4440.1 CHG-3

CHAPTER 5. COST CERTIFICATION

5-1. GENERAL. Cost certification is required by Section 227 of the

National Housing Act and HUD Regulations in all multifamily projects,

except those insured under Section 810(g) of the Act, Rehabilitation

Sales type projects under Sections 221(h) and 235(j) and sales type

projects under Section 213.

\* a. Joint Pre-Cost Certification Conference. The cost and Mortgage

Credit staffs shall hold a joint pre-cost certification

conference with the mortgagor, mortgagee, general contractor, and

accountant when the project has attained a construction

completion percentage of no more than 90 percent. At this

conference, provisions of Reference (5) of the Foreword shall be

explained and the mortgagor and contractor shall be asked to

submit the required statements and certifications. The

importance of a careful review by all parties, including the

mortgagee, mortgagor and accountant, prior to submitting the cost

certification documents to HUD shall be stressed. Particular

emphasis shall be placed on the necessity for completeness with

respect to required documentation, dates and signatures and upon

the timeliness of the submission.

b\. As a general rule, only costs which have been paid in cash or

will be paid in cash upon release of the balance of mortgage

proceeds are eligible for inclusion as certified cost.

c\. Excepted are, amounts allowable for land, for general overhead,

and for builder\'s fee where there is an identity of interest

between the builder and mortgagor.

\(1\) The exception as to builder\'s fee does not apply when there

is an arm\'s length relationship between mortgagor and

builder.

\(2\) The builder\'s fee loses its identity as such, and only that

portion of the (arm\'s length) contract price (inclusive of

the fee) paid in cash or to be so paid at final closing, is

includable.

5-2. REQUIRED STATEMENTS.

a\. Form FHA-2330, Mortgagor\'s Certificate of Actual Cost, is

required in all cases, unless the simplified cost certification,

Form FHA-2200, Borrower\'s Certificate of Actual Cost,

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\*(5-2) is required in all projects where there is an identity of

mortgagor and general contractor as well as the identity of

interest situations stated in 5-2 b below.

\(1\) Forms FHA-2330 and FHA-2330A have declarations as to any

identity of interest or the absence thereof, printed on the

forms. The use of these forms is mandatory, and all

questions as to identity of interest must be answered. It

should be noted that the back of Form FHA-2330 requires the

mortgagor\'s signature and also requires that either (a) a

description of identities be given or (b) the word \"none\" be

inserted.

\(2\) If there is an identity of interest between mortgagor and

general contractor; any subcontractor, supplier or lessor

having identity of interest with general contractor will be

treated as having an identity with the mortgagor. A

separate form, executed in triplicate, is required for each

subcontractor, supplier, or lessor.

b\. Form FHA-2330-A, Contractor\'s Certificate of Actual Cost must be

completed and submitted by the following:

\(1\) General contractors when there is an identity of interest

between the general contractor and the mortgagor.

\(2\) General contractors for a non-profit project, when a cost

plus contract is executed.

\(3\) Any subcontractor, material supplier or lessor of equipment

having an identity of interest with the mortgagor regardless

of the type of contract.

\(4\) Any subcontractor, material supplier or lessor of equipment

having an identity of interest with the general contractor

who has an identity of interest with the mortgagor or is the

general contractor for a non-profit mortgagor.

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\*(5-2) c. Submissions Required with Form FHA-2330-A by Subcontractors
and

Equipment Lessors. Each such subcontractor, supplier, or lessor

will be required to submit a certification of actual costs.

\(1\) For subcontractors, Form FHA-2330-A will be used. Suppliers

will generally be required to submit a listing of quantities

furnished, sources from which suppliers obtained materials,

and unit prices charged, together with brand names, model

number, lumber grades, etc., as applicable. However, the

Field Office Director, may accept, in lieu of the supplier\'s

costs, a breakdown of quantities, item descriptions, and

unit prices charged if the supplier has been established in

the community as a supplier of the type of materials

involved.

\(a\) If the prices are at or below the best obtainable at

the time of purchase, no reduction in certified cost is

needed.

\(b\) It should be noted, however, that this prerogative

applies to materials and supplies which are of a type

normally offered to general contractors and the public

by the supplier and would not include equipment such as

refrigerators and ranges which general contractors

normally purchase from manufacturers at wholesale

prices.

