Capital Construction Project Guidelines

I. Introduction
II. Description of Project Types
III. Approval Requirements
IV. Procedure for Requesting a Capital Project
V. Procedure for Requesting Approval of a Real Estate Lease
VI. Approval Process & Project Phases
VII. CPG Approvers and Committee Memberships
VIII. Development of the Project Budget
IX. Capital Budgeting Process
X. Accounting, Reporting and Control
  Appendix A. Construction Project Request (CPR) Form
  Appendix B. Acronyms

I. Introduction

This document outlines the policies and procedures governing capital construction projects, real estate leases and leasehold improvements at Duke University . The Board of Trustees (BOT), which approves the capital budget, endorsed these guidelines to create an orderly, efficient and coordinated system. These guidelines do not apply to Duke University Health System, which operates under separate policies. Changes to these guidelines must be approved by the Executive Vice President (EVP), Chair of the Capital Project Executive Committee (CPEC).

II. Description of Project Types

There are several types of capital construction projects that are reported to the BOT. Each type follows the approval rules discussed in Section III.

a. New Building Construction

b. Building Renovations

c. Utility Projects
Utility projects, for chilled water, steam, high voltage, potable water, sanitary sewer and storm sewer system expansion and replacement projects are funded through the utility rates charged to university, medical center, and health system facilities and include bringing utility service to the site of the building. The approval of the capital budget authorizes utility projects in aggregate.

d. Facility Renewal (Deferred Maintenance)/Americans with Disabilities Act ( ADA )
The renewal of facilities and ADA compliance projects of the University are funded primarily through the operating budget. Campus Services (CS) and Engineering & Operations (E&O) prioritize these projects according to need and funds availability. The approval of the capital budget authorizes facility renewal/ADA projects in aggregate.

e. Non Utility Infrastructure & Grounds: Non-utility infrastructure work such as landscape improvements, roads, sidewalks, parking lots are prioritized and budgeted by CS and Medical Center/Health System (MC/HS) Architect. The approval of the capital budget authorizes non-utility infrastructure projects in aggregate. All non-utility infrastructure relocations caused by the siting of new buildings are funded within the building construction budget.

f. Real Estate Leases and Leasehold Improvements: Includes any lease (operating or capital) for space , as well as up-front costs of tenant up-fit, leasehold improvements, and fixed equipment .

III. Approval Requirements

The following approvals are required prior to initiation of work and/or commitment of funds to a project. Any exceptions must be approved by the EVP, Chair of the CPEC.

a. Refer to Section V for a detailed description of the project approval process.

b. A funding plan must be established prior to a project being considered for approval.

c. Only upon proper project approval will a project code be established. No funds should be spent or committed prior to the establishment of a project code.

d. Related contracts or Notices to Proceed require appropriate approval in addition to the approval of a project.

e. The requesting department is responsible for ensuring that adequate funding is available and transferred regularly to the project code to prevent overdrafts. For projects funded from multiple sources, funding details must be clearly documented and understood by all parties with clear agreement as to the timing, amount and person responsible for such funding transfers. The Capital Budget Office (CBO) is authorized to transfer funds from the designated funding source to cover such overdrafts. Penalty interest rates (two times the prime interest rate) are assessed on unapproved project s overdrafts.

f. Non-Capital Projects

  1. Cost: Less than $100,000
  2. Required approvals: Dean, Director or Department Head
  3. Funding sources: Operating budget, departmental reserves, internal loans and/or gifts/grants.
  4. Budgeting: Non-capital construction projects are not included in the annual capital budget. Funding should be included in the operating budget or as a budgeted use of departmental/betterment reserves.

g. Tier I Capital Projects

  1. Cost: $100,000 but less than $250,000.
  2. Funding sources: Departmental reserves, central reserves, internal loans or gifts/grants.
  3. Required approvals: Management center budget official ( Provost Area Management Center [PAMC] or School of Medicine/School of Nursing [SOM/SON]) or officer ( Central Administration Management Center [CAMC]), and Dean or Director. (see Section VI)
  4. Budgeting: The BOT approves these projects in aggregate in the annual capital budget, where they are presented according to financial responsibility (PAMC, SOM/SON, Athletics and CS). An actual/budget comparison will be reported quarterly. Any unfavorable variance to the aggregate budget (by financial responsibility) requires a written explanation from the appropriate management center budget official.

