Survey and Letter Approaches: What the ATG Says About Limited Studies

The 2025 IRS Cost Segregation Audit Technique Guide identifies the Survey or Letter Approach as one of six common approaches to cost segregation. The ATG describes it as an alternative method for estimating costs for newly constructed property. Under this approach, contractors and subcontractors are contacted through surveys or letters and asked to provide information about the cost of specific assets they installed on a particular project. Those costs are then used within an engineering approach or the residual estimation approach. The approach can be useful when specific asset costs need to be developed but the available project records do not directly provide those costs. But contractor-provided information still requires engineering evaluation.

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Key Takeaways

• The Survey or Letter Approach obtains project-specific cost information from contractors and subcontractors for identified property items.
• The approach begins with identifying property items, obtaining contractor quantities and prices, developing unit costs, and reconciling the estimates to actual project costs.
• Contractor-provided information must be evaluated for reliability, comparability, scope, and the basis of the reported costs.
• The ATG describes the Survey or Letter Approach as an alternative method for estimating costs for newly constructed property.
• Contractor data from the actual project can be useful, while information from other sites or projects may not be comparable or reliable.
• Reconciliation helps determine whether contractor-derived estimates remain consistent with actual project and system costs.
• Contractor data can inform the estimate. Engineering must still test the evidence.

What Is the Survey or Letter Approach?

The Survey or Letter Approach obtains cost information by contacting the contractors and subcontractors involved with a newly constructed property.

The ATG describes the approach as an alternative method for estimating costs for newly constructed property. Contractors and subcontractors are asked to provide information about the costs of specific assets they installed on the project.

The approach therefore starts with a more detailed engineering identification process.

The engineer first determines which property items require cost estimates.

Then those property items are associated with the contractor or subcontractor responsible for the work.

The contractor or subcontractor is asked to provide quantities and prices.

The resulting unit costs are then used to determine and allocate property costs.

This is different from simply asking a contractor:

“What percentage of this building is personal property?”

The ATG's process is asset-specific.

The engineer identifies the property.

The contractor provides cost information.

The engineer evaluates and applies that information.

When Does the ATG Use This Approach?

The ATG specifically describes the Survey or Letter Approach as an alternative method for newly constructed property.

That context matters.

New construction typically produces a network of contractors and subcontractors, each responsible for different portions of the project.

For example, a project may involve separate contractors for:

• Electrical work
• Plumbing
• HVAC
• Site work
• Flooring
• Specialty equipment
• Fire protection
• Data and communications
• Other building systems

Those contractors may have detailed knowledge of the quantities and costs associated with the property they installed.

The Survey or Letter Approach attempts to capture that information.

It can therefore provide a useful bridge between the physical property and the cost records.

What Are the Steps?

The ATG provides a specific sequence for the Survey or Letter Approach.

Step 1: Identify the property items.

The process begins by completing the initial steps of the detailed engineering approach from actual cost records.

This includes identifying the specific property items that require cost estimates.

That is important.

The engineer does not start by asking contractors for general percentages.

The engineer first determines what needs to be estimated.

Step 2: Reconcile the estimates to an actual cost.

The ATG says the estimates should be reconciled to an actual cost.

That actual cost can be:

• A line-item cost
• An individual system cost
• Plumbing cost
• Electrical cost
• Another identifiable project cost

This creates a control between the estimated asset costs and the actual project.

Step 3: Divide property items by contractor or subcontractor.

The identified property items are organized according to the contractor or subcontractor responsible for them.

For example:

Electrical contractor

→ Electrical distribution components

Plumbing contractor

→ Plumbing components

Site contractor

→ Parking and site improvements

This organization makes the survey more targeted.

Step 4: Ask contractors for quantities and prices.

Contractors and subcontractors are asked to provide the quantities and prices of the specific property items.

The information can then be converted into unit costs.

Step 5: Use the unit costs to determine property costs.

The unit costs obtained through the surveys are used to determine and allocate property costs.

This creates the connection:

Property item → Quantity → Contractor price → Unit cost → Allocated property cost

That is the core mechanics of the approach.

Why Does the ATG Start With Engineering Identification?

The Survey or Letter Approach could appear to be primarily a contractor-information process.

It is not.

The ATG specifically requires the preparer to first identify the property items requiring cost estimates.

That means engineering remains the starting point.

Suppose a project has $1 million of electrical work.

The engineer cannot simply ask the electrical contractor:

“How much of the $1 million is § 1245 property?”

The engineer needs to identify the relevant property first.

That could require understanding:

• What electrical components were installed
• Where they are installed
• What they serve
• How they function
• Which systems they support
• Whether the cost relates to a particular asset or broader system

Only then can contractor information be applied meaningfully.

This distinction is consistent with the broader CostSegRx engineering philosophy.

What exists?

Then:

Why does it exist?

What does it serve?

How is it installed?

What does the documentation show?

The contractor's information becomes one piece of that evidence.

When Is Contractor Data Reliable?

The ATG makes an important distinction between contractor data from the actual project and contractor data from elsewhere.

When the contractor provides actual cost data, the allocations may be reasonably reliable.

That is fundamentally different from obtaining an estimate from another project.

For example, suppose an electrical contractor installed a particular system at the property being studied.

The contractor's actual project records may provide strong evidence of what that installation cost.

But suppose the preparer instead asks the contractor:

“What does a similar system usually cost?”

That answer may be useful.

But it is not necessarily comparable.

Differences may exist in:

• Project size
• Geographic location
• Labor rates
• Material costs
• Construction quality
• Installation requirements
• Project complexity
• Design specifications

The ATG therefore cautions that contractor data obtained from other sites or projects may not be comparable or reliable.