\(2\) For construction equipment lessors, the date equipment was

acquired, the age of equipment at acquisition date, model

numbers, etc., rates charged, and time used will be required

together with a certification that:

\(a\) Rates charged were not more than the lowest rate

obtainable in the area;

\(b\) Time charged was not more than was absolutely essential

for the job;

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4440.1

(5-2) (c) The charge for each piece did not in any case exceed

the difference between the fair market value of the

piece at the time it was brought on the job and its

fair market value at the conclusion of its use on the

job.

\(3\) In lieu of furnishing a certification as to the date

equipment was acquired, age of equipment at acquisition date

and model numbers, etc., plus the certification required

under Paragraph 5-2c above, the lessor may elect to certify

charges for self-owned equipment at 85% of the going rates

for equipment of like capacity and conditions as established

by the Associated Equipment Distribution rental rate guide

or a comparable acceptable publication. In this type of

arrangement, the equipment owner must agree:

\(a\) That HUD-FHA will be the sole judge of the

reasonableness of time charged for; and

\(b\) That equipment maintenance and repair costs will be the

responsibility of the lessor and will not be included

as additional cost.

\(4\) If the total of all identity of interest subcontracts,

purchases, and leases for a project is less than the greater

of \$10,000 or 1/2 of 1% of the mortgage amount, the Field

Office Director may in his discretion waive the requirement

of this subparagraph c.

\(5\) Even if the total involved is greater than either of the

limits set in the paragraph above, the Field Office Director

may agree in writing in advance to waive certification by a

subcontractor, provided all of the following conditions are

met:

\(a\) A disclosure of the identity of interest must be made

to the Field Office Director, and a copy of the sub-

contract furnished to him before the subcontractor

starts to work;

\(b\) The Field Office Director must be satisfied that the

subcontractor is competent and experienced in the field

covered by the subcontractors:

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4440.1 CHG-4

\(c\) The Field Office Director must be satisfied that the

subcontract price is no greater than the most favorable

price that could have been obtained from an \"arms

length\" subcontractor.

\(6\) A comparable waiver, under the same conditions, may be

granted to equipment leasing corporations having an identity

of interest.

d\. Balance sheet. A signed balance sheet of the mortgagor entity, as

of the cut-off date of Form FHA-2330, Mortgagor\'s Certification

of Actual Cost, is required in all cases, except presold

Management Type Cooperatives involving more than one section

Short term liabilities shown on the balance sheet must be in

agreement with Column B of Form FHA-2330, or reconciling

information must be furnished. The mortgage payable must agree

with HUD records as to both disbursed and undisbursed portions,

and all other liabilities must be in the form of HUD approved

notes.

\(1\) If the undisbursed portion of mortgage proceeds is not

sufficient in amount to pay all items listed under Column B

of Form FHA-2330, the mortgagor shall be required to deposit

with the mortgagee (or an escrow agent) cash sufficient to

meet the deficiency.

\(2\) In cases where such cash deposit is required, the mortgagee

(and/or escrow agent) shall be required to supervise the

distribution of funds to creditors.

\(3\) Where there is an identity of interest between mortgagor and

contractor, supervision over the distribution will, of

course, extend to payment of trade creditors of the general

contractor.

\*5-3. ACCOUNTANT\'S CERTIFICATION REQUIRED. Each Form FHA-2330 and FHA-

2330A must be accompanied by the certificate of an independent

Certified Public Accountant or an independent Public Accountant

containing, as a minimum, the representations in the format shown

in Appendix 1 of Reference (5) of the Foreword.

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\*5-4.SUFFICIENCY OF CERTIFICATION. The Assistant Secretary-Commissioner

reserves the right to determine whether or not the certified statement

of cost is satisfactory to HUD. To be acceptable, an accountant must

be a certified public accountant or a public accountant licensed by a

regulatory authority of a State or other political subdivision of the

United States on or prior to December 31, 1970. As required by the

American Institute of Certified Public Accountants (AICPA) standards,

the accountant must be independent within the meaning of the code of

professional ethics of AICPA.

5-5. UNACCEPTABLE CERTIFICATION. Certifications which do not contain the

required mind representations or are inconsistent with the format set

forth in Appendix 1 of Reference (5) of the foreword shall be

considered unacceptable.

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4440.1

5-6. EVALUATION OF COST SUBMISSION. Neither the signature of the

mortgagor/contractor, nor the accountant\'s certification nor the

requirement for the Field Office Director\'s review, operates to

relieve the Field Office Director from his primary responsibility to

pass on the mathematical accuracy and the compliance with prescribed

procedures of FHA Forms 2330 and 2330A. Careful review of the Forms is

expected.

a\. If differences of opinion arise, due consideration should be

given to the possibility that such differences stem from:

\(1\) A genuine misunderstanding of HUD-FHA instructions;

\(2\) Honest differences of opinion clearly identifiable as such;

or

\(3\) Other causes.

b\. If there is any reason to suspect that differences arise from

causes other than cited in paragraph a.(1) and a. (2) above,

Field Office Directors are required to request an audit, of the

mortgagor\'s and/or contractor\'s books by the Director, Office of

Audit before issuance of FHA Form 2580, Maximum Insurable

Mortgage.

