Allocating Costs: Budgets, Cost Codes, and Allocation Methods

Budgets & Cost Codes

  • Purpose: Budgets and cost codes organize and track the financials of land development projects.
  • Budgets defined: an estimation of revenue and expenses over a defined future period or project; serves as a financial plan, aids in goal setting, outcome measurement, and contingencies. Data source example from the slides: Investopedia definitions for budget terms.
  • Budget examples used in the slides:
    • EXAMPLE COLLEGE BUDGET with monthly costs across categories such as Tuition, Rent, Food, Health Insurance, Books & Supplies, Transportation, Clothes, Cell Phone, Entertainment, Utilities, Internet, Subscriptions, Laundry.
    • Average monthly cost ranges shown (e.g., Tuition $850-$1,350; Rent $600-$1,000; Total monthly costs $2,100-$3,265).
    • Data source notes: edmit.me & Business Insider.
  • Budgets in Land Development (focus on costs):
    • For large builders/developers, the budget process emphasizes costs because revenue is relatively fixed after a purchase and sale agreement to sell lots is executed.
    • Roles: Land team handles land-specific items; Finance/Accounting handles revenue aspects.
  • Cost management context:
    • Firms have their own accounting systems for budgets, costs, and revenue.
    • Private developers may need to manage both costs and revenue; project managers (PMs) for large builders typically focus on cost management while accounting/finance handles revenue.
  • Cost Categories and Cost Codes:
    • Budgets are often managed with Cost Categories (broad groupings) and Cost Codes (specific line items).
    • Cost Categories examples: Clearing & Grubbing; Utilities; Paving; Engineering; Dry Utilities; Entries, Amenities and Landscaping.
    • Lenders prefer high-level reports; loan budgets commonly use 12–25 cost categories; example notes: 663 Cost Codes (L) in the example show 17 Cost Categories and 93 Cost Codes.
  • Residential Development Cost Codes and Categories (high-level grouping):
    • COST CATEGORIES (examples): Land Cost, Easement Acquisition, Recording & Filing Fees, Appraisal, Title Policy, Loan Fees, Legal Fees, Closing Costs – Land, Closing Costs – Lots, Lot Grading, Grading & Detention Pond, Clearing & Grubbing, Chipping & Disposal, Stabilization, Lot Benching, Excavation Offsite, Water Injection, Erosion Control, SWPPP & Construction Entrance, Retaining Walls, Water, Water Facilities (Offsite), Sanitary (Offsite), Drainage Facilities (Offsite), Paving On-site/Off-site, Sidewalks & Buffers, Street Signs, Traffic Control, Entries, Amenities & Landscaping, Screening Walls, Greenbelts, Recreation Center, Parks & Schools, Parking/Facilities, Electrical Onsite, Electrical Offsite, Natural Gas Facilities, Franchised Utilities Relocations, Engineering (Paving, WSD, Drainage Study, Boundary Survey, Topographic Survey & Testing, Engineering Offsite, Traffic Impact Analysis, Engineering MISCELLANEOUS), Materials Testing (WSD/Paving), Planning/Zoning & Entitlements, Studies, Environmental Reports (Wetland, Geotechnical), Soils & Materials Testing, Traffic Impact Analysis, Environmental Remediation, Inspection Fees (Onsite/Offsite), Lender Progress Inspections, Park Fees, Tax Certificates, Development Permits & Fees, FEMA/NRCS Fees, Impact Fees & Exactions, Pro Rata Fees, Other Fees, Subdivision Maintenance, HOA Management, HOA Subsidy & Operations, Developer Fee, Development Management Fee, Signage, Contingency, A&D Loan Interest, Preferred Returns, Property Taxes & Rollback Taxes, Financial Bonds, Escrows, Miscellaneous Costs Sharing/Reimbursables, Retainage Payable, Project Management, Retainage Earned.
    • Codes typically range from 8000 through 8160 (illustrative example shown in the slides). The table maps broad cost categories to specific codes.
  • Cost Codes (definition):
    • Cost Codes are classifications of specific types of work within a Cost Category.
    • Example structure: Cost Category → Cost Codes (e.g., Paving category includes On-Site Paving, Off-Site Paving, Left Turn Lane, Traffic Signal, Thoroughfare Paving).
  • Tracking Costs:
    • Depending on the accounting system and the number of cost codes, multiple contracts or proposals may be included under one cost code.
    • PMs may devise their own system to track each contract or proposal within a single cost code.
  • Example of tracking within a Cost Code (Engineering):
    • Cost Category: 8090 Engineering & Testing
    • Cost Code: 8091 Engineering_WSD
    • Contracts under 8091 could include: water, sewer and drainage improvements; lift station and force main; detention pond, etc.
  • Invoice Tracker (illustrative):
    • Phase Common (e.g., lift station, detention pond, other shared improvements) costs allocated to multiple phases as each phase closes.
    • Sample entries show proposals, invoices, dates, budget statuses, and “Fee Remaining” figures; demonstrates how budgets and actuals flow across phases.
    • Takeaway: tracking spreadsheets allow management of costs across multiple contracts within a single cost code and illustrate how actuals compare to budgets across phases.
  • Tracking Costs – Example structure (from slides):
    • Phase Common contains items like Lift Station, Detention Pond, etc., with budgets and actuals shown; totals example: Budget Required $539,120; Actual $413,356; Over/Under $125,764.
  • Soft Costs vs Hard Costs:
    • Soft Costs: nontangible items (design work, real estate fees, inspection fees, project management, taxes).
    • Hard Costs: tangible costs (utility improvements, paving facilities, site work, detention ponds, landscaping).
  • Allocating Costs (concept & rationale):
