Which listed group is classified as indirect improvement production costs in this budget?
Correct Answer
B) Architect fees, construction-period financing and permits.
Design fees, construction-period financing and permits are indirect costs in the stated budget convention. Materials and construction labor are direct. Land acquisition and post-completion purchase financing are not automatically soft improvement costs merely because they are not physical materials.
Why This Is the Correct Answer
Option B is correct because architect fees, construction-period financing and permits are outlays other than labor and materials that are required to develop and construct the improvement. Indirect costs include items such as legal fees, property taxes, construction financing and administrative expenses, and are sometimes called soft costs. Design fees and permits fit the same category under the stated budget convention.
Why the Other Options Are Wrong
Option A: Framing materials, construction wages and on-site labor.
Option A lists framing materials, construction wages and on-site labor. These are the labor and materials of construction, which are direct costs rather than indirect costs.
Option C: Foundation concrete and reinforcing steel.
Option C lists foundation concrete and reinforcing steel. These are physical construction materials, so they are direct costs.
Option D: Roof shingles and flashing materials.
Option D lists roof shingles and flashing materials. These are building materials installed in the structure, which makes them direct costs.
Hard you touch, soft you pay
Hard (direct) costs are the labor and materials you can see in the building. Soft (indirect) costs are fees, financing and permits paid to get it built.
How to use: Sort each budget line by asking whether it is labor or materials in the structure.
Exam Tip
Look for the option where every item is a fee, financing charge or permit. If any item is a material or construction wage, that group is direct.
Common Mistakes to Avoid
- -Treating construction labor as an indirect cost
- -Leaving construction-period financing out of the cost estimate
- -Treating land purchase as a soft improvement cost
Concept Deep Dive
Analysis
This question tests the difference between direct (hard) and indirect (soft) improvement costs. Direct costs are the labor and materials that go into construction, while indirect costs are outlays other than labor and materials required to develop and construct the improvement. Only one group in the options consists entirely of non-labor, non-material items.
Background Knowledge
Cost estimates separate direct costs, the labor and materials used to build, from indirect costs, the other expenditures required to develop and construct the improvement. Indirect costs include legal fees, property taxes during construction, construction financing, administrative expenses, appraisal fees and lease-up expenses. Not every non-physical expense is a soft improvement cost; land acquisition and post-completion purchase financing are treated separately.
Real-World Application
An appraiser reviewing a builder's budget for a proposed house sorts the line items into direct and indirect costs. Lumber, concrete and trade labor go into direct costs, while architect fees, permits and construction loan interest go into indirect costs. This allows a check of the total against cost-service data that may present costs on a different basis.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
A 2,200-sf dwelling costs $200 per square foot, and a separate 400-sf garage costs $75 per square foot. These costs are complete and do not overlap. Both have an effective age of 15 years and a total life of 50 years, with straight-line depreciation and no salvage value. No site value or other loss is involved. What is the combined depreciated cost of the dwelling and garage?
A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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An improvement has an effective age of 18 years and a total economic life of 45 years. Using the straight-line age-life method, what is the percentage of depreciation?
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A functional deficiency causes an annual net income loss of $18,000 that is expected to persist. The capitalization rate for the loss, on the same income basis, is 7.5%. What is the indicated loss in value?