5-7. REVIEW OF COST FIGURES. Field Office Directors have the right and

obligation to require clarification or breakdown of all or any part of

the cost figures presented. This includes, but is not limited to,

legal and organizational expense, general overhead, equipment rental,

and the function of subcontractors or suppliers when such function is

not already known to the office.

a\. When there has been a considerable lapse of time between initial

occupancy and cut-off date for cost certification, there is the

strong possibility that some items properly allocable to renting

and operating the project will be charged against construction

cost.

b\. It is recognized that it may not be possible or practical to make

a precise allocation of such items as gas and electricity, clean-

up costs, etc., as between operation and construction.

c\. Directors should insist on reasonable allocations and, of course,

should be on guard to detect and eliminate duplicate claims for

the same expenses under both categories.

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5-8. DATE OF COMPLETION FOR DETERMINATION OF ACTUAL COSTS. The date of

completion for the determination of actual costs will usually be the

date on which the Director of Housing/HUD Representative endorses the

final Project Inspection Report, Form FHA-2449, and HUD

Representative\'s Trip Report, Form HUD-5379, showing 100 percent

completion (which may be subject to acceptable items of delayed

completion). However, to halt the unnecessary accumulation of certain

costs, the Area Manager/ Service Office Supervisor may, at his/her

option, set an earlier date as the date of completion when it is noted

that although construction is 100 percent complete there is more than

reasonable delay in obtaining or approving the final survey or, in

projects nearly completed, there is unnecessary delay in achieving

completion.

An illustration of the type of case in which the Area Manager/Service

Office Supervisor is expected to set an early cut-off date for

projects less than 100 percent complete would be one where the monthly

inspection reports show 95% completion of work and thereafter show

increases of less than 2% in percentage of completion in any three

consecutive months.

5-9. REQUEST FOR SUBMISSION OF CERTIFICATION. The Area Manager/Service

Office Supervisor will notify the mortgagor and mortgagee in writing,

of the date of completion for determination of actual costs. He/she

will request submission of cost certification within a time that

he/she deems reasonable, and will include in his/her letter a

statement that cost certification, properly documented, must be in

field office hands 30 days before final closing. Copies of the letter

are to be filed: one copy in the mortgagee section of the Washington

docket, and one copy each in the Field Office docket and the Closing

Attorney\'s file.

5-10.ALLOWABLE COSTS ON FORM FHA-2330.

a\. Construction Contract:

\(1\) Where there is no identity of interest between sponsor/

mortgagor and general contractor, and a lump sum contract is

permitted under HUD Regulations, the amount allowable is the

lesser of:

\(a\) The actual cash paid under the contract (including

amounts to be paid in cash within 45 days), or

\(b\) The contract price adjusted upward or downward by the

cumulative effect of all construction changes approved

by HUD:

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4440.1 CHG-5

(5-10) (2) Where there is an identity of interest between sponsor/

mortgagor and general contractor, the amount allowable for

construction is computed as shown in paragraph 5-11.

NOTE: If no construction contract was executed, the upset

price for construction will be the total shown on line 51 of

the approved Form FHA-2328, Contractor\'s and/or Mortgagor\'s

Cost Breakdown, adjusted upward or downed by the net effect

of the HUD-approved change orders.

b\. Architect\'s Fee

\(1\) The architect\'s fee is limited to the amount actually paid

in cash for architectural services and no part thereof may

accrue to the benefit of the mortgagor.

\(2\) No portion of the architect\'s fee paid for in stock may be

considered as part of the allowable costs.

\(3\) In those instances where an identity of interest develops

during construction, the total amount allowed as architect\'s

fees may not exceed the amount set forth in the Agreement

and Certification, Form FHA-3305/3305-A.

\(4\) If the amount of the architect\'s design fee certified at

cost certification is less than the amount set forth on Form

FHA-2403-1, Mortgagor\'s and Architect\'s Certificate,

submitted at initial endorsement, such differences cannot be

used to offset overruns in other costs. Such differences

must be applied as a direct reduction to the mortgage on

line 1 of Form FHA-2580, Maximum Insurable Mortgage, and the

Director of Housing notified of possible violations of the

U.S. Criminal Code, Section 1010.

c\. Reimbursement for Expenses Incurred in Early Start with HUD

Approval.

