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UTS142.4 Policy for Construction in Progress

UTS142.4 Policy for Construction in Progress
Sec. 1 Purpose.

The purpose of this Policy is to document a standard for accounting for Construction in Progress.

Sec. 2 Policy Statement.

The State Property Accounting (SPA) system requires Construction in Progress to be used if

2.1 the asset under construction meets the capitalization threshold for its asset category; and

2.2 the project is one year or more in length and/or spans two fiscal years.

Sec. 3 Accrual and Depreciation.

Construction in Progress shall be accrued at the end of the fiscal year. However, when certain criteria are met, Construction in Progress shall be capitalized to the appropriate asset categories and depreciated.

Sec. 4 Construction Costs.

All construction costs associated with a project are accumulated and capitalized as Construction in Progress if the project meets the capitalization threshold. The Construction in Progress is closed out to the appropriate asset classification when the project is substantially complete, occupied, or placed into service.

Sec. 5 Guidelines for the Accrual of Construction in Progress.

5.1 Concept. Construction in Progress shall be accrued at year end.

5.2 Examples of Expenditures to be Capitalized.

(a) Architect/Engineer Costs (See Exhibit B – Architect/Engineer Statement)

(b) Construction Costs (See Exhibit A – Schedule of Values for an example of the Contractor's costs)

(c) Interest accrued during construction (See UTS142.5, Policy for Capitalization of Interest Cost)

5.3 Determining Amount to Capitalize. For projects that have not been completed and previously transferred from Construction in Progress, an evaluation shall be made to determine if additional costs need to be capitalized as Construction in Progress as follows:

(a) perform a review of payments made to contracted vendors through the fiscal year-end;

(b) the work performed shall be described in examples such as the Schedule of Values (see Exhibit A), the Architect/Engineer Statement (see Exhibit B), or other forms that adequately explain the work; and

(c) if not all invoices for the fiscal year have been submitted by the time accruals are calculated, the remaining payments will be estimated in accordance with Sections 5.4 through 5.8.

5.4 Office of Facilities Planning and Construction (OFPC).

(a) On or about August 15, OFPC will issue a request to contracted vendors via the Resident Construction Manager, Project Manager, or Interior Design Manager for estimated amounts due for work performed during the fiscal year that have not yet been invoiced. For documentation purposes, notice will be sent via email (see example in Exhibit C). Once the amount is agreed upon by both the vendor and the OFPC representative, the estimate should be submitted to an OFPC accounting representative no later than August 31.

(b) If OFPC accounting is unable to receive information from the vendor, an estimate will be created through OFPC accounting based on the contract amount, prior rate of payments, and amount remaining on contract.

(c) The total will include an estimate for retainage.

5.5 Institution (Performing Own Construction). U. T. System institution shall use similar methods to determine estimates for amounts to be accrued for Construction in Progress at year end.

5.6 Accounting for retainage throughout construction. The amount of retainage related to each project will be provided by OFPC. The institutions should accrue this cost as they would any other construction cost, by project.

5.7 Example 1. Asset placed in service and final retainage is resolved and paid within the same fiscal year.

(a) As a construction project is completed and the Construction in Progress asset is moved to the proper asset category (i.e., buildings, infrastructure, etc.), the estimated retainage accrued will be trued up to actual and moved to the proper category with all other capitalized costs. The componentization breakdown provided by OFPC will include retainage at the time the componentization calculations are prepared.

5.8 Example 2. Asset placed in service in Fiscal Year 2001; final retainage is resolved and paid in Fiscal Year 2002. Estimate for retainage was too low.

(a) As a construction project is completed and the Construction in Progress asset moved to the proper asset category (i.e., buildings, infrastructure, etc.), the estimated retainage accrued will be moved to the proper category with all other capitalized costs. The componentization breakdown provided by OFPC will include retainage at the time the componentization calculations are prepared.

(b) A retainage estimate should be made by adding the amount to the depreciable entity as appropriate. If this estimate turns out to be less than the actual retainage amount paid, the value of the asset is corrected as follows:

(i) If the difference is under the capitalization threshold, SPA must be notified so appropriate changes can be made to adjust the depreciable entity and the item will be capitalized and depreciated in the proper period. and

(ii) If the difference meets or exceeds the capitalization threshold, then add the amount to the appropriate depreciable entity.