    • The purpose of allocating costs is to spread the cost of a common facility among all lots on a pro-rata basis.
    • Costs incurred in initial sections may be allocated to future lots; conversely, costs incurred in future sections may be allocated to initial lots.
    • On large projects, lots are often allocated to both present and future sections.
  • Key considerations when allocating costs:
    • Allocate costs to portions of the project that benefit from those costs; goal is to sustain a constant profit margin on the sale of lots over the project life.
  • GAAP and FASB context:
    • What is GAAP? Generally Accepted Accounting Principles used to prepare financial statements.
    • FASB: Financial Accounting Standards Board (established 1973) – independent private-sector organization setting accounting standards for GAAP.
    • FASB standards are recognized by SEC and other bodies (e.g., state Boards of Accountancy, AICPA).
  • FASB Statement No. 67: three cost allocation methods
    • Specific Cost
    • Relative Value (also called Relative Sales Value)
    • Area Method (Acres or Square Feet)
  • Specific Cost (allocation method):
    • Allocate costs to individual components based on specific identification when practicable.
    • Example: If a park benefits only a specific section, allocate those costs to that section; if no paving improvements in a section benefit that section, allocate differently.
  • Relative Value (allocation method):
    • Costs allocated to lots based on the sales price of each lot relative to total sales price of all lots within the community.
    • Important rules from slides:
    • Do not adjust lot prices for anticipated price increases over time when calculating relative value.
    • The method results in higher-cost shares to more valuable lots.
    • Example from slides (Boulevard):
    • Total revenue:
      • Section 1: 80 lots of width 50, price $60,000 each → $4,800,000
      • Section 2: 60 lots of width 65, price $97,500 each → $5,850,000
      • Total revenue: $10,650,000
    • Section shares: 45.1% for Section 1 and 54.9% for Section 2
    • Allocated costs: Section 1 $225,352; Section 2 $274,648; Total cost $500,000.
  • Area Method (Acres):
    • Costs allocated by the share of total acres used by each section.
    • Example (Boulevard): Section 1 uses 16 of 36 acres (44.4%), Section 2 uses 20 of 36 acres (55.6%).
    • Allocated costs: Section 1 $222,222; Section 2 $277,778; Total $500,000.
  • Area Method (Lot Area):
    • Costs allocated by the total area of lots (in square feet) for each section.
    • Example (Boulevard): Section 1 lots area = 460,000 sq ft (49.6%), Section 2 lots area = 468,000 sq ft (50.4%).
    • Allocated costs: Section 1 $247,845; Section 2 $252,155; Total $500,000.
  • Front Foot Method (not GAAP-approved; used by some private developers):
    • Costs allocated based on total front feet of lots (width × number of lots).
    • Example (Boulevard): Section 1 4,000 front feet; Section 2 3,900 front feet; Total 7,900 front feet.
    • Allocated costs: Section 1 $253,165 (50.6%); Section 2 $246,835 (49.4%); Total $500,000.
  • Comparison of methods (illustrative):
    • Relative Value vs Area Method (Acres) vs Area Method (Lot Area) vs Front Foot Method show different shares for Section 1 and Section 2, but all sum to the same total cost ($500,000) across sections.
    • Example results (Section 1/Section 2 totals):
    • Relative Value: $225,352 / $274,648
    • Area Method (Acres): $222,222 / $277,778
    • Area Method (Lot Area): $247,845 / $252,155
    • Front Foot: $253,165 / $246,835
  • Appendix tables (available in slides):
    • Appendix A: Allocation by Relative Value (example table for Boulevard)
    • Appendix B: Allocation by Area Method (Acres)
    • Appendix C: Allocation by Area Method (Lot Area)
    • Appendix D: Allocation by Front Foot Method
    • Appendix E: Comparison of Methods (summary table across Section 1 and Section 2)
    • Appendix F & G: Rec Center allocations by Area Method (two variations)
  • Why allocate costs?:
    • To spread the cost of common facilities (e.g., recreation centers, trails, detention ponds) among all lots on a pro-rata basis.
    • Costs incurred in early phases may be allocated to future lots and vice versa.
    • In large projects, it is common to allocate costs to both present and future lots to maintain equity and profitability across the project life.
  • Images and real-world context:
    • Some slides reference real projects (e.g., Cross Creek Ranch) with Google Earth imagery to illustrate cost allocation in practice.
    • Notes mention that imagery examples are used to visualize common facilities and their impact on cost allocation.
  • GAAP/financial reporting emphasis:
    • Allocation methods are meant to ensure costs are matched to benefits and reported consistently under GAAP.
    • FASB governs the standards; public companies’ reporting is influenced by FASB guidance and SEC recognition.
  • Appendices and accessible tables:
    • The slide deck includes Appendix A–G with table formats that make the relative value, area method, and front-foot analyses accessible for presentation and reference.
  • Summary takeaways:
    • There are multiple methods to allocate development costs across lots: Specific Cost, Relative Value, Area Method (Acres, Lot Area), and Front Foot.
    • The choice of method depends on practicality, fairness, and adherence to GAAP; front-foot allocation is common in private development but not GAAP-approved for public companies.
    • The primary goal of cost allocation is to maintain a constant profit margin across the sale of lots while distributing shared/indirect costs appropriately across present and future lots.

