Construction Definitions and Terminology

Advance Payments

Payments generally made to a prime contractor prior to the performance of any work under a contract. These payments help the contractor cover developmental and preliminary costs incurred prior to commencement of work.

Advances on Contracts

A current liability on the books of contractors where billings on contracts exceed accumulated costs.

Aggregating

The process of treating two or more agreements as one contract for the purpose of clearly reflecting income.

Assemblage

Acquisition of contiguous properties by one owner for a specific purpose, such as the development of a housing tract.

Award

Notification given to a bidder informing him or her that his or her bid was accepted.

Back Charges

Billings between parties, such as from owners to general contractors or general contractors to subcontractors, covering expenses, which, according to the contract, should have been incurred by the party to whom billed.

Backfill

Soil or other materials used to fill an excavation.

Backlog

The accumulation of unfinished jobs of a contractor, including those not started, measured by the amount of revenue expected to be received from them.

Betterment

Improvement to real property, such as the addition of a sidewalk that increases the property’s value. It’s not a repair, restoration, or enlargement.

Bid

A formal offer from a contractor, which specifies the price to be charged for completing, work in accordance with project specifications and contract requirements.

Bid Bond

A bond issued on behalf of a contractor that provides for the payment of the difference between the contractor’s bid and the next lowest bid if the contractor’s bid is accepted and the contractor fails to enter into a contract or furnish such bonds as required by the contract.

Bid Rigging

Any collusive action by contractors that restricts the competitive bidding process by manipulating the bids submitted on a project or projects (such as, inflating bid proposals or predetermining the lowest bidder).

Bonding Capacity

The total dollar amount of the construction bonds (or maximum value of incomplete work) that a surety company will underwrite for a contractor.

Bonus

A premium paid to the contractor in excess of the basic contract price as a reward for meeting various goals stated in the contract; for example, completing the project prior to the contract completion date. The provisions for bonuses are stipulated in the bonus clause of the contract and are in contrast to the penalty clause.

Bridge Loan

Short-term loan to cover the period between the termination of one loan and the beginning of another loan; for example, the period between the construction loan and the permanent loan.

Broker

A party that acts as the general contractor for a project but subcontracts all of the construction work required under the contract.

Building Permit

Permission granted by the local government to construct a building or to make property improvements.

Build to Suit

Method of leasing whereby the lessor agrees to make tenant improvements to the lessee’s specifications in return for the lessee’s long-term commitment to lease the space.

Buy-Down

Technique used to facilitate the sale of property. The buyer is offered a below-market interest rate on a mortgage loan for an initial number of years. The developer or other seller pays the lender the difference between the below-market rate and the market rate during the buy-down period, after which the borrower pays the full interest cost.

Certificate of Occupancy

Written authorization issued by a local government stating that the structure is ready and fit for occupancy.

Certificate for Payment

Statements prepared by an architect to inform the owner of the amount due a contractor as a result of work completed on a project.

Change Order

A modification of the provisions of a contract, such as a change in specifications or manner of performance that may be initiated by either the owner or the contractor.

Claims

Amounts in excess of the original contract price that the contractor seeks to collect from the owner or others due to unanticipated circumstances; for example, owner-caused delays, errors in specifications, contract terminations, and disputed change orders.

Class A Office Building

Relatively new office building in a prime location, with a high occupancy rate and highly competitive rental rates.

Class B Office Building

Older office building that has been fully renovated to modern standards that is in a prime location with a high occupancy rate and competitive rental rates or newer building that is not in a prime location.

Closing Statement

A settlement statement. Detailed cash accounting of a real estate transaction prepared by an escrow officer, broker, or attorney.

Cluster Development

Subdivision development in which detached houses are built close together. It results in allowing little individual yard space.

Commercial Real Estate

Income-producing property, such as shopping centers, offices, hotels, or apartments.

Commitment

A promise to perform a certain act such as making a loan.

Commitment Fee

Fee paid for a written promise to make or insure a loan for a predetermined amount and on specified terms.

Completed Contract Method

One of the two generally accepted methods of accounting for long-term contracts under which all contract income and all contract costs are deferred until the year in which the contract is finally completed and accepted.

Completion Bond

A bond, generally given to the owner and the lender, guaranteeing completion of a project and the provision of funds to complete it.