5.9 Example 3. Asset placed in service in Fiscal Year 2001; final retainage is resolved and paid in Fiscal Year 2002. Estimate for retainage was too high.

(a) As a construction project is completed and the Construction in Progress asset moved to the proper asset category (i.e., buildings, infrastructure, etc.), the estimated retainage accrued will be moved to the proper category with all other capitalized costs. The componentization breakdown provided by OFPC will include retainage at the time the componentization calculations are prepared.

(b) A retainage estimate should be made by adding the amount to the depreciable entity as appropriate. If this estimate turns out to be more than the actual retainage amount paid, the value of the asset is corrected for the overestimation by reversing it against the appropriate depreciable entity adjustment column in the capital asset footnote.

Sec. 6 Guidelines for Transferring Construction in Progress to an Asset Class.

6.1 Capitalization of Assets. Construction in Progress assets are capitalized to the appropriate capital asset categories at the earliest occurrence of

(a) execution of substantial completion contract documents;

(b) occupancy; or

(c) when the asset is placed in service.

6.2 Notification that Construction in Progress has ended.

(a) OFPC shall review the monthly Substantial Completion reports and forms for any buildings that have been completed and qualify for capitalization per 5.3.

(b) OFPC shall communicate with all institutions each February and July to determine if any buildings have been completed and qualify for capitalization per 5.3 that have not been transferred to the appropriate asset class. Final follow-up with the institutions will occur at the end of the fiscal year.

Sec. 7 Depreciation Methodology.

Depreciation is not applicable while assets are accounted for as Construction in Progress. A Policy is being developed that will include depreciation guidelines for those assets that are capitalized and qualify as depreciable assets.

Definitions

Architect/Engineer - this statement breaks down the work performed by the architect/engineer according to Basic Services fees, Additional Service fees, Change Order Services, and Reimbursable Expenses (See Exhibit B).

Building - a structure that is permanently attached to the land, has a roof, is partially or completely enclosed by walls, and is not intended to be transportable or moveable.

Building Improvements - capital events that materially extend the useful life of a building or increase the value of a building, or both.

Capitalization Thresholds - standard capitalization thresholds for capitalizing assets have been established for each major class of assets as follows (Reporting Requirement for Annual Financial Reports of State Agencies and Universities - July 2004):

Class of Asset

Threshold

Land/Land Improvements

Capitalize All

Buildings/Building Improvements

$100,000

Facilities & Other Improvements

$100,000

Infrastructure

$500,000

Construction in Progress - the economic construction activity status of buildings and other structures, infrastructure, additions, alterations, reconstruction, installation, and maintenance and repairs that are substantially incomplete.

Depreciable Entity - the sum of financial transactions affecting a unique component of a unique property number within a single fiscal year. Each depreciable entity exists as a "layer" of the component so that depreciation can be correctly charged to the component. Each depreciable entity constitutes a separate record on the depreciable entity table in the SPA system.

Facilities and Other Improvements - those assets built, installed, or established to enhance the quality or facilitate the use of land for a particular purpose. Examples include: fencing and gates; landscaping; parking lots, driveways, and parking barriers; outside sprinkler systems; recreation areas and athletic fields (including bleachers); golf courses; paths and trails; septic systems; stadiums; swimming pools, tennis courts, basketball courts; fountains; plazas and pavilions; and retaining walls.

Infrastructure Assets - long-lived assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets. Examples of infrastructure assets include roads, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems.

Retainage - an amount owed to contractors consisting of 5% of each payment amount that is withheld pending successful completion of the contracted work. Retainage so withheld shall be managed in conformance with Subchapter B, Chapter 2252, Texas Government Code. Contractors must submit a "Consent of Surety" with their payment application in order to have retainage released and paid to them.

Schedule of Values - breaks down the work performed by Cost of Work, General Conditions, Construction Phase Fees, Construction Contingency, and Preconstruction Fees (See Exhibit A). 

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