Relative Value vs Area vs Front Foot (key formulas and examples)

  • Relative Value (Relative Sales Value) allocation formula:
    • C<em>i=C</em>exttotal ⋅ P<em>i∑</em>jPjC<em>i = C</em>{ ext{total}} \,\cdot\, \frac{P<em>i}{\sum</em>j P_j}
    • Example (Boulevard): Total cost $500,000; Section 1 revenue $4,800,000; Section 2 revenue $5,850,000; Total revenue $10,650,000.
    • Section shares: Section 1 = \frac{4{,}800{,}000}{10{,}650{,}000} = 45.1\% ; Section 2 = 54.9\%
    • Allocated costs: Section 1 = $225{,}352; Section 2 = $274{,}648.
  • Area Method (Acres) allocation formula:
    • C<em>i=C</em>exttotal ⋅ A<em>i∑</em>jAjC<em>i = C</em>{ ext{total}} \,\cdot\, \frac{A<em>i}{\sum</em>j A_j}
    • Example (Boulevard): Section 1 = 16 acres; Section 2 = 20 acres; Total = 36 acres.
    • Shares: Section 1 = 16/36 = 44.4\%; Section 2 = 20/36 = 55.6\%
    • Allocated costs: Section 1 = $222,222; Section 2 = $277,778.
  • Area Method (Lot Area) allocation formula:
    • C<em>i=C</em>exttotal ⋅ S<em>i∑</em>jSjC<em>i = C</em>{ ext{total}} \,\cdot\, \frac{S<em>i}{\sum</em>j S_j}
    • Where $S_i$ is the total lot area for section i (in square feet or other unit).
    • Example (Boulevard): Section 1 area = 460{,}000 sq ft; Section 2 area = 468{,}000 sq ft; Total = 928{,}000 sq ft.
    • Shares: Section 1 = 460{,}000/928{,}000 = 49.6\%; Section 2 = 468{,}000/928{,}000 = 50.4\%
    • Allocated costs: Section 1 = $247,845; Section 2 = $252,155.
  • Front Foot Method allocation formula (not GAAP-approved for public companies):
    • C<em>i=C</em>exttotal ⋅ F<em>i∑</em>jFjC<em>i = C</em>{ ext{total}} \,\cdot\, \frac{F<em>i}{\sum</em>j F_j}
    • Where $F_i$ is total front feet for section i (sum of frontage lengths of all lots in i).
    • Example (Boulevard): Section 1 front feet = 4,000; Section 2 front feet = 3,900; Total = 7,900.
    • Shares: Section 1 = 4,000/7,900 = 50.6\%; Section 2 = 3,900/7,900 = 49.4\%.
    • Allocated costs: Section 1 = $253,165; Section 2 = $246,835.

