Survey or Letter Approach: What the ATG Says About Contractor Cost Data

Contractors and subcontractors often know exactly what they installed and what they charged for it. That information can be valuable in a cost segregation study, especially when an engineer needs cost information for specific property items. The 2025 IRS Cost Segregation Audit Technique Guide recognizes the Survey or Letter Approach as an alternative method for estimating costs for newly constructed property. The important limitation is that contractor information is not automatically reliable simply because it came from a contractor. The engineer still has to determine whether the information matches the property, reconcile the estimates to actual project costs, and evaluate whether the underlying cost data is comparable.

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Key Takeaways

• The Survey or Letter Approach uses contractors and subcontractors to provide cost information for specific property items they installed.
• Engineers identify the property items first, divide them by contractor or subcontractor, obtain quantities and prices, and use the resulting unit costs to allocate property costs.
• Contractor information can be useful, but information from other projects may not be comparable or reliable.
• The approach is designed primarily for newly constructed property where contractors and subcontractors can provide project-specific information.
• The estimates should be reconciled to actual line-item or system costs and the total allocation should not exceed the actual project cost.
• The quality of contractor cost data can materially affect the estimated cost assigned to individual property items.
• Contractor input can strengthen the cost evidence, but the engineer still has to determine whether the data actually matches the property.

What Is the Survey or Letter Approach?

The Survey or Letter Approach is one of the six cost segregation approaches identified by the 2025 ATG.

The ATG describes it as an alternative method for estimating costs for newly constructed property.

The basic idea is straightforward.

Instead of estimating every cost from a published cost database or relying entirely on other estimating techniques, the engineer contacts the contractors and subcontractors who worked on the project and asks them to provide information about the specific property items they installed.

That information can include quantities and prices for specific assets.

The resulting unit costs can then be incorporated into an engineering approach or a residual estimation approach.

But there is an important distinction.

A contractor's response provides cost information.

It does not replace the engineering process used to identify and classify the property.

The engineer still needs to determine:

• What property items exist
• Which contractor or subcontractor installed them
• What each item does
• How the items are installed
• What quantities are present
• Whether the contractor's cost information applies to the actual property
• How those costs reconcile to the overall project

This reinforces the CostSegRx engineering principle that contractors build and engineers classify. Contractor categories provide construction information. Engineering analysis determines how the installed property should be understood for cost segregation.

How Does the Survey or Letter Approach Work?

The ATG describes a defined sequence.

First, identify the property items that require cost estimates.

The engineer completes the relevant initial steps of the detailed engineering approach to identify the specific property items requiring estimated costs. The ATG says those estimates should be reconciled to an actual cost, either a line-item cost or an individual system cost such as plumbing or electrical.

Second, divide the property items by contractor or subcontractor.

This allows the engineer to direct questions to the party most familiar with the relevant construction work.

Third, request quantities and prices.

Contractors and subcontractors are asked to provide quantities and prices for the specific property items they installed.

Fourth, apply the unit costs.

The engineer uses the unit cost estimates obtained through the surveys to determine and allocate property costs.

The process is therefore not simply sending a letter and accepting the response.

The engineer has already identified the property items before requesting the cost information.

That sequencing matters.

The question is not:

“What percentage of this building did you install?”

The question is:

“What did you install, in what quantity, and what did those specific property items cost?”

Why Does Comparability Matter?

The ATG makes an important distinction between contractor information from the actual project and contractor information obtained from other projects.

When a contractor provides actual cost data for the project being studied, the resulting allocations may be reasonably reliable.

But when contractor data comes from other sites or projects, the ATG warns that the information may not be comparable or reliable.

That makes engineering judgment important.

A contractor may have installed the same general type of system at another property.

That does not necessarily mean the cost is interchangeable.

Construction costs can vary because of:

• Building size
• Project specifications
• Material selection
• Installation conditions
• Labor requirements
• Geographic location
• Project complexity
• Changes in scope

The ATG also notes that different contractors may provide very different levels of detail and use different cost estimation methods. That disparity requires caution when determining whether the resulting allocation is reasonable.

This is one reason the CostSegRx engineering process begins with the property itself.

