FHA 203k draw inspection process - how does the contractor get paid?

The first draw is very important to the FHA 203k contractor as they typically get money up front to start a project and with the Standard 203k loan program being a "reimbursement" program the contractor has to use their own good credit and buying ability to get materials and get them installed so they can get that crucial first draw. The contractor wants to see some "skin in the game".

Permit and Architectural fees are called "soft costs" by most of the lenders and dont' require a draw inspection but rather do require a copy of the permit(s) and a copy of the paid receipts. The money for these items is not a line item in the bid request as it sits in a different bucket at the lender's controlled account. This is done so it can be paid out 100% with no hold back once the receipts and permit has been provided.

Typically the first draw is smaller than the future draws because the contractor doesn't know how the process works and they want to "test it" but this can do more harm than good if they test it too soon. Once the loan closes and the work begins the money from the title company or attorney is sent to the lender where they must "get you into the system" and assign the project draw admin person who will handle your project. That takes about a week from "close of escrow (COE)" till it is ready for the first draw. Sending a draw before that will likely take a few days longer than typical and disappoint the contractor.

I suggest to the borrower and the contractor that when an escrow closes they have a meeting and develop a plan for completing that project so there are no surprises. The contractor has the obligation of getting their first draw inspection completed within 30 days of the COE. The Borrower/Owner wants to see hammers flying at the job the day it closes escrow.  In reality we set the expectation for the borrower back a few days from COE.

The contractor must assess his crew's availability and if they have another project wrapping up in a week that would be ideal. That gives them time to order the materials and set that experienced crew to move to the new project in one week. Just because there are no hammers flying doesn't mean the project isn't moving forward, it is. It is called logistics. The contractor needs time to "plan" and organizing his thoughts to give you, the borrower, the best possible service.

If the project has septic or well work, the first draw must include those items, by the HUD Guideline. Some areas require an upfront deposit prior to close of escrow for that work but by being up front it lays that fee on the borrower. There may be a way around that fee. In any case the draw will include those items, if they exist and any other items that are complete at the time of the inspection (not counting what might be completed by the end of the day) along with any items that are partially completed. 

So a contractor who calls us for a draw inspection to be paid for the sewer lateral repair as an example, might also get 50% on the well, and/or 25% on some other items, and 10% on something else. We can pay line items by a percentage. Change orders must be 100% complete prior to payment.

Cash flow is the name of the game and we want to pay the contractor for all the work that is done up to the time we arrive at the site but nothing more than what has been completed so please don't ask for items not yet completed, the answer will always be NO.

Each time the contractor gets some work completed they will call for another draw inspection and this system will continue until the project is completed. This should happen each 30 days or more often as the work dictates. 

Posted by

Mike Young, 203k Team Leader

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