\(1\) A mortgagor may cost certify a reimbursement to the

contractor for interest on money borrowed by the contractor

for construction after issuance of commitment and prior to

initial endorsement.

\(2\) To induce the contractor to agree to an early construction

start, the mortgagor may enter into an agreement with the

contractor, subject to HUD approval, to reimburse the

contractor for interest on money borrowed by the contractor

for construction prior to initial endorsement. The

12/80 Page 5-8

4440.1 CHG-5

(5-10) endorsement. The agreement must clearly state that

reimbursement will be made only to the extent that the

mortgagor has funds available from the amount estimated for

interest during construction.

\(3\) The amount of interest certifiable as cost is that amount

incurred by the builder for this purpose between the date

construction started and the date the mortgage is initially

endorsed for insurance. However, the rate of interest, so

certifiable, may not be in excess of the rate established by

HUD for the insured loan. The date of the start of

construction must have been approved by HUD on Form FHA-2415

or Form FHA-3265 must have been executed.

d\. Interest. The interest allowable is the amount accrued on the

first mortgage only, between initial endorsement (start of

construction - Insurance Upon Completion) and a date 60 days

after the HUD representative endorses the final HUD

Representative\'s Trip Report, Form HUD-5379, showing 100 percent

completion, which may be subject to acceptable items of delayed

completion (or such earlier date as the Area Manager/Service

Office Supervisor may \*

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(5-10) or otherwise is not to be paid in cash, the \"non-cash\" amount
is

to be deducted from the accrued amount.

e\. Taxes: The amount of taxes allowable is the amount accrued during

the same period used for (d) above, provided that the amount has

been either; (1) paid in cash to the taxing authority or, (2)

deposited in escrow with the mortgagee.

f\. Property and Casualty Insurance: The amount of property and

casualty insurance allowable is the amount accrued during the

period used in (d) above, provided that cash payment has been

made to the insurer or cash has been escrowed with the mortgagee.

g\. FHA Mortgage Insurance Premium: Because the Office of Finance and

Accounting cannot compute the exact amount of mortgage \*

insurance premium due during the construction period until the

project has been completed and the Washington docket forwarded to

Washington, mortgage insurance premiums at 1/2 of 1% per annum on

the mortgage amount will be allowed on the basis of accrual for

the number of days in the period used in d., above, when

applicable.

h\. HUD-FHA Fees: HUD-FHA application, commitment and inspection fees

are allowable in the amounts paid. Fees paid to reopen an

expired or terminated commitment are not includable in certified

cost.

i\. Financing Expenses: Financing expense may include the \"initial

service charge\" made by the construction lender, any discount

charged by the construction lender and permanent lender, FNMA

commitment fees, and in some cases brokerage fees. As to all of

these, the maximum allowable is the lesser of: (1) the amount

paid in cash or, (2) the amount shown on FHA Form 2434,

Mortgagee\'s Certificate, and approved by the Field Office

Director.

\(1\) It is required that, all other charges by the construction

lender, (except for construction loan discount, if any),

including those classified as \"processing fees,\" or expenses

of lender\'s counsel\" be included within the limit prescribed

by the requirements of the Regulation\'s 2% of the mortgage

amount. Processing fees, in excess of this limitation, if

allowable at all in cost certification, are classifiable by

HUD-FHA as part of Legal and Organization Expense and are

discussed under that heading.

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4440.1 CHG-1

(5-10) (2) In insurance of advances, the interest rate recited in the

mortgage and a reasonable discount on the construction loan

is all that is allowable. Any \"side deals\" (except for

approved discount) by which the mortgagor agrees to pay for

\"additional cost of money\" are at the sole expense of the

mortgagor and not includable in certified cost.

\(3\) Any charges made by the lender for payment of counsel, or

charges paid directly to the lender\'s counsel to the extent

they cause the total to exceed 2% are not certifiable except

insofar as they may be related to \"Title and Recording\"

expense, in which case they should be so classified.

\(4\) In any case where the permanent lender pays a premium for

acquiring the permanent loan, any portion of such premium

paid or credited to the mortgagor sponsor is to be treated

as a recovery of cost for cost certification purposes.

\* (5) Partial refunds of the commitment fee that were allowed in

processing which are returned directly to the mortgagor will

be treated as a recovery of cost.

