5.14.1 Detailed Cost Estimate

A. As part of the Firm Commitment application, the Lender’s Construction Analyst will prepare a detailed cost estimate and all required reports and recommendations as described below. For streamlined processing, these same documents will be prepared in draft consistent with the draft drawings and specifications. However, these documents must be corrected as needed and submitted in final form based on the final drawings and specifications no later than 30 days prior to initial endorsement.

• B. Required Forms:

1. Form HUD-92326. Used for preparation of detailed construction cost estimate for new construction and substantial rehabilitation projects.

2. Form HUD-92331-B. Used to make a detailed comparison of trade line items between Estimators’ cost estimate (form HUD-92326) and Contractor’s trade payment breakdown (form HUD-2328) for new construction and substantial rehabilitation projects.

3. Form HUD-92329. Property Insurance Schedule, prepared in the CNA e-Tool, used to determine the Insurable Value for each project structure and the aggregate sum for all structures for all applications. Form HUD-92447, Property Insurance Requirements, will be prepared by HUD and provided to the Lender at closing.

4. Form HUD-92264. Project Income Analysis and Appraisal.

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• Section G. Estimated Replacement Cost, Line 36a through 52 is used to summarize Total Structures, Land Improvements, General Requirements, and Fees from form HUD-92326, and also records estimated construction time. This section is primarily used for substantial rehabilitation and new construction.

• Section M. This is used to summarize Cost Not Attributable to Dwelling Use (lines 10 through 15), and Offsite Requirements (lines 16 and 17).

• Section O. The ”Remarks” Is used to explain Unusual Land Improvements, Other Fees, itemization of professional fees (e.g., engineers), the overall difference between Lender's and Borrower's cost estimates, and other cost items.

C. For new construction and substantial rehabilitation proposals, prepare detailed cost estimate on form HUD-92326 using instructions in Section 5.11; sign form on the “Estimate Prepared by” line and certify. Refer to standard certification in Chapter 11, Section 11.2.

D. Resolve differences in Lender’s and contractor’s construction cost estimates. Before the Firm Commitment application can be submitted for HUD review, the construction cost estimates prepared by the General Contractor and the Lender’s Construction Analyst must be reconciled. The Lender’s Construction Analyst is responsible for resolving major differences between the two estimates. When the two estimates are generally consistent, the Lender may use the contractor's cost figures as shown on form HUD-2328 as its cost estimate. The Lender’s Construction Analyst will use the following review procedure for new construction and substantial rehabilitation applications:

1. Prepare trade line-item comparison of Lender’s and contractor’s cost estimates using form HUD92331-B.

   • Enter costs from forms HUD-92326 andHUD-2328. For multiple-structure type projects, a separate form HUD -2328 must be submitted for each structure type, and a master form HUD2328 for the entire project.

Calculate and list line item percentage differences.

2. Review trade line item differences and note all variations beyond normal ranges. The range of trade line item differences varies from trade to trade. Major trades (e.g., engineers, carpentry) should have a smaller range difference than minor trades (e.g., sheet metal). The Construction Analyst should judge the variations based on established data.

3. The Construction Analyst should be alert for a pattern of front-end loading in trade items, where the contractor inflates costs for trade items needed early in the job schedule in order to secure more mortgage proceeds early. Such a pattern may indicate inadequate working capital or risky business practices by the contractor. Advances of funds from loan proceeds should always accurately reflect the cost of work completed, and payment should follow, never precede, the completion of work or portions thereof for which payment is requested.

4. Meet with the contractor to discuss and resolve all questionable trade line item differences. The resolution process may result in either the estimator or the contractor, or both, recalculating costs of various trade line items based on discussions.

   • If differences are resolved, accept costs in form HUD-2328 and use as Lender’s Cost Estimate in form HUD-92264.

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• When dealing with suspected front-end loading, require rigorous documentation of early trade items that are higher than normal.

• If differences cannot be resolved, do not accept costs in form HUD-2328.

• Use the Construction Analyst’s cost estimate as to the Lender’s cost estimate.

• Inform the Lender’s Underwriter that the contractor’s form HUD-2328 is unacceptable.

• Advise the Lender’s Underwriter to meet with the Borrower and the contractor for further attempts at resolution.

E. Prepare cost portions of form HUD-92264, using instructions in Section 5.12. Sign the form in the “Cost Processor” box and certify (see standard certification in Chapter 11, Section 11.2).

F. Complete the property insurance schedule, form HUD-92329, based on CNA e-Tool replacement cost per building. Common equipment that serves the entire property or portions thereof (e.g., a boiler and cooling tower assembly) should be included with the cost of the building where it is located and not prorated among the buildings served by the equipment.

G. Prior approval of identity-of-interest subcontractors’ proposed costs including overhead and profit is required.

1. Identity of interest is a relationship that exists giving the Borrower or General Contractor apparent control or influence over a subcontractor, equipment lessor, material supplier, or manufacturer of industrialized housing. (See General Contractor’s cost certification instructions in Chapter 13, Cost Certification, for definition of relationships).

2. When subcontractors, material suppliers, or equipment lessors have an identity of interest with a Borrower or General Contractor, the Lender must approve the subcontract amounts, including specific amounts for subcontractor general overhead and profit.

3. Approval is required before work begins under the subcontract. Failure to secure prior approval will result in the disallowance of the total general overhead and profit of the subcontractor at cost certification.

4. Request for approval (with the subcontracts, agreements, or leases) is submitted to the Lender’s Construction Analyst, whose recommendations must include:

   • Acceptability of the documents.

• Reasonableness of guaranteed maximum prices for the subcontract work.

• Appropriateness of general overhead and profit dollar amounts.

5. Mandatory conditions for approval include the following:

   • Subcontracts. There are general requirements for the use of subcontracts.

• 1. There must be a separate subcontract for each trade.
• 2. They must clearly identify the scope of work.
• 3. They must be on a cost-plus fixed fee basis, which includes:
  • a) Guaranteed maximum dollar amount for work.

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• b) Specific dollar amount for general overhead and profit.

• 4. Disapprove “paper conduit” arrangements where work is to be done by General Contractor personnel or other subcontractors, suppliers or lessors.

• Subcontract prices. For this criterion, recent reliable data is a better test than whether higher bids were submitted.

  • 1. The total price must not exceed the amount shown for the trade item on the accepted form HUD-2328.
  • 2. Total price must not exceed reasonable prices taken from available data.
  • 3. The Lender’s cost analyst must resolve disagreements in trade prices with the subcontractor .

• Overhead and Profit. The amounts for general overhead and profit shall be no higher than the typical prices for the specific trade.

  • Subcontractor entity. The burden of proof of 1, 2, and 3 below is on the subcontractor.

    • 1. The firm must operate and have documented the experience as a subcontractor for the specific field covered in the subcontract.
    • 2. The firm must control labor, materials, and equipment typical for the trade.
    • 3. The firm must do significant business in its specific field with Borrowers and General Contractors having no identity of interest.

6. If a total of all identity of interest subcontracts, purchases and leases are less than ½ of 1 percent of the mortgage amount, the requirements for each identity of interest subcontractor to cost certify may be waived by the MF Regional Center/Satellite office Director upon notification by the Lender.

7. The Lender’s Cost Analyst must prepare a letter of approval or disapproval to the Borrower or General Contractor. The letter must address all mandatory conditions.

   • Approval will indicate any conditions, including whether or not subcontractor must cost certify.

• Disapproval will state the reason for disapproval and indicate any cost certification requirements.