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Cost Segregation ATG - Chapter 6.6 Construction Process

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Chapter 6.5 | Table of Contents | Chapter 6.7

APPENDIX - CHAPTER 6.6 - CONSTRUCTION PROCESS

In order to better understand how a cost segregation study is conducted, it is helpful to understand the construction process (i.e., how a building is constructed). The following discussion provides a general overview of this process, from the conceptual stage through the bidding, construction, payment, and completion stage of a project. Although there may be certain facts and circumstances in specific geographic locales that vary from what is presented here, the basic construction concepts are similar in all locales. For purposes of this discussion, it is assumed that a fee contractor, rather than an in-house labor force, performs the construction. For additional information and a glossary of construction terms, refer to the MSSP Guide for Construction Industry, which can be downloaded using the following link: MSSP

STAGES IN THE CONSTRUCTION PROCESS

The Construction Process is composed of six distinct stages, which are:

Each of these stages is discussed below in more detail.

1. Concept

All construction projects begin with planning and design, also referred to as "architectural programming." Numerous overlapping steps occur during this conceptual or design phase, prior to actual construction of the project.

An architect is the primary designer of a building or project and controls the overall design, specifications, finished materials (e.g., brick, paint, carpet, wall covering, etc.), and other architectural features of the building. In addition, the architect supervises the engineers responsible for the structural, mechanical, electrical, lighting and plumbing design of the building. Engineers must always conform to the design requirements of the architect. Each member of the design team must also be licensed with the proper state licensing authorities where the facility is located.


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  • Planning & Architectural Programming
    During the initial stages of the design process, the architect(s) and engineer(s) have a number of client meetings in order to determine the purpose and objective of the proposed construction. The primary activities, for which the project is being constructed, as well as the relationships between spaces, are reviewed. Consideration is also given to how well the completed project relates to adjacent buildings (if any) and its surroundings. The preliminary programming produces a list of solutions, alternatives, feasibility studies and costs estimates. After a review of the programming statement, schematic plans are prepared.

  • Schematic Plans
    Schematic plans are the first plans of a facility and show the interrelationship between spaces and activities. All of the parties (architects, engineers, and the client) review the schematic plans and make recommendations, as necessary. Any changes are then incorporated into the final schematic plans. Revised schematic plans are also known as "preliminary plans," and provide a graphic view of the project, the refined details of how the project will look, and the relationship of all spaces.

Once the preliminary planning phase is complete, the project then enters a stage involving the preparation of contract bid documents and working drawings.

2. Contracts and Bid Documents

In order to solicit construction bids, the builder must provide potential bidders with working drawings and plans for the proposed structure, as well as project specifications, the terms of which are spelled out in contracts.

  • Contract/Working Drawings/Plans
    All projects, whether they involve new construction or expansion of an existing structure, require the preparation of contract documents. The contract working drawings and plans provide a pictorial representation of the construction work, and specify or lay out the designer’s intentions for the facility. The drawings illustrate, among other things, the appearance, layout, equipment, and amenities of the project. These drawings show the architect’s plan/design for the building’s overall appearance, such as finish materials, floor plans, sizes, and use of each building area. Engineers design the building’s structural, mechanical, electrical, plumbing and communication systems.

The architect also begins to gather project data to deal with problems or situations that are expected to arise during the construction process, such as local zoning requirements, local infrastructure, traffic, environmental and population impact, acoustic, energy, lighting, and aesthetic considerations. Various consulting engineers may also be utilized to solve specific project problems.

Numerous drawing plans are involved in a construction project, including the following.

  • Architectural Plans
    The architectural plans indicate the layout of the project, such as floor plans, elevations, and details of the construction and architectural finishes. These plans are typically numbered sequentially with the prefix "A" for "architectural." "Plan view," the most common type of an architectural plan, is an overhead view of the spaces on a specific floor. These plans also indicate the length, width and various heights of the structure and floor elevations. Plans may show notes of specific construction information and may also contain details on a specific portion of work.

