Week 10: How to Schedule Construction Draws

and save thousands of dollars

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This edition has the following sections:

Learning: The Hard Thing About Hard Things

Adding Value: How to Schedule Construction Draws

Florida Markets: Real Estate Markets

Interesting things: Tweets

Other Stuff: Acristo Engine Scope of Work

Enjoy!

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Learning:

The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers

I’m staying consistent with the startup book recommendations. I read this book a few years ago and continue to refer to it whenever I start new projects.

"The Hard Thing About Hard Things" is a book by Ben Horowitz about his experiences running tech companies. He shares stories about tough times, like when he had to fire people or make hard business decisions. The book says there's no easy way to handle these challenging situations, but bosses must be strong and make choices even when things are uncertain. Ben gives advice and examples to help leaders improve at their jobs, especially when things get tricky.

Things certainly get tricky as we look to make our business more of an actual business and less of a mom-and-pop shop. I can relate to the stories in this book and use them to make better decisions.

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Adding Value: How to Schedule Construction Draws

While building the Acristo Engine software, one of the challenging things I had to do was explain to my lead programmer, Jose, how we estimate what we would spend on debt service for a new construction loan. Jose speaks no English and knows nothing about real estate or construction, so I explained the process to him in an easy-to-understand manner that he could put into code.

Draw?

"Like a drawing?" Jose asked me. "No, think of it more like baking a cake," I said. Imagine you're baking a big cake for your bake shop, and you've asked your friend to pay for the ingredients. Instead of giving you all the money at once, your friend gives you money in parts, just like an allowance. First, your friend gives you money to buy the basics like flour, sugar, and eggs. Once you've made the cake batter and your friend sees it's going well, they give you more money to buy frosting and decorations. When you complete a step and show it to your friend, you get more money to buy the next set of ingredients.

A draw is the money your friend gives you to pay for your chosen ingredients. In construction, banks will lend you money for different activities as draws according to the scope of work. The catch is that you must complete the activities before they release cash.

Scope of Work (SOW)

The scope of work is like a list of ingredients you will use for your cake. You get bids from your subcontractors and create a list with the estimated prices for each activity. The bank needs the scope of work to know what they're lending you money for and its cost. As you build, you will request draws based on one or a combination of multiple construction activities.

SOW example using the Acristo Engine

Interest

The thing about this cake is that for each ingredient your friend lends you money for, you have to pay him back with interest. Additionally, you must pay him all the money you've borrowed at the end. To minimize the money you pay, you want to bake this cake as fast as possible so you can sell it to clients and pay your friend back.

The Construction loans we use are generally interest-only. This means that during the life of the loan, our debt service payment is only based on the interest on the amount of money we have taken out. This is unlike regular loans, where you pay both the interest and the principal. You pay off the total loan amount at the end of the loan.

Example:

I take out a construction loan for $100k for one year at a 10% annual interest rate. My first draw is $50k, which I will pay interest on for two months. $50k at a 10% yearly interest rate is an annual payment of $5,000, so for each month