from the sale of first or second mortgage bonds, debentures, or from the sale of stock in a company to be formed, or from a building loan agreement or permanent mortgage. The income should be based on the number of rentable square feet and the estimated amount per foot that can be obtained under leases if the building is to be a renting proposition. To this should be added any income to be derived from stores or any special income-producing privileges that could be let. An allowance should be made for possible vacancies. If an hotel is being constructed, the estimated income would include that anticipated from occupancy of rooms, meals served and special concessions let, as coat room, barber shop, etc.

The estimated expenses should include all expenditures for (1) operating the building, janitor, electric, cleaning service, etc., fuel and other items directly operating charges; (2) allowances for repairs; (3) allowances for taxes; (4) interest on mortgages; (5) allowances for amortizing mortgages or mortgage bonds.

Engagement of Architect

When arrangements for fully financing the project have been completed, the investor employs an architect to prepare plans and specifications for the new building. The architect is also required to inspect and generally supervise the work of construction. His fee for these services is an agreed-upon percentage of the sums paid to contractors by the owners.

The American Institute of Architects form of contract between the architect and the owner appears in the Appendix. This form clearly expresses the relations between the architect and the owner and the basis and method of compensation to be paid to the architect by the owner. The general schedule of architect's charges prepared by the Institute is also given in the Appendix (Forms F and G).

The architect engages draftsmen and engineers to draw plans and prepare the specifications. The completed plans and specifications are submitted to several contractors with requests to submit formal bids. These bids name the sum for which the contractors will agree to perform the work and the time they will require to carry out the contract fully. After the bids are received, the owner and the architect select the bid which is the most advantageous to the owner. In deciding upon the contractor, the owner considers his responsibility, the price for which he will agree to do the work, and the time he will require to complete it. The additional income to the owner produced by earlier completion of a building may more than offset the difference between two contractors' bids for its construction.

Employment of Contractor

The contract with the contractor is then prepared and signed. The classes of contracts in use and their provisions were discussed in Chapter II. The text of some appears in the Appendix (Forms A and B).

ACCOUNTING RECORD. No entry should be made on the regular books of account at the time the contract is let. The reasons were given in Chapter XI, page 150.

A record is made, in memorandum, similar to the procedure outlined for the contractor's memorandum account with subcontractors. This record contains the date, the amount, and other details of the original contract and of subsequent orders issued for additional work to be done or work to be omitted. This record indicates the total sum for which the contractor has agreed to perform certain specified work. The aggregate of all payments made to the contractor should equal but not exceed this sum after the work has been entirely and satisfactorily completed.

Performance of Work

As work is performed under the contract, the liability of the owner to the contractor is created. The contractor renders an application for payment to the architect, stating his valuation of the work completed and the payment due him. Contracts generally provide for a retention of a fixed percentage until entire work has been completed, frequently 10% or 15%.

The architect checks and places a value on the work performed, based on the relation of the completed portion to the entire contract. He then issues a certificate which briefly recites the amount of the original contract, total of extra work ordered subsequently, total of previous certificates issued, amount of present certificate, and the balance remaining. This balance must always be sufficient to complete the unfinished portion of the contract and to pay any claims against the contractor which may be filed with the architect or the owner.

The certificate is the architect's approval of the payment to be made to the contractor. If the latter's contract contained a 10% retention clause, the architect's certificate would be for 90% of the value of work completed. When the contractor has performed work valued at $100,000, the certificate would be issued for $90,000. The liability of the owner to the contractor, however, is for the full value of work performed, $100,000. Payment of part is deferred, but the liability exists.

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ACCOUNTING ENTRY. The certificate is the basis of an entry on the owner's books crediting the contractor with the value of work completed and charging it to Construction acWhen a check is sent to the contractor for the sum due, credit is given to Cash and the contractor's account charged with the payment of $90,000. The balance of the contractor's account represents the percentage retained by the owner under the terms of the contract.

Accounting under Cost-Plus Contracts

The foregoing procedure applies to lump-sum contracts between an owner and a contractor. When a contractor is operating under a cost-plus contract financed by him, a Contractor's Contract account and Contractor's Progress Payment account are used in place of the Contractor's account mentioned above. The value of work represented by the architect's certificate is then credited to the Contractor's Contract account instead of the Contractor's account. The Construction account is charged with the value of work. Payments to the contractor on account of the certificates are charged to his Progress Payment account.

The total of the receipted invoices and payrolls furnished by the contractor is credited to his Progress Payment account and charged to his Contract account, when they are proper items of cost within the meaning of the contract.

The purpose of these extra accounts and the entries outlined is that the amount the contractor is finally to receive for his work under a guaranteed cost-plus contract is the actual cost of labor and material plus his fee, provided their sum does not exceed the guaranteed amount. Payments based on the architect's certificates issued during the progress of the work are really advance payments for which the contractor must render an accounting. Should the total of progress payments made to a contractor exceed his final cost of labor and material and his fee, he would have to refund the excess to the owner. The balance of the Contractor's Progress Payment account represents the excess of the sum of all payments made him over the total of all proofs of cost submitted.

The balance of the Contractor's Contract account represents the difference between the sum of the architect's certificates for the value of work done by the contractor and the total of his proved cost.

When the work is completed, the Contractor's Contract account will show the total of all architect's certificates on one side and the total of the contractor's proved cost on the other. The Contractor's Progress Payment account will state on one side the total of his proved cost and on the other the sum of all payments to him.

No change in the method of making entries from that indicated above is required when the owner finances the work. The order in which they take place is changed, however. The advances to the contractor are immediately charged to his Progress Payment account and those based on the architect's certificates and contractor's proved cost are made subsequently.

Architect's Account

Payments made to the architect are charged to an account with him. From time to time as his fees are earned according to his agreement with the owner, the fees may be credited to his account and charged to Architect's Fees.

Books of Account

The books kept by an owner are an ordinary cash book, ledger, journal, and purchase register. The purchase register is a record of all invoices and other charges and is in effect the book of original entry. The general principle of keeping it is the same as that outlined for the purchase register for the contractor's office (Chapter X). The headings of the credit controlling columns are changed to meet the requirements of the owner's office.

General Ledger Accounts

The principal accounts in the ledger to the date the building is ready for occupancy are given on the pages following. Those listed do not represent all the accounts. The special