h. Tier II Capital Projects

  1. Cost: $250,000 but less than $2.5 million.
  2. Funding sources: Departmental reserves, central reserves, internal loans, gifts/grants, or external debt. The BOT must approve any external debt financing by resolution.
  3. Required approvals: Approval authority for Pla nning / Feasibility and Design has been delegated by the EVP to the management center budget official or officer and Dean or Director with review by the Capital Project Review Committee (CPRC) . All other approvals are from the EVP, th r ough the CPEC, based on review from the CPRC.
  4. Budgeting: An aggregate amount (by financial responsibility) will be included for approval in the annual capital budget. An actual/budget comparison will be reported quarterly. Any unfavorable variance to the aggregate budget (by financial responsibility) requires a written explanation from the appropriate management center budget official.

i. Tier III Capital Projects

  1. Cost: $2.5 million or greater.
  2. Funding sources: Departmental reserves, central reserves, internal loans, gifts/grants, external debt financing.
  3. Required approvals: All of the following: EVP, chair of the CPEC, Trustee Business & Finance Committee (B&F), Trustee Building and Grounds Committee (B&G).
  4. Budgeting: The BOT must approve the budget, and each stage of the project budget, for each Tier III project. A Tier III Capital Project report will be included in BOT materials at each of their regular meetings.

j. Real Estate Leases and Leasehold Improvements

  1. Determine the present value of future lease payments (net of the operating expense portion) using a discount rate of 8.5% (DUMAC target real return of 5.5% plus 3% inflation). Add the up-front costs of tenant up-fit, leasehold improvements, and fixed equipment to arrive at a value for the lease.
  2. Required approvals: Management approval of leases will be the same as appro v als for construction projects of the same estimated cost. For lease values less than 100K, see approval requirements above for non capital projects. For lease values equal to $100 ,000 but less than $250,000, refer to Section III, g, 3 for approvals required for Tier I Capital Projects. For present values equal to $250,000 but less than $2, 500,000, refer to Section III, h , 3 for approvals required for Tier II Capital Projects. For present values equal to $2,500,000 or greater, see Section III, i , 3 for approvals required for Tier III Capital Projects. All leases with a term of 10 years or more, regardless of value, require approval by the Executive Vice President.
  3. Negotiated lease extensions are treated as new leases and subject to the guidelines in this document.
  4. Leasehold improvements projects initiated subsequent to the initial approval of the operating lease are considered normal capital construction projects and subject to the approval and reporting requirements noted in this document.
  5. Budgeting: An aggregate amount (by financial responsibility) will be included for approval in the annual capital budget. The lease payments themselves are included in University operating budgets. An actual/budget comparison of the approved upfront lease cost will be reported quarterly. Any unfavorable variance to the aggregate budget (by financial responsibility) requires a written explanation from the appropriate management center budget official for leases and leasehold improvements under $2.5m. A lease report for those leases and leasehold improvements over $2.5m will be included in BOT materials at each of their regular meetings.

IV. Procedure for Requesting a Capital Project

a. A school or department may propose a Tier I or II capital project by first consulting with CS for campus projects or the MC/HS Architect's Office for SOM/SON projects. A project manager will be assigned to assist the school or department in determining the scope, feasibility, budget and schedule of the project based upon the programmatic need. In addition, the project manager will complete a Construction Project Request (CPR) form (see Appendix A) for the project. Tier III projects must be introduced first to the CPEC, prior to consulting with CS or the MC/HS Architect.

b. Upon completion of the CPR, the project manager will work with the school or department to obtain all necessary internal technical reviews, including but not limited to coordination with the University Architect or MC/HS Architect, Committee on Facilities and Environment (CFE) and FMD. This approval process is illustrated in the flowcharts included in Section V for Tier I, II, and III projects.

c. All appropriate project approvals are required prior to spending or committing funds or overspending previously approved budgets. Approvals can be requested by each project phase: early planning, feasibility, design, construction, as well as for programmatic and owner controlled scope changes and budget modifications (see Section V).

