AIA Billing and Draw Schedules: What Every Real Estate Developer Needs to Know

Table of Contents

• Understanding the Schedule of Values
• How the Draw Schedule Process Works
• Contractor Submits Payment Application
• Architect or Owner's Rep Reviews and Certifies
• Lender Draw Request Submitted
• Lender Inspection and Approval
• Retainage Withheld
• Accounting Records Updated
• Retainage: What Developers and Contractors Need to Know
• Standard Retainage Rate
• Retainage Release
• Accounting Treatment
• State Prompt Payment Laws
• Change Orders and Their Impact on AIA Billing
• How AIA Billing Connects to Construction Accounting
• Common Mistakes in AIA Billing Management
• AIA Billing in the Context of Commercial Development Finance
• Frequently Asked Questions
• What is the difference between AIA G702 and G703?
• Can developers negotiate the retainage percentage?
• What are stored materials in a payment application?
• How do change orders affect the draw schedule?
• When should I bring in a construction accountant for my development project?
• Get Your Construction Accounting Right from Day One

AIA billing and draw schedules are the financial backbone of every construction project. If you are developing commercial real estate, understanding how progress payments are requested, documented, and released is not optional. It directly affects your cash flow, your lender relationship, and your ability to keep a project on schedule.

AIA billing refers to the standardized payment application process established by the American Institute of Architects. The core documents are AIA G702 (Application and Certificate for Payment) and AIA G703 (Continuation Sheet). Together, they provide a structured format for contractors to request progress payments based on work completed and materials stored on site.

These forms are not proprietary software. They are a standardized industry framework used across commercial construction, ground-up development, and major renovation projects. Lenders, general contractors, subcontractors, and owners all operate from the same document structure, which is precisely why AIA billing has become the default in commercial real estate development.

AIA billing is not just administrative paperwork. It is the primary mechanism for controlling cash flow on a construction project. Every draw request your general contractor submits should be verified against the schedule of values, the actual work completed, and any stored materials before payment is approved. Releases that outpace actual progress create significant financial and legal exposure for developers.

The schedule of values is the foundation of AIA billing. Before the first payment application is submitted, the general contractor provides a detailed breakdown of the total contract value allocated across every line item of the project: foundations, framing, mechanical, electrical, plumbing, finishes, and so on.

Each line item carries a dollar value that, in aggregate, equals the total contract amount. As work progresses, the contractor tracks what percentage of each line item has been completed and bills accordingly. The schedule of values is the reference point for every payment application throughout the project.

Developers and their accountants should scrutinize the initial schedule of values carefully. Front-loaded schedules, where early phases are over-valued relative to actual cost, create a situation where the contractor receives more cash in early draws than the work completed justifies. This benefits the contractor's cash flow but increases the developer's risk if the contractor defaults later in the project.

Contractor Submits Payment Application

The general contractor completes the AIA G702/G703 forms listing work completed and materials stored since the last application. The application includes the total contract value, amounts previously billed, current period billing, and the balance to complete.

Architect or Owner's Rep Reviews and Certifies

The architect (or an owner's representative on projects without an architect of record) reviews the payment application against actual site progress. If the amounts are consistent with work completed, they certify the application. Discrepancies are flagged and resolved before certification.

Lender Draw Request Submitted

On projects with construction financing, the certified payment application is submitted to the lender as a draw request. Lenders typically require supporting documentation including lien waivers from contractors and subcontractors, a current inspection report, and updated project budget status.

Lender Inspection and Approval

Most construction lenders require a physical inspection by their own inspector before approving a draw. The inspector verifies that the work claimed in the payment application has actually been completed. Approved draws are funded to a construction escrow account or directly to the contractor.

Retainage Withheld

Most contracts withhold a percentage of each payment, typically 5% to 10%, as retainage. This amount is held until substantial completion and final close-out, creating a financial incentive for the contractor to complete all punch list items before the project is fully paid out.

Accounting Records Updated

Each approved draw is recorded in the project's accounting system as a cost draw against the construction loan and an expense against the relevant cost codes. The construction budget is updated to reflect costs to date, remaining contract balance, and retainage held.

Retainage is one of the most negotiated elements of construction contracts and one of the most complex from an accounting standpoint. Developers hold retainage to protect against contractor non-performance. Contractors manage cash flow with retainage in mind because it represents a meaningful percentage of their total contract value that they will not receive until project close-out.

Standard Retainage Rate

Most commercial construction contracts specify 5% to 10% retainage. Some contracts allow for reduced retainage once a project reaches 50% completion, recognizing that at that point the risk of contractor default is substantially lower.

Retainage Release

Retainage is typically released in stages: a portion upon substantial completion, and the balance after final close-out, including resolution of all punch list items and receipt of final lien waivers. The specific terms are negotiated in the contract.