Exterior elevations show the exterior and the exterior finishes, and are similar to photographs of the exterior. Architectural schedules on the plans indicate the door types, windows, hardware, plumbing, and light fixtures in each room.

In preparing the plans, the architect utilizes graphic symbols, instead of words, to indicate various facility conditions. These symbols indicate the various types of material, sizes, and room finishes to be used. Symbols may be shown on the plans themselves or in the legends of the plans. [A list of general symbols is shown in the Appendix of Plan Reading and Material Takeoff, by Wayne J. DelPico, published by R. S. Means Company.]


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A civil engineer is responsible for the proper drainage of a site, as well as the design of land improvements, such as paving, curb and gutter design, retaining walls, and drainage culverts. Site plans prepared by the civil engineer indicate the existing and proposed grades of the land and the specific location of the facility on the land.

  • Structural Plans
    The structural plans are prepared by structural engineers and show the structural design of a building. These plans incorporate foundation planning with considerations for rain, snow, wind, earthquakes, and other natural phenomena. Structural engineers design the facility for both "live" and "dead" loads of the building. Live loads consist of the people, furniture, and other items that are not part of the building, but are supported by the building. Dead load is simply the weight of the building or structure itself.

  • Mechanical Plans
    Mechanical plans are prepared by a mechanical engineer to show the design of the various mechanical systems in the building. These systems must be designed to incorporate the proper air conditioning, heating, and ventilation equipment, as well as adequate plumbing, to meet the needs for all of the building’s designated activities.

Like the structural engineer, the mechanical engineer must design the mechanical building systems to meet building "loads." For example, office work produces a certain level of heat load, whereas cooking in a commercial kitchen may produce greater heat loads. The energy use of the air conditioning, heating, pumps, and other building equipment are monitored by the mechanical engineer and are considered when specifying building equipment for an efficiently designed building system. Mechanical plans are numbered with the prefixes "P" for "plumbing" and "H" for "heating, ventilating, and air conditioning."

    • Electrical Plans
      Electrical plans are prepared by an electrical engineer, and show the electrical distribution system for the efficient distribution of power in a building. The plan design includes the distribution of electrical power from the utility company and the distribution to power-specific equipment. Engineering design factors for the overall electrical "load" of a building must also be considered (e.g., proper sizing and arrangement of transformers, panel boards, circuits, wires, conduits and power to the various machines, equipment and activities in the building). Electrical engineers may also handle the lighting design requirements of the building, as well as specialty areas such as a central security monitoring system, a computerized control system, and fire and smoke management systems. Electrical plans are numbered with the prefix "E" for "electrical."

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  • Contract Specifications
    The second part of the contracts and bid documents stage is the preparation of project specifications, also known as "specs." Specs instruct the contractor how to build the project, and consist of contract documents, the technical specifications of the materials and the quality of the materials to be installed, and the workmanship for installation of the materials. Given the amount of information that is required to be included, specs have to be organized in a coherent manner. The most widely accepted system for arranging construction specifications is called the CSI Master Format. The CSI format, developed by the Construction Specification Institute, requires four categories of information: bidding requirements, contract forms, contract conditions, and technical specifications.
  • Bidding requirements
    Bidding requirements describe the conditions of the bid to the owner, and encompass the Invitation to Bid, the Instructions to Bidders, the Information Available to Bidders, the Bid Forms and Attachments, and the Bid Security Forms. The type of contract between an owner and a contractor dictates the form of the bidding conditions.
  • Contract Form
    Contract forms are divided into sections, including the Agreement, the Performance and Payment Bonds, and the Certificates.
  • Contract Conditions
    The contract conditions include the General Conditions and Supplementary Conditions.
  • Technical Specifications
    The technical specs are generally prepared for each specific project in the CSI Master Format and these include hundreds, perhaps thousands of individual items that will be installed in the project.