V. Procedure for Requesting Approval of a Lease

a. Needs for leased space must be requested through the Office of the Associate Vice President for Capital Assets and Real Estate. Upon negotiation of the leased space, but prior to signing the lease, the school or department will request approval of the lease (including leasehold improvements, tenant upfit and/or any other upfront costs), using a CPR form, indicating a Lease in Section II, Project Level, option E. The school or department will need to work with the Office of the Associate Vice President for Capital Assets and Real Estate to complete the relevant sections of the CPR form.

b. The Office of the Associate Vice President for Capital Assets and Real Estate is responsible for attaching additional information, including but not limited to a copy of the proposed lease agreement, present value calculation, and any other information to justify the lease. Annual O& M costs should also be disclosed on the form or in the additional documentation.

c. All appropriate approvals are required to be in place prior to signing the lease. If necessary, BOT approval can be sought through the BOT Executive Committee.

VI. Approval Process & Project Phases

a. Tier I & II Project Approval Process

.

b. Tier III Project Approval Process

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c. Project Phases

  1. Planning/Feasibility
    The Senior Officers (President, EVP, Provost or Chancellor) must recommend the conduct of any Planning /Feasibility Study for a potential Tier III University capital project. The EVP (or his delegate) is authorized to approve up to $75,000 on planning /feasibility which should be requested through the CPEC. Approval to spend is limited to $75,000 unless approved by the CPEC, B&G and B&F (The planning /feasibility study must be approved by B&F if not included in the approved capital budget). For Tier I & II capital projects, authorization to spend planning /feasibility money must be sought through the process outlined in Section V.a.
  2. Design
    For Tier III capital projects, B&G must approve projects to enter the Design phase in order to develop a design and to select a construction firm, either through negotiation or bid. Design phase spending for Tier III projects is authorized as follows: by B&F if the project was not included in the capital budget: by CPEC if the project was included in the capital budget. For Tier I & II capital projects, authorization to spend design money prior to requesting construction approval must be sought through the process outlined in Section V.a.
  3. Approved for Construction
    For Tier III capital projects, the BOT, by resolution (upon recommendation of B&G and B&F) must approve the design, the recommended construction firm, and the start of construction, based on a firm budget.
  4. Completion
    The CPEC determines that a Tier III project is complete. The project remains on the capital report until fiscal year end or it is closed to further charges, whichever is later. B&F and B&G receive a final project report, including sources of fund and expenditure categories.
  5. Scope Changes
    Programmatic scope changes are defined as changes developed and initiated by the department or project champion. Owner controlled scope changes are those proposed by contractors, consultants and/or FMD or MC/HS Architect. These may occur as new construction-related ideas and opportunities arise that reduce costs or improve outcomes, such as new materials or processes. All significant programmatic and owner controlled scope changes that occur during the design or construction phase and which significantly impact the contingency or total project budget must be approved by the appropriate body based on the project tier. Management centers are authorized to re-allocate costs within the approved project budget.
  6. Budget Modifications
    Requests to increase a project budget must be appropriately approved prior to funds being spent or committed. In addition, BOT approval is required for Tier III projects to overspend their approved budget by more than 10%.

VII. CPG Approvers and Committee Memberships

a. Management Center Budget Officials
Responsible for managing the Board approved capital budget and prioritizing projects for their organization.

  • PAMC -Executive Vice Provost
  • SOM/SON -Vice Dean for Finance and Administration
  • Athletics -Vice President, Financial Services
  • CS-Vice President, Campus Services
  • Other CAMC - Vice President, Financial Services

b. Capital Project Review Committee (CPRC)
Responsible for review of all Tier II and III capital projects to: 1) review the CPR form for completeness, 2) ensure that the technical reviews were completed, 3) recommend approval, disapproval, or approval with modification to the CPEC, and 4) review for compliance with the approved capital budget.

  • Associate Vice President, Facilities, Chair
  • Director, Capital Budgeting & Reporting
  • Utility Services Department Representative
  • Director, MC Design & Construction
  • Director, Engineering & Operations (E&O)
  • Facilities Management Department (FMD) Staff
  • Facility Planning, Design and Construction (FPDC) Staff
  • Project Managers as needed
  • Management Center Representatives

c. Capital Project Executive Committee (CPEC)
Responsible for advising EVP for approval of all Tier II and III capital projects.