\(6\) The purchase of FNMA stock is not an allowable cost.

\(7\) FNMA or GNMA extension fees paid covering a period of time

beyond the cut off-date will not be allowed for cost

certification purposes. \*

j\. Title and Recording Expense: Amounts paid in cash for title

search and policy, and recording fees at the time of initial

endorsement, updating of title policy during construction, and

final title policy and recording charges are all allowable, as

are cash legal fees paid in connection with any of the above.

k\. Legal and Organization Expenses: Legal and organizational

expenses are those ordinarily incurred in organizing the

mortgagor corporation, developing the proposal for submission to

HUD-FHA and other necessary governmental agencies, and for

necessary services during closings and construction.

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4440.1

(5-10) (1) Organization expenses include necessary expenses customarily

incurred by prudent, knowledgeable sponsors for reasonable

reimbursement for time devoted to the proposal, travel and

communications, audit, and consultations in keeping with the

complexity of the project.

\(2\) Legal expenses are limited to those incurred for initial and

final closings; tax advice during organization of mortgagor

corporation only; and preparation of documents and

representation for and during organization of the mortgagor

corporation. Normally the allowed expenses include only

those customary expenditures expected to be incurred prior

to and during initial closing and construction (but

including legal expense for final closing). (a) They will

not include ground breaking ceremonies or entertainment.

\(b\) Neither will they Include the usual expenses connected

with land acquisition already included in or contributing to

the Title and Recording Expenses incurred in obtaining

zoning. (c) Unavoidable additional legal and personal

service expense may be incurred in connection with project

land acquisition in urban renewal areas and a reasonable

allowance may be made therefor, provided that the total of

amount paid to the Local Public Authority and such

additional ex pense does not exceed fair market value.

\(3\) Care must be exercised to assure that Legal and Organization

Expenses do not include any expenses intended to be paid

from the Working Capital Deposit. A reasonable allowance

may be included for advertising and promotion al brochures.

\(4\) Salaries of administrative and operating personnel etc., are

not allowable. Such salaries would be recovered only from

project income and to the extent funds are available after

final endorsement would be chargeable against the Working

Capital Deposit.

\(5\) The mortgagor may wish to arrange a \"package deal\" for

organization and/or legal services. Provided the supplier

is qualified to furnish such services, the cost of such

packages may be recognized (see Paragraph k(6)). A careful

review is required, however, to insure that duplicate credit

for the same service is not included.

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4440.1

(5-10) (6) The amount included in FHA Form 2264 for Legal and

Organization Expenses is not a blanket allowance, but

ordinarily sets an upper limit on the amount to be allowed.

In extraordinary cases where this limit is exceeded, full

documentation will be required as to reasonableness,

purpose, necessity, and proper classification of all items

included in this category. This limitation will be applied

with extreme rigidity where a \"package\" is involved.

l\. Off-Site Costs: The amount of a supplemental contract to which

the mortgagor is a party in connection with off-site improvements

is includable here. This, however, is not an allowable cost in

the case of leasehold\' estate in which the ground rent is based

on a land value which reflects off-site improvements and such

improvements have not been paid for by the mortgagor.

m\. Other: Allowable here are costs not provided for elsewhere in FHA

Form 2330 and which are clearly attributable to actual cost of

improvements on the mortgaged property up to the date of

completion. The cost of topographic surveys, test borings,

foundation investigations, or soils analysis, if not included in

the architect\'s contract, is allowable in the amount actually

paid.

\(1\) Other installation charges for sewer and water, if not

included in plumbing contract, may also be separated

hereunder in the amount actually paid.

\(2\) In case the land in the project is held by the mortgagor

under a leasehold, an allowable item of cost to be reported

by the mortgagor under this caption is the actual amount, if

any, the mortgagor paid for acquisition of the leasehold. It

is, however, subject to reduction by HUD-FHA so as not to

exceed the HUD-FHA estimate of the fair market value of the

leasehold. Unless precluded by Regulations, such as in

Section 207 cases, ground rent paid during construction may

also be included here.

\(3\) In the case of rehabilitation proJects, outstanding

indebtedness on, purchase price of, land and improvements to

be financed with part of the proceeds of the mortgage are

also allowable in actual amounts paid, but are subject to

HUD-FHA reduction so as not to exceed limitations of the

Regulations and related Underwriting instructions.