How engineers perform cost segregation matters because the physical property provides the context needed to evaluate whether cost information actually fits the installed asset.

When Is the Survey or Letter Approach Most Useful?

The ATG specifically describes this approach as an alternative for newly constructed property.

New construction creates a useful opportunity because the contractors and subcontractors involved in the project may still have detailed knowledge of the work they performed.

For example, a new commercial property may include:

• Electrical installation
• Plumbing installation
• Mechanical systems
• Site improvements
• Specialized equipment connections
• Interior construction

Different contractors may have installed different portions of those systems.

The engineer can identify the relevant property items and then obtain project-specific information from the parties who performed the work.

This can be especially useful when the contractor's records provide enough detail to support specific unit costs but do not organize the costs in the same way the cost segregation analysis needs them organized.

The survey can bridge that information gap.

It should not, however, become a substitute for reviewing the available project documentation.

The 2025 ATG states that a quality study should use the best available documentation to classify assets and determine costs, with contemporaneous documentation considered the most reliable and trustworthy.

How Should Engineers Control the Cost Allocation?

The biggest practical issue is reconciliation.

The ATG says survey estimates should be reconciled to an actual cost, either to a line-item cost or an individual system cost such as plumbing or electrical.

That creates a useful control point.

Suppose several subcontractors provide estimated costs for individual property items.

The engineer should not simply add those responses together and assume the result is correct.

The costs should be compared with the actual project costs available for the relevant systems or line items.

The ATG specifically warns that the wide disparity in contractor estimation methods requires caution to ensure that the total allocated costs do not exceed the actual total project cost.

This is also consistent with the ATG's broader quality-study requirements. A quality study should substantiate the cost basis of each asset and reconcile total allocated costs to total actual costs.

For CostSegRx engineers, this is where documentation becomes more than paperwork.

Documentation allows the engineer to test the conclusion.

Contractor information provides one piece of the evidence.

Drawings, specifications, invoices, payment records, field observations, and project costs provide additional evidence.

The strongest conclusion is the one that makes those pieces agree.

How Can Contractor Data Change an Estimated Cost?

Illustrative example only. Figures shown are estimated for demonstrative purposes only. Actual land allocations, asset classifications, depreciation, and tax results depend on the specific property, supporting documentation, engineering analysis, and taxpayer circumstances.

Assume a new commercial building contains 1,000 linear feet of a particular electrical installation that the engineer has already determined requires a cost estimate.

A contractor survey response provides a unit cost of $42 per linear foot.

The initial estimated cost would be:

1,000 × $42 = $42,000

The engineer then compares that estimate with the actual electrical system cost shown in the project's contractor payment records.

Suppose the available project records indicate that the relevant electrical work was actually billed at $35,000.

The difference is:

$42,000 − $35,000 = $7,000

The survey response therefore requires additional review.

The $42,000 estimate may reflect a different scope, a different installation condition, or a different estimating method.

The engineer should determine why the numbers differ rather than simply selecting the higher amount.

The ATG's discussion of cost estimating similarly emphasizes comparison with actual contractor costs when available and recognition of applicable indirect costs.

The financial example illustrates the engineering lesson: contractor input is evidence to evaluate, not an answer to accept automatically.

What Is the Most Important Lesson?

The Survey or Letter Approach can provide valuable project-specific cost information.

It can bring the people who actually installed the property into the cost-development process.

But contractor information is only one part of the engineering analysis.

The engineer still has to identify the property, understand its function, evaluate its installation, determine whether the contractor's information is comparable, and reconcile the resulting costs to the actual project.

A contractor's estimate from another project may look precise and still be a poor match for the property being studied.

A project-specific contractor response may be much more useful because it is tied directly to the construction being analyzed.

That is why the ATG emphasizes both the usefulness and the limitations of the approach.

The goal is not to collect as many contractor responses as possible.

The goal is to develop cost evidence that is relevant to the actual property and supportable through the available documentation.

For CostSegRx engineers, the principle is straightforward:

Contractor input can strengthen the cost evidence, but the engineer still has to determine whether the data actually matches the property.