The CSI Format consists of 16 "Divisions of the Work", which are:

  • Division 1 - General Requirements
  • Division 2 - Site Work
  • Division 3 - Concrete
  • Division 4 - Masonry
  • Division 5 - Metals
  • Division 6 - Wood & Plastics
  • Division 7 - Thermal & Moisture
  • Division 8 - Doors & Windows
  • Division 9 - Finishes
  • Division 10 - Specialties
  • Division 11 - Equipment
  • Division 12 - Furnishings
  • Division 13 - Special Construction
  • Division 14 - Conveying Systems
  • Division 15 - Mechanical
  • Division 16 - Electrical

Each CSI Division is further sub-divided into three additional parts, called General, Products, and Execution (Installation).

  • The General Section explains the scope or the limits of work for a particular CSI Division and makes a correlation between the technical specifications and the general and supplementary conditions of the contract. The administrative portion for any trade (e.g., shop drawings) would be found in this section, as well.
  • The Product Section lists the materials to be used, by name and model number, and explains the quality of materials and the basis for any substitution.
  • The Execution Section explains the method of material installation, techniques to be used, and workmanship quality.
  • AIA Document A201, General Conditions of the Contract for Construction
The American Institute of Architects (AIA) is a nationally recognized, professional organization of architects. Over the years, the AIA has developed a document entitled "AIA Document A201 - General Conditions of the Contract for Construction ("Document A201"). The Document A201 is universally accepted in the construction industry and provides the legal basis and description of the following contract items:
  • General Provisions
  • Owner
  • Contractor
  • Administration of the Contract
  • Subcontractors
  • Construction by the Owner or by separate Contractors
  • Changes in the Work
  • Time
  • Payments and Completion
  • Protection of Persons and Property
  • Insurance and Bonds
  • Uncovering and Correction of Work
  • Miscellaneous Provisions
  • Termination and Suspension of the Contract

Document A201 provides legal definitions of the elements in the construction process and the items that will be provided by the contractor. Document A201 also details how to prepare material submittals, shop drawings, and interim payment requests.


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3. Bidding

The third stage of the construction process is bidding. Once an owner determines that a project is feasible and that construction financing is available, the owner will solicit bids or proposals from general contractors and/or specialty contractors. Owners generally use trade publications and newspapers in order to invite contractors to bid on a construction job. A copy of "The Notice to Contractors" will be shown in the project’s specifications, providing contractors with the bidding procedures.

The following is the sequence of events to prepare a contract bid:

  1. The contractor obtains a copy of the plans and specifications from the owner in order to prepare a formal estimate of the construction cost or bid (experienced construction personnel prepare the bids).
  2. The contractor reviews the contract plans and specifications to determine how to build the project and to consider all the limitations or conditions the owner requires for the project.
  3. The contractor solicits bids from subcontractors, estimates their direct material and labor costs, and evaluates the ultimate profit potential of the contract. The amount of the bid covers the estimated costs and a profit for the construction project.
  4. The owner evaluates all of the submitted bids and then awards the contract.
  5. The contract document and specs contain the project start and completion dates, the progress billing procedures, the insurance requirements, and other pertinent information.

The preparation of a bid is the first step in the cost control system of a construction project. The agreed-upon bid price then becomes the budget by which the actual expenditures are measured and drawn against. The object of a cost control system is to provide the general contractor and/or owner with information regarding actual project costs versus the anticipated or budgeted costs. These cost comparisons become essential for internal control purposes.

Standard cost manuals, such as the "R. S. Means Building Construction Cost Data," are used by a general contractor to compute a bid. These guides contain a compilation of cost data for each phase of construction. There are also construction cost data guides for both union and non-union wage rates. If the Service examiner needs to estimate construction costs as part of the analysis of a study, it is important to use the proper wage rates.

Subcontractors bid jobs in much the same way that a general contractor does. A subcontractor may also solicit bids from sub-subcontractors for specialty construction.

