builder reimbursement process

18 years ago

We'll be breaking ground soon, and are in the last stages (we hope!!) of getting the financing in place. Hoping to get some feedback on anyone's experience with different methods of builder reimbursement. Our builder is pretty insistent on a draw schedule style of payment, with set portions of the contract amount being disbursed directly from the lender to the builder upon completion of certain milestones (completion of the foundation, stacking 10 rows of logs, roof completion, etc, etc). Builder pays subs directly, after obtaining lien waivers from each. Lien waivers are submitted along with each draw request, and the lender sends out an inspector before each disbursement to verify completion of said work. As we work through the process, we also have found that some title companies require, as a condition of issuing the lien insurance that is required in our state, that the title company disburse directly to subs through a voucher system after reviewing the invoices, obtaining lien waivers, and having both we and the builder sign the vouchers. (The builder, whom we trust and who has a lot of experience with the kind of project we are doing, etc., AND is a very independent spirit, is not inclined to accept the voucher method. He always uses the draw method.)

Can anyone tell me their experience with either of these ways of doing things, pros and cons, etc.? I've read that the voucher system has been the norm for a long time, but that the draw reimbursement process is becoming the industry standard.

While we do trust the builder, we're not naive either, and want to make sure our interests are protected. A realtor/developer friend advised us that we should not consider agreeing to the draw system, but if there are lien waivers and inspections by the bank, etc., should we be worried? She feels the voucher system is much safer and protects us.

Feedback? Would love to hear from both contractors and owners about this.

Thanks!

Sort by:Oldest

Comments (4)

sue36
18 years ago
I would NEVER accept a payment method where the builder works directly with the bank bypassing you. The money should either go to you, or you should be required to sign off on the draw before the bank will release the funds. And never let the builder get ahead of you on draws. Many of these draw schedules are front weighted. If he leaves the job before it is complete you will be short funds. He may be honest, but something could happen (illness, death, etc.). And many people on here have written of seemingly honest builders going wacky after construction begins.

This bank money is YOUR money and you should treat it as such.
teresamacalmon
18 years ago
Sue - thanks. I forgot to include that yes, we will sign off on the draws before they are disbursed. Once we do, it will be the bank paying the builder directly, who then pays the subs.

THanks.

-t
Related Professionals
Philadelphia Architects & Building Designers · Aiken Architects & Building Designers · Hartford Architects & Building Designers · Fall River Architects & Building Designers · Mankato Architects & Building Designers · Ithaca Architects & Building Designers · Napa Architects & Building Designers · Grand Junction Architects & Building Designers · Springfield Design-Build Firms · Zanesville Design-Build Firms · Nashville Design-Build Firms · Muskegon Design-Build Firms · Jamestown Design-Build Firms · Sioux City Home Builders · Denver Home Builders
dixiedoodle
18 years ago
You should still be the one who receives the money from the bank to pay the builder. This is not a step that I would ever be okay with skipping!
stinkytiger
18 years ago
Hi,

I built a home in New York about 4 years ago from the ground up including blasting. Having a detailed schedule is a must with your GC. He seems to know what he is doing in having a costing schedule.

One thing I learnt is that handling all the paper work is like a one hour a day office job. So treat it as such. Have a filing cabinet and keep track of where you are. The detailed cost schedule is essential to make sure you keep your costs in check. Is is so easy to blow a budget, a nicer carpet here, better tiles there.

Usually at the start you give the GC some working capital. This varies but maybe 5% on contract signing. You should be able to see from the cost schedule how much you are expected to pay at what stage of the project. Get your architect to look over the schedule to make sure you are not paying too early. Also you need to visit your building site often. Say once a week. If the schedule says HVAC is in, check to see if the boiler is really there! My builder billed me once a month. With the bill was all the lien releases and an updated spreadsheet of where we were. So it may say foundations 20%, tree removal 100% etc. Some of these partial completions are subjective, hence you need to keep visitng the site, or have your architect visit the site on your behalf.

Also I always asked the builder to give me as much warning as possible and to tell me as soon as possible how much he needed next month. That is to make sure you have the funds ready and you can give the bank a heads-up on a draw-down funding requirment.

Finally towards the end you need to hold back funds. Say $US 20,000 or what ever. This should be in the cost schedule. That way you only pay him once you are happy. Typically you end up with a long punch list. e.g. sheet rock damaged when appliances where installed etc. Take your time to make your punch list and have this in writing. Compiling such a list may take like a day or two. Remember you only really have one shot at this, go through it with your builder. Getting trades people back multiple times is expensive.

Good luck with your build.

Best, Mike.