Construction projects have many moving parts, stakeholders and dependencies. If money doesn’t flow smoothly from lender to borrower, a project can quickly become delayed. Because construction loans are funded in increments, rather than all at once, managing draws are of the utmost importance.
One way to think about draw management is to conceptualize it as the project’s heartbeat. While there are other components to a project’s overall health, it’s difficult to imagine a project doing well if its heartbeat is off pace. But just as pacemakers exist to keep real hearts healthy, software can ensure draw management is executed seamlessly and on-schedule.
A pacemaker for payments
Imagine this: every time your heart beats, you have to scan paperwork, print it out and mail it to a third party. That might sound ridiculous, but it’s essentially what happens when draw management is handled manually. Money must be disbursed in a timely manner for contractors, subcontractors and suppliers to do their jobs and keep the project moving forward.
When draw management isn’t digitized, you’re essentially keeping the project alive with CPR. That might work for now, but it’s not sustainable in the long run. By digitizing draw management, it’s much easier to ensure your construction projects don’t just survive but thrive.
Utah-based Zions Bancorporation implemented draw management software with envious results. Manually, it took Zions nearly a week to get draw disbursements out the door. By digitizing the process, Zions was able to reduce its average draw turnaround time to a mere 2-4 days.
When a construction project has a healthy heart, good things follow. The elimination of erratic and manual draw procedures makes the project more efficient and enjoyable for everyone involved. This means stronger relationships with builders and borrowers.
Having a centralized platform for lenders, borrowers, contractors and inspectors to connect also reduces back-and-forth communication and improves overall visibility. Plus, improved efficiency equates to scalability. Zions, for one, was able to grow its portfolio by 50% without increasing its headcount.
The importance of mitigating risk
Keeping projects and relationships healthy is beneficial in and of itself, but digitizing draw management has other perks too. Currently, the macroeconomic landscape is riddled with uncertainty. Draw management is closely aligned with risk management, as the aforementioned visibility helps highlight areas – such as inspections and liens – that might cause costly delays.
Mechanics liens, for example, can signify deep payment issues that must be quickly addressed. With the right technology, Zions Bancorp was able to turn its reactive lien waiver process into a proactive one, ensuring all liens were caught before funds were disbursed.
A centralized platform also lets lenders pre-schedule regular on-site progress inspections, thoroughly vet contractors, ensure encrypted draw disbursement, and more. Because construction projects are complex, risk mitigation is too. Why take the pulse of a construction project manually when technology can do so proactively?
By mitigating risk at the project level, lenders are mitigating risk at the portfolio-level too. In fact, technology must be used to identify red flags within a lender portfolio, especially in the current environment. Ufirst Credit Union, for example, has used draw management software to ensure all projects meet its standards and the standards of regulators. While portfolio-wide reports take days to compile manually, they can be created easily when data is centralized in a single platform.
From total project commitments to risk red flags (i.e., liens, materials delays, business credit score decline), lenders must be able to see where risk lies in their portfolio. Manual spreadsheets may be the status quo, but they don’t cut it in the current environment. Modernizing draw management can make risk mitigation efforts more robust and allow lenders to operate as a less risky business.
Modernizing draw management
It may be common to complete draw management manually, but it’s not ideal. Tedious, manual processes aren’t just slow, they’re also prone to greater risk. Every time money changes hands, the opportunity for an error exists.
Draw management is the heartbeat of any given construction project. By digitizing draw management, lenders can reduce turnaround times and get cash to builders more quickly. This increases interest income and lowers operational costs, allowing lenders to grow their business.
A centralized platform also lets builders and borrowers see the progress of every line item, view inspection statuses, and communicate in the portal without having to wait for a report from the lender. When a project has a healthy heart, it’s easier to forge strong relationships with project stakeholders.
The broader economic environment is riddled with enough risk. By bringing draw management into the 21st century, lenders can eliminate outdated processes, minimize risk, and generally improve the health of their projects and portfolio.