Working drawings and specifications provide information to allow general contractors to estimate the project’s construction costs. Along with using their own estimators, a contractor usually has the subcontractor’s and the material supplier’s information readily available. If necessary, a general contractor can perform the preliminary details and/or shop drawings (see discussion on Appendix page 6.6-10) in order to estimate the proper costs to construct various parts of a building. The general contractor gathers all the information from his estimators and subcontractors and then adds in an amount for overhead and profit. This final cost estimate is used in the competitive bidding for the construction of a project.

The cost estimate of a building or project is broken down and organized by the construction divisions shown in the specifications. The cost estimate is further detailed by trade and by item. The general contractor may also have a bank of information in order to estimate labor and material costs. Otherwise, the contractor will rely on any of several cost estimating manuals [e.g., R. S. Means Building Construction Cost Data (highly detailed), Marshall Valuation Services, etc.]


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4. Construction (Field Work)

The fourth stage of the construction process, called fieldwork, is the actual construction of the project. Fieldwork is broken down into building permits, subcontractors, scheduling subcontractors, shop drawings, project submissions, and change orders.

  • Building Permits
    Before construction can begin, the appropriate municipality must issue a building permit. Specifications and blueprints must be provided to the municipality's building department, along with the application for a permit. The period of time for a permit to be approved can be lengthy, especially in the case of new construction. The general contractor or owner may also be required to submit results of soil testing, environmental impact studies, and any other necessary testing or studies. Sometimes, a public hearing is mandated, if there is opposition to the project. In most cases, a permit is issued within a few months. The cost of the permit and any related studies may be the responsibility of either the owner or the general contractor.

Construction projects must also follow the standards of the applicable building code. A building inspector will be involved at various construction stages in order to verify that the project is being constructed according to municipal code.

  • Subcontractors
    Subcontractors range from a one-man operation to nationwide, publicly traded corporations, or divisions of larger corporations. Subcontractors are distinguished from general contractors by their limited scope of work, which usually involves a special skill, knowledge, or ability. Subcontractors, which include plumbers, electricians, framers, and concrete workers, generally enter into contracts with the general contractor and may provide the raw materials used in their specialty areas. The general contractor, not the owner of the property, pays the subcontractors. Materials purchased by the subcontractors are generally delivered directly to the job site. The subcontractors’ work may either be completed in stages, or it may be continuous.

  • Scheduling of Subcontractors
    The general contractor schedules the subcontractor's work so that the construction runs smoothly and is completed on schedule. The general contractor is also responsible for scheduling the subcontractor in such a way that one subcontractor does not hold up another. This order on subcontractor sequencing is known as the "critical path."

An example of the sequence in scheduling subcontractors for a small project is as follows:

  1. Clear the land (which may include demolition of existing structures)
  2. Excavate the land (which may include digging holes and leveling)
  3. Pour the foundation
  4. Frame steel and/or concrete
  5. Rough framing
  6. Rough electrical
  7. Concrete flooring
  8. Roofing
  9. Heating and air conditioning
  10. Ductwork for heating and air conditioning
  11. Elevators and/or escalators
  12. Sprinklers and other safety equipment
  13. Install electrical fixtures
  14. Insulate and weatherstrip
  15. Frame windows and door sashes
  16. Install tile and marble
  17. Install suspended acoustical ceilings
  18. Install toilets, sinks and other plumbing fixtures
  19. Paint walls (inside and out)
  • Shop Drawings
    Working drawings only include enough detail to show the general contractor the overall layout of the building. The individual specialty trades and suppliers use working drawings to produce shop drawings for items such as granite finishing, cabinets and countertops, structural steel, etc. Shop drawings detail the specific building components and are usually produced after the final design phase but before the beginning of the construction phase. Drawings are prepared in accordance with the instructions on Document A201. The architect/engineer will also check each shop drawing for precise measurements and for compliance with the intended building design.