Construction Contract

Any contract for the building, construction or erection of or the installation of any integral component of, or improvements, to real property. A construction contract generally specifies the work to be performed and the terms of payment.

Construction Contractor

A person or entity that enters into an agreement to build, construct, or install improvements to real property according to the owner’s specifications.

Construction in Progress

A current asset of contractors where accumulated costs exceed billings on a contract.

Construction Loan

Mortgage loan used to finance real estate construction. It may include funds for acquiring land for the construction project and the permanent financing of the completed project.

Construction Management

The function of managing and coordinating the construction of a project including the negotiating of contracts with others to perform the construction work.

Contract Bond

A bond to indemnify the owner against the failure of a contractor to comply with the requirements of a contract.

Contract Cost Breakdown

A schedule showing the various elements and phases of work in a construction project and the cost of each.

Cost Plus Contract

A contract, which provides for reimbursement to the contractor of the costs incurred in completing the work plus some additional amount to compensate the contractor for profit, overhead, and performance. Different types of cost-plus contracts include cost-plus-fixed-fee, cost-plus award-fee, and cost-plus-incentive fee.

Cost Plus Award Fee Contract

A type of cost-plus contract in which the fee consists of a fixed-fee plus an amount which varies according to the level of performance of the contractor in areas such as cost savings and timeliness.

Cost Plus Fixed Fee Contract

A type of cost-plus contract in which the fee is usually a stipulated sum or a percentage of cost.

Cost Plus Incentive Fee Contract

A type of cost-plus contract in which the fee is based on either cost savings or performance. It varies according to the level the contractor achieves in meeting such cost or performance criteria.

Critical Path Method

A method of scheduling construction activities according to sequence and interdependence. The sequence of activities that allows the project to be completed in the shortest time is called the critical path.

Delayed Billings

Billings from a contractor for which he or she was entitled to payment in previous billing periods.

Design Construction Contract

A single contract in which the contractor agrees to provide the design, procurement, and construction services necessary to complete a project.

Design Management Contract

A contract in which construction is performed by a number of independent contractors in a manner similar to the professional construction management concept.

Developer

A person or entity that prepares raw land for development. The developer may develop the land and then sell it to a builder, an investor, or another developer.

Development Agreement

Agreement under California law by which local governments and developers can defend their respective interests during the development period. Such agreements can protect developers against changes in public policies that can cause delay or abandonment of a development project even though the developer has spent substantial funds for development.

Development Loan

A loan for off-site improvements such as streets and utilities as opposed to a construction loan.

Direct Cost

Any labor, material, job overhead, or other cost that is directly attributable to a specific construction job.

Draw

The amount of progress payments that is currently available to a contractor under a contract with a fixed payment schedule.

Engineering Contract

A contract for engineering services only, as opposed to the actual construction of a project.

Escalation Clause

A provision in contracts providing for upward adjustments to be made in the contract price of certain items or elements of work when conditions affecting the cost change.

Estimates

These are estimated costs of a construction project. A project has three types of estimates during the evolution of the project. Conceptual estimates are generally made in the early phases of a project for the owner to consider whether the project is economically feasible. Detailed estimates are made after the design has been approved. These require a careful tabulation of all the quantities for a project or portion of a project (quantity takeoff or quantity survey). A definitive estimate is made after the initial approximate estimates become more defined and accurate as additional information is developed. Definitive estimates forecast the final project cost with little margin for error.

Factory Built Houses

Houses whose shells are factory-built and assembled at the building site to reduce construction costs.

Fast Tracking

A system of scheduling the design and construction in such a manner that both phases progress simultaneously, with an appreciable reduction in the total time to complete the project.

Final Acceptance

The owner’s acceptance of the project from the contractor upon certification by an architect or engineer that it has been completed according to contract requirements. Final acceptance usually precedes the date when the owner makes the final payment. The procedures to determine final acceptance will be specified in the contract.

Final Inspection

The final review or inspection of a project performed by an architect, engineer, or construction manager in order to certify that work has been completed according to the contract requirements, after which the final certificate for payment may be issued.

Financial Engineering

The providing of assistance by the contractor to the client in arranging for the long-term financing of the project. This is an emerging feature in some large contracts, which requires the contractor to submit a financial package with his or her bid.