Accounting Treatment

Retainage held from the contractor is recorded as a liability until the developer releases it. Retainage withheld by a lender from the developer is recorded as a contra-asset against the construction loan receivable. Both must be tracked separately in the project accounting system.

State Prompt Payment Laws

Many states have prompt payment laws that regulate how quickly retainage must be released after substantial completion. Violations can expose developers to interest penalties on late retainage payments. This is a legal area where state law varies significantly.

Change orders are inevitable on any significant construction project. From the accounting perspective, every approved change order modifies the original contract value and must be reflected in the schedule of values before the contractor can bill for the related work.

The process for change orders in AIA billing follows a specific sequence:

• The change order is proposed, priced, and approved by the owner and contractor
• The approved change order is documented and added to the contract sum
• The schedule of values is updated to include the new line items or adjust existing ones
• The contractor begins billing for change order work in subsequent payment applications

Unapproved change orders are a major source of construction disputes. Contractors who proceed with changed scope without a signed change order, and then bill for that work in a payment application, create conflicts that delay draws, damage lender relationships, and frequently end in litigation. Developers should require signed change orders before any out-of-scope work begins, and their accounting team should flag any payment application line items that do not trace back to an approved contract or change order.

Every payment application creates multiple accounting entries. The construction accountant must track:

REA's commercial real estate accounting services include construction draw accounting, budget-to-actual tracking, lender reporting, and close-out reconciliation. The goal is to give developers a clean, accurate picture of project costs at every stage, not just at completion when surprises are most damaging.

Developers who manage their own draw administration or delegate it to project managers without accounting oversight frequently encounter the same set of problems:

• Approving draws without verifying actual completion. Payment applications should never be approved on the contractor's word alone. An independent verification step, whether by an architect, owner's rep, or lender inspector, is essential protection.
• Failing to update the budget after change orders. A project budget that does not reflect approved change orders gives a false picture of costs to complete and remaining contingency.
• Releasing retainage too early. Releasing retainage before punch list completion and final lien waivers are in hand removes the primary financial lever for ensuring project completion.
• Failing to track cost codes consistently. Construction costs that are not categorized correctly create problems at disposition, refinance, or tax filing when capitalized costs need to be separated from expense items.
• Ignoring stored materials documentation. Payment applications that include stored materials require documentation that materials are on-site, properly identified, and insured. Billing for stored materials without this documentation is a common source of disputes.

Lenders financing commercial development are sophisticated users of AIA billing documents. A draw package submitted to a construction lender typically includes the certified AIA G702/G703, a budget variance report showing costs to date versus the original budget, updated title bring-down confirming no new liens, conditional lien waivers from the general contractor and major subcontractors, and the architect's certification.

Lenders who see disorganized or inconsistent draw packages slow down their approval process, ask more questions, and in some cases require additional conditions before funding. Clean, well-documented draw requests move faster and maintain the lender relationship throughout a project that may span 18 to 36 months or longer.

REA's real estate accounting team prepares and reviews draw packages as part of construction project accounting engagements, ensuring that every document is complete, consistent, and formatted to the lender's requirements.

What is the difference between AIA G702 and G703?

The AIA G702 is the summary payment application form that shows the total contract value, previous payments, current application amount, and balance to complete. The G703 is the continuation sheet that breaks the payment application down by the schedule of values, showing the percentage complete and amount due for each line item. Both are submitted together as a complete payment application package.

Can developers negotiate the retainage percentage?

Yes. Retainage is a negotiated contract term. Larger, more established contractors may negotiate lower retainage rates or step-down provisions that reduce retainage once the project reaches a specified completion percentage. Lenders may also have requirements about minimum retainage that affect what can be negotiated in the general contract.

What are stored materials in a payment application?

Stored materials are materials that have been purchased, delivered to the project site or a secured storage location, and are intended for permanent incorporation into the project. Contractors can typically bill for stored materials before they are installed, provided they can document that the materials are on-site, identified, and insured. Lenders and owners often require additional documentation before approving payment for stored materials.

How do change orders affect the draw schedule?

Each approved change order increases or decreases the total contract value and must be added to the schedule of values before the contractor can bill for the related work. This keeps the billing documentation in sync with the actual contract scope. Payment applications that include billing for work not in the approved contract or change orders are typically rejected by architects and lenders.

When should I bring in a construction accountant for my development project?

Before the first draw. Setting up the project accounting structure, the budget, the cost codes, and the draw review process correctly from day one prevents the errors that compound throughout a project. Developers who bring in accounting support mid-project typically spend significant time reconciling inconsistent records before the team can move forward.

REA works with real estate developers on commercial construction accounting from ground-up projects through close-out and stabilization. If your current draw process relies on spreadsheets or project management software without proper accounting oversight, there are almost certainly gaps in your records that will surface at refinance, disposition, or audit.

Contact REA to discuss construction accounting support for your development project.