Capital Construction Project Guidelines

I.	Introduction
II.	Project Approvals, Phases and Committees
III.	Procedure for Requesting a Capital Project
IV.	Development of a Project Budget
V.	Accounting Reporting and Control
VI.	Real Estate Leases and Leasehold Improvements
VII.	Closeout
VIII.	Capital Equipment or Lease Purchases
	Appendix A – Approval Matrix and Work Flows
	Appendix B – Capital Project Request Form (CPRF)
	Appendix C – Capital Project Financial Close Out

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).

II. Project Approvals, Phases and Committees

Approvals:

a. Tier 0A Non–Capital Projects

Cost: Less than $100,000
Required funding approvals: Approval authority has been delegated by the EVP to the Dean, Director or Department Head.
Required planning approvals: Dean, Director or Department Head
Required design approvals: Facilities Management Department (FMD) or Facilities Planning Design Construction (FPDC)
Required construction approvals: FMD or FPDC
Funding sources: Operating budget, departmental reserves, internal loans and/or gifts/grants.
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.

b. Tier 0B Capital Projects

Cost: $100,000 but less than $500,000
Required funding approvals: Approval authority has been delegated by the EVP to the Management center budget official (Provost Area Management Center [PAMC] or Medicine and Nursing Management Center [MNMC]) or officer (Central Administration Management Center [CAMC]) upon recommendation from the Dean, Director or Department Head.
Required planning approvals: Dean, Director or Department Head
Required design approvals: FMD or FPDC
Required construction approvals: FMD or FPDC
Funding sources: Operating budget, departmental reserves, internal loans and/or gifts/grants.
Budgeting: Tier 0B 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.

c. Tier I Capital Projects

Cost: $500,000 but less than $2.5 million
Required funding approvals: Approval by the EVP upon recommendation from the Management Center.
Required planning approvals: Management Center
Required design approvals: EVP
Required construction approvals: Management Center
Funding sources: Departmental reserves, central reserves, internal loans, gifts/grants or external debt.
Budgeting: The BOT approves these projects in aggregate in the annual capital budget.

d. Tier II Capital Projects

Cost: $2.5 million but less than $10.0 million
Required funding approvals: Approval by the Capital Review Committee (CRC) upon recommendation from the EVP. The BOT must approve any external debt financing by resolution.
Required planning approvals: Approval by the CRC upon recommendation from the Committee on Facilities and Environment (CFE)
Required design approvals: Approval by the CRC upon recommendation from the CFE
Required construction approvals: Approval by the CRC upon recommendation from the CFE.
Funding sources: Departmental reserves, central reserves, internal loans, gifts/grants, or external debt.
Budgeting: The BOT approves these projects in aggregate in the annual capital budget.

e. Tier III Capital Projects

Cost: $10.0 million or greater
Required funding approvals: Approval by the Resources Committee (RC) with recommendation from the CRC and EVP. The BOT must approve any external debt financing by resolution.
Required planning approvals: Approval by the RC with recommendation from the CRC and CFE.
Required design approvals: Approval by the RC with recommendation from the CRC and CFE.
Required construction approvals: Approval by the BOT with recommendation from the RC, CRC and CFE.
Funding sources: Departmental reserves, central reserves, internal loans, gifts/grants, external debt.
Budgeting: The BOT approves these projects in the annual capital budget.

Phases:

a. Planning – 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. Upon recommendation by the CRC and CFE, the RC must approve projects to enter the Planning phase. The EVP (or his delegate) is authorized to approve up to $150,000 on planning/feasibility. Approval to spend is limited to $150,000 if not included in the capital budget, unless approved by the RC. For Tier I & II capital projects, planning approval must be sought through the process outlined in Appendix A.

b. Design – For Tier III capital projects, upon recommendation by the CFE and CRC, the RC 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 budgeted Tier II and III projects is authorized as follows: by the EVP if the project was included in the BOT approved Capital Budget and for which no prior approvals have been granted by the CRC, RC, or the BOT. Spend is limited to 10% of the Capital Budget and Capital Plan project estimates for all projects included in the approved Capital Budget. For Tier II and III walk on projects, approval for design authorization must be sought through the process outlined in Appendix A. Design authorization for Tier I capital projects is outlined in Appendix A.

c. Construction – For Tier III capital projects, the BOT, by resolution (upon recommendation of the RC) must approve the recommended construction firm, and the start of construction, based on a firm budget. The RC upon recommendation by the CRC authorizes construction phase spending for Tier III projects. For Tier I & II capital projects, construction authorization must be sought through the process outlined in Appendix A.

d. Acceptance – The CRC approves completion of Tier II and III projects upon recommendation of FMD or FPDC. The RC receives a project summary report for completed Tier III projects. FMD or FPDC approves completion of Tier I and Tier 0 (A & B) projects.

e. 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 Medical Center (MC)/Health System (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.

f. 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%.

The approvals outlined in the attached matrix (see Appendix A) are required prior to initiation of work and/or commitment of funds to a project. Any exceptions must be approved by the EVP.