Fixed Price Contract

Agreement in which the contractor agrees to perform the required work in return for a fixed price stipulated in the contract.

Front End Loading

A common strategy used by contractors under which higher relative values are assigned to work to be completed in the early stages of a contract than to the work to be completed in the later stages. The result is that progress billings during the early stages exceed the actual value of the work done causing the contractor’s revenue from the project to be higher during the early stages. See Unbalanced Bid.

General Contractor

A contractor who contracts with an owner to be responsible for all of the construction work necessary to complete a project, even though subcontractors may be used to perform part of the work.

Guaranty Bond

A type of bond guaranteeing that the contractor will complete the work according to the contract and pay all obligations. It is also known as a surety bond. If the bond guarantees completion of the work it is a performance bond or completion bond. If it guarantees payment of obligations it is a payment bond.

Hard Dollar Costs

Cash outlays for land, labor, and improvements.

Historic Structure

Pre-1936 building that qualifies for special rehabilitation tax credits as a historic structure under the Tax Reform Act of 1986. See IRC section 47 (c)(1)(B).

Holdback

A contract item that can be delayed in finalization. See “Retainage”.

Improvement Bond

Bond issued by public agency to finance the construction of improvements such as highways and streets.

Indirect Costs

Generally, overhead expenses of the contractor that is not directly attributable to a particular construction project.

Invited Bid

A bid submitted by one of a selected group of contractors who have received an invitation to bid on a project, as opposed to bidding that is open to all qualified contractors.

Job Costs

Costs that can be allocated to specific jobs of a contractor such as material, labor and job overhead costs. See Overhead Costs.

Job Overhead Costs

Costs that can be allocated to specific jobs of a contractor such as material, labor, and job overhead costs. See Overhead Costs.

Joint Venture

A cooperative undertaking, by two or more parties (contractors), operated as a separate business entity for the purpose of combining resources and sharing risks on a construction project.

Kickbacks

Payments made without any legal obligation, usually to individuals in return for their influence in obtaining a contract.

Labor and Material Payment Bond

A type of guaranty bond, which guarantees the owner that all costs of labor, material, and supplies incurred by the contractor in connection with a project, will be paid.

Labor and Material Release

Document signed by laborers and material men waiving their rights under any mechanic’s lien against the developer.

Letter of Credit

A document issued by a financial institution guaranteeing the payment of its client’s debts up to a stated amount for a specific period.

Lien

Legal claim against specific property of the owner to secure payment of amounts due to material suppliers or contractors, who are engaged in the construction of a project.

Liquidated Damages

Amounts stipulated in the contract, usually as a fixed amount per day, that the contractor is obligated to pay the owner as compensation for damages suffered as a result of the contractor’s failure to complete the work within a specified time.

Loan Commitment

See Commitment.

Loan Origination Fees

Lender’s charge for services in originating a mortgage. Such fees typically are 1 to 2 percent of the amount of the loan.

Long Term Contract

A building, installation, construction, or manufacturing contract, which is not completed within the taxable year in which it is entered.

Lot Block

Records maintained by a title company of recorded transactions affecting a particular property.

Lump Sum Contract

See Fixed-Price Contract.

Maintenance Bond

A bond guaranteeing the owner that, for a specified time following the completion of a project (warranty period), any defects in workmanship or materials will be rectified. A one-year maintenance bond is normally included in the performance bond.

Mechanic’s Lien

A lien on real property in favor of persons supplying labor or materials for a building or structure, generally for the value of the labor or materials provided. A mechanic’s lien also exists for professional services in some states. Clear title to the property cannot be obtained until the claim is settled.

Negotiated Bid

A bid proposal from a specific contractor (selected on the basis of reputation, past performance, quality of work, expertise, or other reasons) in which the terms and conditions are negotiated between the owner and contractor, as opposed to the competitive bidding process under which the lowest bid is sought from various qualified contractors.

Offsite Costs

Expenditures incurred for the improvement of raw land that are not related to the construction of the building such as, curbs, gutters, sidewalks, and streets.

Off Balance Sheet Financing

Financing that does not appear on the balance sheet such as, operating leases.

Onsite Costs

Expenditures incurred for the actual construction of a building.