  • Executive Vice President, Chair
  • Vice President, Campus Services
  • Vice President, Financial Services
  • University Architect
  • Medical Center/Health System Architect
  • Executive Vice Provost
  • Vice Dean for Finance and Administration, SOM/SON
  • Associate Vice President, Facilities
  • Assistant Vice President, Budgets, Cost Allocations, & Reporting
  • Director, Capital Budgeting & Reporting

VIII. Development of a Project Budget

a. All project budgets are developed by FMD or FPDC project managers on the total project budget development sheets and then entered onto the CPR form.

b. Project budgets evolve over time and solidify as the design progresses. Larger projects go through four stages of cost estimates: 1) a "place holder" estimate included in early planning; 2) a preliminary estimate after scope definition; 3) a more refined cost estimate after a feasibility study, and 4) a firm construction estimate, after design and bidding.

c. The total project budget includes: construction costs, consulting expenses, project management fees, the initial complement of furniture and fixtures, expenses related to relocation of utilities and non-utility infrastructure, and any other major expense.

d. Related capital construction projects, such as utility infrastructure, while not a part of the project budget, should be disclosed as supplemental information with the CPR form in order for the CPEC and BOT to have full costs of the construction project . The CBO will report significant utility infrastructure costs to the BOT separately from the total project budget.

e. The building project budget includes utility relocations caused by the siting of a new building; in addition, the project budget must include the cost of natural gas installation provided by PSNC. Exceptions must be approved by the CPEC, chaired by the EVP.

f. Each project budget must include a contingency budget line regardless of the type or tier. A contingency is required for the following: design, program, owner, and construction. The project contingency amount is determined by FMD or the MC/HS Architect. The contingency must be a minimum of 10%. This amount will vary depending on the nature and scope of the project and can range between 10%-25%. Any request for a Tier I or II contingency less than 10% or more than 15% must be submitted in writing with an explanation, and approved by the CPEC. At the "Approved for Construction" phase, the Tier I or II contingency must be a minimum of 10% of total project costs. Contingency budgets for Tier III projects are based on recommendation to CPEC when budget approval is sought.

g. Each construction project request must include an estimate of on-going operational expenses such as maintenance and other operating expenses, approved by either FMD for University (excluding SOM/SON) or E&O for SOM/SON.

h. When applicable, construction projects must include a budget for financing costs, provided by the Treasurer/Deputy Treasurer. The CBO will report financing costs to the BOT separately from the total project budget.

i. The sponsoring department or project champion must develop a financial plan for funding the construction and future operational costs. This plan must be included in the CPR form. In the case of Tier III project, this plan must be approved by the appropriate senior officer in consultation with the appropriate development officer (when applicable).

j. The CBO will regularly distribute to senior administration and the BOT a capital projects financial report, to include approved budgets, actual-to-date information, and expense/funding projections. (Reporting is discussed in more detail in Section IX.)

IX. The Capital Budgeting Process

a. The CBO maintains a five-year capital plan, which includes a one-year capital budget and a plan for the next four years.

b. Each year, the CBO will ask departments and schools for proposals for projects as the next fiscal year's capital budget is developed.

c. Each school or department must prioritize requests internally and identify funding sources.

d. Capital budget requests are coordinated through the appropriate management center budget office, which must approve them before they are submitted to the CBO.

e. The CBO consolidates capital budgets for review by the CPEC.

f. When necessary, the EVP will request a meeting to discuss project details.

g. Capital projects expected to span more than one fiscal year require a cash flow analysis prepared by the project manager.

h. The Treasurer/Deputy Treasurer analyzes the annual capital plan's impact on debt ratios (expendable resource ratio, interest expense to operations, and debt service coverage ratio).

i. Each May, B&F reviews the five-year capital plan, which includes the capital budget for the next fiscal year, and recommends approval to the BOT. B&F meets jointly with B&G for this purpose.

j. The project manager must submit a request for a budget modification to the CBO if a project's cost is expected to exceed the approved project budget. The request will be reviewed by the CPRC and recommended for approva l forwarded to the CPEC, chaired by the EVP , for approval . (unless it is for a Tier I project, which would only require approval by the management center budget official or officer and Dean or Director.) The budget modification must be approved by the CPEC for Tier II projects and both the CPEC and B&F for Tier III construction projects. Budget modifications for Tier II projects that cause the estimated project cost to exceed $2.5 million must be approved by B&F.

k. Only B&F may modify the capital budget, which is the first year of the five year capital plan. However, schools and departments may continue to update out-year plans (years 2 - 5) with the most current information.