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4440.1 CHG-1

(5-10) n. Builder\'s and Sponsor\'s Profit and Risk Allowance: In those

Sections of the National Housing Act where such an allowance is

prescribed, the computation is as follows, and will be made

without regard to amounts on FHA Form 2264:

\(1\) Where there is an identity of interest between builder and

mortgagor, and provided that no one subcontractor performs

more than 50% of the HUD-FHA estimated cost of construction

on FHA Form 2264, (exclusive of builder\'s fee general

overhead, and architect\'s fee) and provided that no three or

less subcontractors perform more than 75% of such, HUD-FHA

estimated construction cost, a percentage is prescribed as

agreed on FHA Form 3305 or FHA Form 3305A (not to exceed

\* 10%) of all items entering into the term \"actual cost\"

except land, amounts paid for the acquisition of a leasehold

and any supplemental management funds allowed in

processing.\*

NOTE: The division of the Profit and Risk allowance between

mortgagor and sub contractor is a matter of no concern to

HUD-FHA and any savings clauses or similar arrangements are

also a matter of indifference to HUD-FHA provided that no

such arrangement will be allowed to operate to increase the

amount allowable as Profit and Risk beyond 10% of the actual

cost exclusive of land.

\(2\) Where one contractor performs more than 50% of the HUD-FHA

estimate of construction cost, or three or less contractors

perform more than 75% of the HUD-FHA estimate of

construction cost, the profit and risk allowance will be

treated as if there were no identity of interest and

computed as shown below.

\(3\) Where there is no identity of interest between mortgagor and

builder, the profit and risk allowance will be computed on

the sum of:

\(a\) Allowable architectural fees,

\(b\) Allowable carrying charges and financing,

\(c\) Allowable legal and organization expenses, including

consultant\'s fee, if such a fee was allowed in

processing and,

\(d\) Allowable off-site costs.

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4440.1 CHG-1

(5-10) (4) The \"50%-75% rule\" as set forth above will not apply when

factory built (including a temporary set-up on the site)

modular units or components are involved in the construction

of a project, since appropriate builder\'s fee is to be

reflected in processing for this method of construction.

o\. Contractor\'s Fee\--Profit Motivated Projects. Only where there is

an identity of interest between contractor and mortgagor, where

FHA Form 2330A is submitted, and where the Profit and Risk

allowance is not applicable, will any amount be allowed for

builder\'s profit. When all of the above conditions are met, the

amount of builder\'s profit (not including general overhead, which

is provided for in FHA Form 2330A) as shown on FHA Forms 2264 and

3305 or 3305A trill be allowed whether or not paid in cash.

p\. Occupancy During Construction Periods. If there has been

occupancy during the period of construction, an operating

statement is required.

\* (1) The period covered shall be from first residential or

commercial occupancy (or date of initial endorsement in \*

rehabilitation of refinanced projects where occupancy is

continuous) to the cutoff date for inclusion of interest,

etc., as determined under the provisions of Paragraph 5-10.

\* (2) The operating statement must show gross rents including

commercial income (not including security deposits) \*

received during the period from first occupancy to the

cutoff date and actual operating expenses during the same

period.

\(a\) Operating expense, rental commissions customary for the

type of project, if any, a reasonable management fee

(not including salaries paid to officers of sponsor or

mortgagor), and electricity, gas, water and operating

salaries (maintenance, cleaners, gardeners, elevator

operators, etc.,) are payable to the extent they are

not already included in construction cost on FHA Form

2330 or 2330A.

\(b\) Depreciation, interest, taxes, property insurance

premiums, and mortgage insurance premiums are not to be

included.

4/74 Page 5-14

4440.1

\(c\) If the operating statement produces an excess of Income

over operating expense as defined, the excess shall be

treated as a recovery of construction costs (line 15 of

FHA Form 2330). A copy of the statement, signed by the

mortgagor, must be attached to FHA Form 2330.

\(d\) If operating expense exceeds income, no entry shall be

made on FHA Form 2330. As a matter of information, it

is pointed out that in this latter case, the recognized

excess of expense over income may be carried over as a

reduction against the statement, if any, required by

Paragraph 4-3a.

\(3\) At the option of the mortgagor, the statement may cover the

period from first occupancy to the last day of the month in

which the final Inspection Report was signed. If this

election is made, interest, taxes, insurance, and MIP will

also be cut off as of the month-end date used for the

statement.