Overhead Costs

May refer to either job overhead or operating overhead costs. Job overhead costs are direct costs of work, which can be allocated to a specific job, but they cannot be allocated to specific items of work within that job. Operating overhead costs are indirect costs of operating a construction business that cannot be allocated to specific jobs.

Owner

The customer of a contractor, architect, or engineer who generally owns the right to the land on which the project is being built.

Payment Bond

A bond guaranteeing payment of the contractor’s obligations incurred in connection with a project. See Labor and Material Payment Bond.

Penalty Clause

In contrast to the bonus clause, this provision of the contract provides for a reduction of the amount payable under a contract if the contractor fails to meet specified targets or project specifications.

Percentage of Completion Method

One of the two generally accepted methods of accounting for long-term contracts in which the amount of gross income reportable in each year is that portion of the gross contract price which represents the percentage of the entire contract completed during the year.

Performance Bond

A guaranty bond executed by the contractor to protect the owner against the contractor’s failure to perform according to the terms of the contract. It is usually combined with a labor and material payment bond.

Phased Construction

See Fast-Tracking.

Pre Qualification

The approval given a contractor under circumstances where an agency or owner requires bidders to meet certain standards. This approval then authorizes the contractor to submit a bid on the project.

Prime Contractor

The general contractor or any major contractor who has a contract directly with the owner.

Profit Center

The unit, usually a single contract, used by a contractor to measure profit or loss for accounting purposes.

Progress Billings

Amounts billed by a contractor during the progress of work on a project. The amounts of the billings are determined in accordance with the terms of the contract, the amount of work completed, and the materials suitably stored. Change orders will affect the progress billings.

Progress Payments

Payments made in response to progress billings.

Progress Schedule

Usually a diagram or other pictorial prepared by the contractor and updated monthly, showing the proposed and actual starting and completion times of the various elements or phases of work included in a project.

Project Manager

An employee of the general contractor or contract manager who is responsible for all work performed on a project.

Punch List

A list prepared by the architect or owner near the completion of a project indicating items to be completed or corrected by the contractor.

Quantity Take Off

A detailed compilation of the quantity of each elementary work item that is called for on the project. These are used in making project cost estimates.

Retainage

Specified amount usually withheld from progress billings pending satisfactory completion and final acceptance of the project.

Severing

The process of treating one agreement as two or more contracts for the purpose of clearly reflecting income.

Specifications

A technical description along with working drawings of the materials, workmanship, special construction methods, and standards required under a contract.

Subcontract

A contract between a prime contractor and a separate contractor or supplier to perform a portion of the work or supply materials for which the prime contractor is responsible to the owner. A contractor who contracts with the general contractor or another prime contractor to perform a specific part of the work required on a project.

Subcontractor Bond

Performance and payment bonds executed by a subcontractor and given to the prime contractor to guarantee the subcontractor’s performance and payment of obligations required under the subcontract.

Substantial Completion

The point reached in a project at which all major work has been completed. The remaining costs and potential risks of the contractor are insignificant.

Surety

A person or organization, such as a bonding company who promises in writing to make good the debt or default of another in return for consideration.

Surety Bond

A legal instrument under which a surety (bonding company) agrees to answer to another party (the owner) for the debt, default, or failure of performance of a third party (the contractor).

Time and Materials Contract

A contract that generally provides for payments to the contractor based on the number of direct labor hours expended at fixed hourly rates plus the cost of materials. To cover indirect costs and profit, time (and sometimes material) is charged at marked-up rates.

Turnkey Job

A project on which the contractor is responsible to deliver a completed and operational facility.

Unbalanced Bid

A bid under which the contract price is disproportionately allocated to elements or phases of work on a basis other than that of cost plus overhead and profit. For example, front-end loading is the assigning of higher relative values to the work completed during the early phases of a project, or the assigning of higher profits to high quantity items under a unit-price contract.

Unit of Delivery Method

Under this method, revenue and cost of sales are recorded as units of work are delivered. This is most suitable to production-type contracts where many units of a product are produced in a continuous process (for example, aircraft).

Unit Price Contract

A type of construction contract, which divides the work (or project) into various elements and fixes a price per unit for each element. Thus, payments to the contractor are based on the number of units of work performed for each element. This type of contract is particularly suited to projects where the quantities of work may vary substantially.