X. Accounting, Reporting and Control

a. All capital projects must have a project code, to be monitored by the project manager, the financial owner and the capital budget office. Large projects should not be split into several smaller projects in order to avoid approval requirements.

b. A comprehensive capital projects report updated after the close of each fiscal month reflects funding and expenditures and projected expenses and revenues. This report is provided to senior administration and to B&F.

c. The current financial information is taken from the university accounting system SAP, Duke University 's official ledger of record. Each month, the project manager projects expenditures; the appropriate development officer projects gifts and pledges; Financial Services projects other funding; and the Treasurer/Deputy Treasurer projects financing costs.

d. Direct salaries should never be charged to capital construction projects. Typically, project management fees are recorded as internal professional fees, not as payroll expense. Only project expenses within the approved budget may be charged to the project. The Vice President, Financial Services must approve any exceptions to this policy.

e. Without prior approval, projects should not run in overdraft. Departmental reserves are the first source of funding for any unauthorized overdrafts. The CBO may fund overdrafts from departmental reserves if unauthorized overdrafts are not covered within one fiscal month of notification. Projects that are funded by external debt will run in overdraft until the external debt is placed/sold.

f. The CBO will close out a capital project code no later than one year after occupancy of the facility, or when it is declared substantially complete. If invoices or other payments remain outstanding, the project manager must write the CBO requesting to delay closing the project code. The project manager should copy the request to the Deputy Treasurer. As projects are closed out, inappropriate charges will be removed from the project and charged to the discretionary account of the department.

g. The status and financial position of capital projects will be reviewed regularly with the CPEC, chaired by the EVP.

h. Project interest charges - The requesting department is responsible for ensuring that adequate funding is available and transferred regularly to the project code to prevent overdrafts. Unauthorized overdrafts are assessed a penalty interest rate equal to two times the prime rate. Capital construction projects that are funded by approved internal loans are charged the blended interest rate, which is calculated annually by the Treasury Division within Financial Services.

i. Sales tax - As a non profit organization, Duke University is eligible for a refund of sales taxes paid. Vendors are contractually obligated to provide Duke with information required to request this refund. If a vendor has not provided such information, Financial Services will contact the project manager to obtain this information from the vendor. If the information is not provided, the project will be charged the sales tax.

j. Project managers maintain the total project budget and track expenditures, prepare projections, estimate cash requirements and account for the use of contingencies. The project manager reviews project estimates with the AVP of Facilities or the MC/HS Architect before submitting them to the CBO. Project managers also review monthly accounting system statements from SAP for discrepancies. Project managers, financial owners and the CBO meet quarterly to discuss the financial status of all Tier II and III projects.

k. University project contingency funds should be tightly controlled to deal with unexpected project developments. All significant programmatic and owner controlled scope changes that occur during the design or construction phase and which significantly impact the contingency or total project budget must be approved by the appropriate body based on the project tier. The project manager will track all uses of project contingencies. In general the uses are:

  • Design Changes - During the design phase, all changes are scope changes and should not be funded using a project contingency.
  • Construction Changes - Changes relating to unforeseen conditions, designer errors and omissions, code compliance, allowance overages, and time-related expenses deemed acceptable by the owner.
  • Owner (Duke University) Controlled Changes - Changes proposed by contractors and/or project managers as new construction-related ideas and opportunities arise that reduce costs or improve outcomes such as new materials and processes.
  • Programmatic Changes - Scope increase to reconfigure the space and/or systems that require additional funding. Construction contingency funds do not normally cover scope expansion.

l. Project managers monitor all project schedules and keep all interested parties informed of changes to the anticipated schedules.

Appendix A. Construction Project Request (CPR) Form
Appendix B. Acronyms

History
Revised: October 2005
Revised: September 2006