Appendix tables (conceptual descriptions)

  • Appendix A: Allocation by Relative Value (Boulevard) – demonstrates the proportional allocation of the $500,000 cost by relative sales value across sections 1 and 2.
  • Appendix B: Allocation by Area Method (Acres) – shows the distribution by share of total acres.
  • Appendix C: Allocation by Area Method (Lot Area) – shows allocation by total lot area (sq ft) per section.
  • Appendix D: Allocation by Front Foot Method – shows allocation by total frontage feet per section.
  • Appendix E: Comparison of Methods – side-by-side comparison of the four methods for Section 1 and Section 2.
  • Appendix F & G: Rec Center allocations under Area Method (two variations).

Note on the practical context

  • The materials reference a real-world cross-section image of Cross Creek Ranch (Google Earth) to illustrate how common facilities span multiple phases.
  • The cost allocation methodology supports long-term profitability and equity across both current and future lots.
  • The practical takeaway is to choose an allocation method that reflects benefit, is practically implementable, and complies with relevant accounting standards (GAAP/FASB for public entities) while acknowledging that some private development practices (like Front Foot) may not be GAAP-compliant for public reporting.

Summary of why this material matters for exam preparation

  • You should be able to:
    • Define budgets and cost codes and explain their roles in land development projects.
    • Distinguish soft costs from hard costs and provide examples of each.
    • Describe how cost categories and cost codes are organized and used for reporting to lenders.
    • Explain the three FASB/GAAP cost allocation methods: Specific Cost, Relative Value, and Area Method (Acres or Lot Area), including the key assumptions and limitations of each.
    • Perform sample allocations using each method with simple data (e.g., total cost, lot prices, acres, or front feet).
    • Interpret the implications of allocation methods for project profitability and cash flow across present and future phases.

Quick reference formulas

  • Specific Cost (conceptual): allocate to components based on identification of benefit; no single universal formula.
  • Relative Value: C<em>i=C</em>exttotal ⋅ P<em>i∑</em>jPjC<em>i = C</em>{ ext{total}} \,\cdot\, \frac{P<em>i}{\sum</em>j P_j}
  • Area Method (Acres): C<em>i=C</em>exttotal ⋅ A<em>i∑</em>jAjC<em>i = C</em>{ ext{total}} \,\cdot\, \frac{A<em>i}{\sum</em>j A_j}
  • Area Method (Lot Area): C<em>i=C</em>exttotal ⋅ S<em>i∑</em>jSjC<em>i = C</em>{ ext{total}} \,\cdot\, \frac{S<em>i}{\sum</em>j S_j}
  • Front Foot Method: C<em>i=C</em>exttotal ⋅ F<em>i∑</em>jFjC<em>i = C</em>{ ext{total}} \,\cdot\, \frac{F<em>i}{\sum</em>j F_j}