- Do not bill undelivered materials. Stored-material billing is only appropriate if the contract permits it and the materials are actually stored, insured, and verifiable on site or in a bonded warehouse.
- Stop cross-subsidizing. Separate project funds; fund overhead from company working capital, not from another project's draws.
- Communicate proactively. Disclose the billing correction to the owner and lender with a recovery plan rather than letting them discover it.
- Manage retainage. Forecast the retainage release and ensure the final months are funded; consider negotiating a retainage reduction at substantial completion if the contract allows.
The core principle: bill what is installed, keep project funds with the project, and never certify a draw the cost report does not support.