5-11.ALLOWABLE COSTS IN FHA FORM 2330A. In any case where FHA Form 2330A
is

required, by reason of either (a) An identity of interest between

mortgagor and contractor, or (b) Regulatory requirements applicable to

nonprofit mortgagors, the Cost Analyst is required to review all costs

of trade items, material purchase, equipment rental, general overhead,

and job overhead. This review is expected to uncover and call

attention to any major variances from reasonable market prices on an

item by item basis. Although the review is not intended to be a cost

audit, consideration should, at this stage, be given to the size and

bargaining position of the general contractor and the determination as

to what is reasonable should be made with those factors in mind. The

determination must also take into consideration the time at which

subcontracts, purchases, and leases were negotiated, as opposed to the

time at which the cost estimation was prepared. If explanations of any

cost items are needed for proper analysis, they should be requested

immediately to avoid unnecessary delays. Reference 1 of the Foreword.

The Cost Analyst\'s comments and recommendations shall be reported on

\"memo\" FHA Form 2331 and forwarded to the Director of Operations/Chief

Underwriter for his information and approval.

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4440.1

(5-11) a. Trade Items: Allowable costs under this heading will be the

amounts paid in cash, or payable in cash within 45 days, to any

subcontractor for the construction of on-site or off-site

physical improvements after deducting any rebates, refunds,

kickbacks, trade discounts, or price adjustments. When escrows

are to be established for items of incomplete work, the full

amount of the contract, as adjusted per above, shall be reported

unless the subcontractor is cost-plus-fee with guaranteed upset

price. In such cases the cost of the completed work plus the

estimated cost of the completed work, or the upset price as

adjusted by approved construction change orders relating to the

trade item, whichever, is the lower, is allowed.

b\. Materials: Allowable amounts in this category may include the

purchase price of any materials not included as part of a

subcontractor\'s price, after deducting all rebates, kickbacks and

discounts, but including any delivery and handling costs.

NOTE: If FHA Forms 3608 are required (see Paragraph 5-2), the amount

of any subcontract, material purchase or equipment lease covered shall

be subject to downward revision, at the sole discretion of the Field

Office Director, to reflect actual going prices for the area. (See

also requirement for submission of cost data under Paragraph 5-2.)

c\. Labor: Charges for labor will be limited to amounts actually

paid.

d\. Escrow: The amount of any required escrow for incomplete items is

not to be included at all if the incomplete work is the

responsibility of a subcontractor or supplier whose price is

already included under the appropriate section of FHA Forms

2330A. If it is clearly established that the cost of the

completed work is not included elsewhere on the cost

certification, the cost (not the required escrow amount) as

estimated by HUD-FHA may be included and allowed. If significant

amounts are involved, a supplemental statement of cost, as

described in Paragraph 5-11, is required.

e\. Job Overhead: Allowable amounts for Job overhead cover such items

as superintendents, field engineers to provide lines and grades

for locating structures and utilities on the site, watchmen,

temporary offices, telephones, supplies, temporary toilets,

temporary heat for water and power during construction, cleaning,

rubbish removal, and building permits. Other items may be

approved by the Field Office Director provided they can properly

be considered as part of job overhead for the project in

question.

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4440.1

(5-11) (1) There shall not be allowed in job overhead any general

overhead of the contractor such as the salary of any person

employed on a permanent basis and whose activities are in

general confined to work performed in the main office or any

established branch office of the builder.

\(2\) The time spent on the actual construction of a project by a

superintendent or foreman who is generally retained by the

firm and who is assigned to a specific job or jobs for the

purpose of coordinating the work may be charged to the cost

of construction for that portion of such total employment as

is actually applicable to the construction of the project in

question.

\(3\) Salaries of officers or executives of the contracting firm

are allowable only if both of the following tests are met:

\(a\) The \"executive\" must have performed, during the period

for which his salary is allowed, a type or types of

duties which would normally be performed by a

nonexecutive employee.

\(b\) Salary must be in line with the situation outlined in

\(a\) above.

f\. General Overhead: As stated in \"e\" above, no general

overhead costs may be included under the \"Job Overhead\"

classification. Under the provisions of the National Housing

Act, however, for the purpose of determining actual cost as

defined in Section 227 of the Act, there may be included in

reimbursement for expenses paid \"such allocations of general

overhead items as are acceptable to the Assistant Secretary-

FHA Commissioner.\"

\(1\) Inasmuch as a contractor dealing at arm\'s length will

include in his contract price an amount to cover both

his estimate of general overhead expenses and profit,

the FHA Regulations provide for the inclusion of

general overhead only in cost-plus contracts.

\(2\) The contractor may include in his certification of

actual cost the amount allowed in processing with no

itemization required by the general contractor.

