Inspections, Retainage and Change Orders
Draw inspections verify progress for funding purposes under the lender’s process. They are not necessarily code inspections, engineering reviews or workmanship warranties. Keep your own construction oversight and required local inspections in place. If work is incomplete or differs from the approved scope, the lender may reduce or defer the requested release.
Retainage is money held until defined conditions are satisfied, often to support final completion. Confirm the percentage, the base to which it applies and when it is released. The contractor may expect full payment even while the lender holds retainage, creating an additional liquidity requirement for the investor.
A change order alters scope, cost or timing. Document the reason, price, schedule impact and source of funding before authorizing work. The lender may require approval or revised plans and appraisal review. Moving money between budget lines without approval can create an ineligible request later. Maintain the original budget alongside approved changes and remaining contingency so the project does not appear fully funded after contingency is exhausted. Clear change control protects both the funding plan and the investor’s ability to finish. An inspection confirming progress cannot resolve a budget gap caused by unapproved added work.
Worked example
Eligible completed work is $20,000 and hypothetical retainage is 10%, so the draw releases $18,000. A separate $5,000 change order is not yet approved. If the contractor expects $25,000, the investor faces a $7,000 difference until approval and retainage release, not just a $2,000 gap.
Mini glossary
- Retainage
- Withheld funding subject to release conditions.
- Change order
- Documented modification of scope, cost or schedule.
- Contingency
- Budget allowance for unexpected costs, subject to approval rules.
Put it into practice
Review a hypothetical change order before approving it. Show original budget, revised cost, contingency remaining and schedule effect. Calculate contractor cash needs after retainage. Ask who authorizes budget transfers and distinguish lender inspections from municipal approvals and your own quality-control reviews.
Recommended reading
Use these primary sources for context. Individual lender requirements can change; confirm the current program for your transaction.