  • Project Submissions
    Project submissions are an important part of the construction process. Each installed building item must receive the architect’s approval to ensure that the item or product is in conformance with technical specifications. Project submissions illustrate each item's intended use, function, method of attachment or installation requirements, and placed-in-service date. When the project is started, the architect and /or engineer monitors the contractor’s progress and often approves the progress payments made to the contractors. The architect/engineer may also make modifications to the building plans as needed.

  • Change Orders
    Change orders are the written contract revisions that increase or decrease the total contract price. Change order documents contain the change order number, change order date, a description of the change, and the amount of the change order. Contractors, based on the terms of the contract, may also issue orders.


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5. Construction Payments

The fifth stage of the construction process is the construction payments stage. All construction contracts extend over a period of time. The order of any business operation is to collect money as soon as work is complete. When a contractor completes a prescribed amount of work, the owner pays the contractor for the completed work.

  • Specifications for Payment
    The specifications for contract payments are shown in Document A201, under the "General Conditions for Construction Contracts." Document A201 contains AIA Forms G701 and G702. Form G702 requires that the contractor break down the bid into various parts of work. The project designer (architect or engineer) critically reviews the G702 schedule of values that are prepared by the contractor and either accepts or rejects them. The close scrutiny of this form is due to the future release of funds that will be used to pay for the progress (and ultimately the completion) of construction. This form also provides the first basis for the construction cost control on a project. The architect and/or engineer have a legal and fiduciary responsibility for the accuracy of the cost allocations. The architect and the owner also want an adequate and timely distribution of funds to ensure smooth progress payments and to ensure that there will be the necessary funds to pay for the completion of the last portion of the project.

It is also to the contractor’s benefit that items of construction be broken into as many parts as possible. The more individual items of work that the contractor can identify and complete, the more items of work he/she will be entitled to bill and for which he/she will be timely paid. Typical schedules of values in the G 702 may be 15 to 20 pages long and may contain hundreds, if not thousands, of individual cost items.

The contractor submits the G702 to request payment on a regular basis. The contractor completes the G702 by listing the total construction cost for each item of work completed to date. The amount previously paid for the work and the amount accomplished in this billing period are subtracted from the total amount to arrive at the amount of money remaining, minus a retainage for the completion of the work.

It is extremely important for the Service examiner to analyze the G702. This document provides a breakdown and analysis of the construction costs and, since it is prepared by 3rd parties, it provides an element of objectivity.

  • Change Orders
    The architect/engineer may make modifications or change orders to the construction plans as needed. Change orders should be reviewed for any agreed changes to the payment schedule.


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6. Completion

The final phase of the construction process is known as the completion stage, and it readies the building for occupancy.

  • As Built Plans
    After a facility or project is completed, the architect and contractor prepare a set of plans known as the "as built plans." These plans represent exactly how the facility was constructed and they also incorporate all the changes to the original construction plan. It is very important that the Service examiner utilize the "As-Built Plans" when reviewing a cost segregation study because these represent the actual construction of the project.

  • Notice of Partial Completion
    In some instances, the owner may desire to occupy a portion of the completed building. In that case, local building officials conduct an inspection to determine if that portion of the facility meets all building codes and is safe to be occupied. If approval is granted, a "Certificate/Notice of Partial Occupancy" is issued.

  • Notice of Substantial Completion
    Local building officials issue this notice when 95 % of the construction is complete.

  • Notice of Completion/Certificate of Occupancy
    A "Notice of Completion" is requested by the contractor/owner when the building is 100% complete. The project must pass a final inspection by local building officials in order for the "Notice of Completion" and the "Certificate of Occupancy" to be issued. These documents are recorded at the office of the local recorder and the property will be then appraised for property tax purposes.

SUMMARY AND CONCLUSIONS

This chapter provides an overview of the construction process and should assist Service examiners in understanding terminology used in the construction industry. In turn, this will assist in the review of cost segregation studies.


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Chapter 6.5 | Table of Contents | Chapter 6.7

Page Last Reviewed or Updated: 11-Jun-2013