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4440.1

\(3\) In IdentIty of Interest cases, however, general overhead may

not exceed an amount estimated by underwriting processing,

as stated in FHA Form 3305 or related forms. The amount

allowed for general overhead shall relate to items outlined

In Reference 1 of the Foreword.

g\. The FHA Form 2331 \"Memorandum\" as completed by the cost analyst

gives an opinion on all of the costs claimed on FHA Form 2330A.

Upon receipt of this memorandum it will be the responsibility of

the Mortgage Credit Staff to eliminate any portion of general

overhead which exceeds the maximum as set forth in f., above. The

Mortgage Credit Staff is also responsible for adherence to the

upset price as adjusted to reflect the HUD-FHA effect of approved

construction changes. (Adjustments to upset price are made after

all deletions to avoid doubly penalizing the contractor.)

5-12. ADJUSTMENTS FOR UNDETERMINED COSTS AND/OR ESCROWS. The statute

requires that the mortgage shall not exceed the applicable percentage

of actual costs. Consequently, FHA Forms 3305, and 3305A provide that

where the Assistant Secretary-FHA Commissioner, for cost certification

purposes, accepts estimates of cost for any item, and the later

substitution of certified actual costs requires a reduction of the

mortgage amount, the amount of such reduction will be paid to, or

retained by, the mortgagee for application to reduction of the

mortgage, or will be deposited in the Reserve Fund for Replacements.

Such reductions of cost may arise from refunds, rebates, or discounts.

The reductions also arise from the excess of escrows over the actual

cost of incomplete construction items, refund of amounts deposited by

the mortgagor to save the mortgagee from loss in connection with the

sale of the mortgage (as set forth in Mortgagee\'s Certificate, or

Request for Endorsement of Credit Instrument-Certificate of Mortgagee

and Mortgagor) and any receipts from the settlement of claims against

bonding companies or others which arose in connection with the

completion of the project.

a\. Any prepayment required under this paragraph is to be considered

mandatory and is to be applied to (1) scheduled monthly payments

to principal to the extent possible, and (2) the Reserve for

Replacements Fund.

b\. After required prepayment has been made the amortization schedule

may then continue to be used for servicing the mortgage.

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4440.1

c\. These mandatory payments are in addition to and not in lieu of

regular monthly payments to principal or to the Reserve for

Replacement Fund. There will be no adjustment in the amount of

the annual MIP due on the mortgage resulting from the application

of these mandatory prepayments to principal.

d\. When cost certifications are reviewed, the Field Office Director,

shall determine the estimated items, if any, and whether or not

the mortgagor or contractor has any claims in process or

contemplated which might affect the actual cost. At this time the

director shall establish an appropriate follow-up system for

obtaining supplemental certifications of the actual cost of each

item.

5-13. PREPARATION OF FHA FORM 2331. Field office cost sections are to

proceed with processing and will prepare FHA Form 2331 \"memorandum

following the instructions in Paragraph 5-12. Working papers in

connection with this processing will be retained.

5-14. REVIEW OF FHA FORM 2330. The mortgage credit staff is to perform
its

examination of costs for interest, taxes, HUD-FHA fees, financing, and

legal and organization costs. If review of FHA Form 2330 reveals that

any construction costs are included in \"Miscellaneous and \"Other\"

categories, the cost section is to be so advised by memorandum.

5-15. IDENTITIES OF INTEREST. In connection with the identities of

interest it may be well to cite three paragraphs which bear on this

point:

a\. Paragraph 5-2 requires written reconfirmation of non-identity of

interest between the mortgagor and contractor at the time of cost

certification and also requires a statement from the mortgagor as

to any identity of interest between the mortgagor and any

subcontractor, material supplier, or equipment lessor.

b\. Paragraph 5-11 provides that any sub contract, material purchase,

or equipment lease for which FHA Forms 3608 are required are

subject to downward revision at the sole discretion of the Field

Office Director.

c\. Paragraph 5-2c requires that in most cases subcontractors,

suppliers or lessors must certify to their costs

Page 5-19 12/72

4440.1

(5-15)d. As to \"a\" above, It should be made clear that, if any
identity of

interest exists between mortgagor and general contractor, any

subcontractor, supplier or equipment lessor having an identity

with the general contractor is considered as having an identity

with the mortgagor.

e\. As to \"c\" above, a downward revision will have to be made in

any case where the parties fail to establish that the amount of

the subcontract, material purchase, or equipment lease was in

line with the current prices without giving excessive weight to

commitment estimates.

f\. Field Office Directors are required to obtain certification from

identity of interest subcontractors, suppliers, or lessors unless

this requirement has been waived in accordance with Paragraph 5-

2c.

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