Committees:

a. Committee on Facilities and Environment (CFE)

Responsible for advising on issues relating to the aesthetics of buildings, sustainable construction, energy conversation, and public spaces on campus or areas contiguous to campus, Duke Forest, and the Marine Laboratory. All new building/project sites and campus signage must be considered and approved by the CFE membership. CFE will review projects prior to presentation to the CRC. The CFE consists of the following membership:

Vice President, Facilities
Faculty (5)
Student – Undergraduate
Student – Graduate/Professional
CFE, Co-Chairs (2)
University/Health System Representatives (5)
University/Advising Architect

b. Capital Review Committee (CRC)

Responsible for the necessary oversight for capital projects $2.5 million but less than $10.0 million. The CRC consists of the following membership:

Trustees (2)
President
Executive Vice President
Vice President, Facilities
Vice President, Finance
CFE, Co-Chairs (2)
University/Health System Representatives
University/Advising Architect
Campus Landscape Architect

c. Resources Committee (RC)

Responsible for overseeing the condition and ensuring the quality of the University’s physical plant including facilities and land leased by the University. The Committee is responsible for the oversight of the University master plan and capital projects $10.0 million and greater. The RC consists of the following membership:

Trustees (9)
Executive Vice President
Vice President, Facilities
Vice President, Finance
Vice President, Administration
Faculty (2)
Student – Undergraduate
Student – Graduate/Professional

d. Board of Trustees (BOT)

Responsible for approving the annual capital budget and University master plan. The BOT must approve construction for Tier 3 projects and funding approval for projects financed with long-term bonds.

III. Procedure for Requesting a Capital Project

A school or department may propose a capital project by first consulting with FMD for university projects or the FPDC 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.

a. The project manager will work with the school or department to complete a Capital Project Request Form (CPRF) for all proposed projects (Appendix B).

b. Upon completion of the CPRF, the project manager will work with the school or department to obtain all necessary internal technical reviews, including but not limited to coordination with FPDC Architect, Project Steering Team (PST) and CFE.

IV. Development of a Project Budget

a. All project budgets are developed by FMD or FPDC project managers and then entered onto the CPRF.

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 CPRF. The Capital Budget Office (CBO) will report significant utility infrastructure costs to the BOT separately from the total project budget.

e. New capital project opportunities that relate to previously approved projects should be carefully examined to determine if a second project is warranted or if budget modification to the existing project is required.

f. 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 EVP.

g. Each project budget must include a contingency budget line regardless of the type or tier. The project contingency amount is determined by FMD or the FPDC Architect. 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 EVP. 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 the EVP when budget approval is sought.

h. 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 or Engineering and Operations for SOM/SON.

i. The CBO will regularly distribute to senior administration, the CRC, and the RC (as necessary) a capital projects financial report, to include approved budgets, actual-to-date information, and expense/funding projections.

V. Accounting, Reporting and Control

a. 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: planning, design, construction, as well as for programmatic and owner controlled scope changes and budget modifications (see Section II).

b. 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 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 overdraft projects.

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

d. The current financial information is taken from the university accounting system R/3, Duke University's official ledger of record. 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.

e. 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 for Finance must approve any exceptions to this policy.

f. 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.

g. Project interest charges – 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.

h. 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.

i. Project managers maintain the total project budget and track expenditures, prepare projections and account for the use of contingencies. The project manager reviews project estimates with the Director of Project Management or the FPDC Architect before submitting them to the CBO.

j. 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.

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

VI. 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.

a. The Office of the Associate Vice President for Capital Assets and Real Estate processes requests for new real estate leases and lease renewals.

b. The present value of future lease payments (net of the operating expense portion) is calculated using a discount rate of 5.5% (consistent with University internal borrowing rate). Add the up-front costs of tenant up-fit, leasehold improvement, and fixed equipment to arrive at a value for the lease.

c. Required approvals: For lease values less than $500,000, refer to Section II.a.2 and II.b.2 above for Tier 0A and 0B projects. For lease values equal to $500,000 but less than $2.5 million, refer to Section II.c.2 for approvals required for Tier 1 Capital Projects. For present values equal to $2.5 million but less than $5.0 million, refer to Section II.d.2 for approvals required for Tier II Capital Projects. For present values equal to $5.0 million or greater, see Section II.e.2 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 EVP.

d. Negotiated lease extensions are treated as new leases.

e. Leasehold improvements projects initiated subsequent to the initial approval of the operating lease are considered normal capital construction projects.

f. 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.

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. Requests for leasehold improvements and/or tenant upfit improvements are requested using a CPRF and follow the approvals for construction projects of the same estimated cost outlined in Section II. 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 CPRF.

b. The Office of the Associate Vice President for Capital Assets and Real Estate is responsible for 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 in the 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.

VII. Closeout

Once the project manager declares the project substantially complete, he/she will process a Capital Project Financial Close Out form and submit it to the CBO for code closure in R/3 (Appendix C).

VIII. Capital Equipment and Lease Purchases

Includes any capital equipment or lease purchase greater than $100,000. Approvals follow the same guidelines as capital projects.

Tier 0B: purchases costing $100,000 but less than $500,000 require management center approval.
Tier I: purchases costing $500,000 but less than $2.5 million require management center and EVP approval.*
Tier II: purchases costing $2.5 million but less than $10.0 million require management center, EVP and CRC approval. BOT approval also required if funded with external debt.*
Tier III: purchases costing $10.0 million and greater require management center, EVP, CRC and BOT approval.*

*For equipment purchases only, required documentation includes the following: short justification explaining the need for the equipment, how/where it will be used, funding source, and any associated space modifications. Include any related capital costs necessary to support equipment installation.