Commercial Construction Lending: AIA G702 Draw Schedules, Retainage & Interest Reserve Sizing
A financial guide to sizing commercial construction interest reserves, managing AIA G702/G703 payment certifications, and 10% retainage withholdings.
Construction Draw & Reserve Sizer
Model S-curve construction draws, retainage schedules, and interest reserve escrows
Empirical Analysis & Findings
## Construction Loan Cash Flow Mechanics and Risk Management
Construction financing differs fundamentally from permanent debt because loan proceeds are disbursed incrementally as construction milestones are certified.
### 1. The S-Curve Draw Schedule and Interest Reserve Math
Capital deployment follows an S-curve: low initial draws for excavation, rapid capital absorption for structural framing, and steady completion outlays for interior finishes.
$$\text{Interest Reserve}_t = \sum_{m=1}^{N} \left( \text{Cumulative Draw}_m \times \frac{\text{SOFR}_m + \text{Spread}}{12} \right)$$
If construction delays extend the schedule by 4 months, interest reserves deplete prematurely, requiring developer capital calls to prevent default.
| Milestone Phase | Typical Cumulative Draw | Inspection Verification | Retainage Escrow |
|:----------------|:-----------------------:|:-----------------------|:----------------:|
| Foundation/Slab | 15% | Soil density, structural engineer sign-off | 10% |
| Steel Framing | 45% | AIA G702 certification, welding inspection | 10% |
| Building Shell | 70% | Waterproofing, roofing warranty | 10% |
| Certificate Occ | 90% | Municipal CO, life safety sign-off | 10% |
| Final Closeout | 100% | Full unconditional lien waivers, punch list | 0% (Released) |
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Frequently Asked Questions
How are interest reserves sized on a commercial construction loan?
Interest reserves are calculated by simulating monthly loan draw amounts along an S-curve, computing compounded monthly interest at floating SOFR spreads, and escrowing the cumulative total.
Why do commercial construction lenders enforce a 10% retainage withholding?
Retainage protects the lender and developer by withholding 10% of every contractor draw until substantial completion, punch list clearance, and final lien waiver release.
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