The source matters.

The context matters.

The actual property matters.

Why Can Contractor Detail Create Problems?

The ATG also warns about differences in the amount of detail provided by different contractors.

One contractor may provide a detailed breakdown.

Another may provide only a broad system-level estimate.

Another may provide quantities but no supporting unit costs.

Another may provide a lump-sum figure.

Those differences can create inconsistencies.

For example:

Contractor A

Provides 25 individual asset costs.

Contractor B

Provides one lump-sum cost for the entire system.

If those figures are combined without further analysis, the resulting cost allocation may not be consistent.

The engineer needs to understand what each number represents.

The question is not simply:

“Did the contractor respond?”

It is:

“Does the response provide sufficiently comparable and supportable information for this analysis?”

Why Does Reconciliation Matter?

The ATG specifically requires estimates to be reconciled to an actual cost, such as a line-item cost or an individual system cost.

This is an important control.

Suppose the electrical contractor provides unit costs for several electrical components.

The engineer develops the following estimates:

• Branch circuits: $250,000
• Electrical panels: $100,000
• Dedicated equipment connections: $150,000
• Lighting: $200,000

Total estimated electrical allocation:

$700,000

The engineer then compares that amount with the actual electrical system cost reflected in the project records.

Suppose the project records show:

Actual electrical system cost: $720,000

The $20,000 difference requires investigation.

It might represent:

• Additional indirect costs
• Unidentified electrical components
• Differences in contractor scope
• Costs not included in the survey response

The engineer investigates the difference rather than simply accepting the $700,000 figure.

That is the important part of the methodology.

The contractor supplied useful evidence.

The engineer still tested it.

What Happens When Contractors Use Different Estimating Methods?

The ATG specifically warns that there can be a wide disparity in cost estimation methods among contractors.

This matters because two contractors may respond to the same request using completely different assumptions.

One might provide installed costs.

Another might provide material-only costs.

Another might include labor but exclude supervision.

Another might provide a budget estimate.

Another might use actual project records.

Those numbers cannot necessarily be compared directly.

The engineer therefore needs to understand the basis of each response.

A unit cost is only meaningful when the engineer understands what the unit cost includes.

For example:

$50 per linear foot

does not tell the full story.

The engineer needs to know whether that amount includes:

• Material
• Labor
• Installation
• Equipment
• Contractor overhead
• Other applicable costs

Without understanding the basis, the unit cost can produce a misleading allocation.

Why Does the ATG Warn About Exceeding Total Project Cost?

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

This is a fundamental reason for reconciliation.

Imagine three contractors provide cost estimates that are each reasonable in isolation.

The electrical contractor estimates:

$800,000

The plumbing contractor estimates:

$600,000

The mechanical contractor estimates:

$1,200,000

The combined amount is:

$2.6 million

But the actual total project cost for those systems is only:

$2.1 million

The difference is:

$500,000

The solution is not to accept every contractor response simply because each contractor supplied a number.

The engineer must investigate the difference.

Some costs may overlap.

Some may include different levels of indirect cost.

Some may be based on estimates rather than actual costs.

Some may include work already captured elsewhere.

The reconciliation process helps identify those issues.

Is the Survey Approach a Shortcut?

It can be more efficient than developing every cost independently.

But efficiency does not mean the approach is automatically less rigorous.

The ATG recognizes the Survey or Letter Approach as one of the common approaches to cost segregation.

The quality of the result depends on how the approach is executed.

A well-supported survey can provide useful property-specific cost information.

A poorly supported survey can create significant uncertainty.

The difference comes down to:

• What was requested
• Who provided the information
• What property was analyzed
• What the contractor's information actually represents
• Whether the source is comparable
• How the costs were applied
• Whether the results were reconciled

That is why the survey itself is not the conclusion.

It is an information-gathering tool.

How Does This Approach Compare With Actual Cost Records?

The distinction between the first three approaches in the ATG is useful.

Detailed Engineering from Actual Cost Records

Uses contemporaneous construction and accounting records as the primary cost evidence.

Detailed Engineering Cost Estimate Approach

Uses engineering estimates when actual cost records are unavailable or insufficient.

Survey or Letter Approach

Obtains property-specific cost information from contractors and subcontractors for identified assets.

The Survey or Letter Approach can therefore overlap with the other engineering approaches.

The ATG expressly says the resulting costs are then used in one of the engineering approaches or in the residual estimation approach.

That means the survey is not necessarily a completely separate universe of analysis.

It can function as a cost-information source within a larger methodology.

That is an important distinction for understanding the ATG.

What Should an Investor Ask About a Survey-Based Study?

An investor reviewing a study that relies on contractor or subcontractor surveys should be able to ask:

Who supplied the cost information?

Was it from the actual project?

Was it actual cost data or an estimate?

What specific assets were included?

What quantities were used?

What unit costs were provided?

What did the contractor's price include?

Were the costs reconciled to actual project costs?

Were different contractors using consistent assumptions?

Were any contractor estimates based on other projects?

These questions help distinguish property-specific evidence from generalized cost assumptions.

How Does This Fit Into the ATG Encyclopedia?

For the CostSegRx ATG Encyclopedia, the Survey or Letter Approach connects several important concepts.

Detailed Engineering

Provides the framework for identifying the property.

↓

Survey or Letter Approach

Obtains additional cost information from contractors and subcontractors.

↓

Unit Costs

Convert contractor information into property-specific cost allocations.

↓

Cost Reconciliation

Tests those allocations against actual project costs.

↓

Quality Study

Requires the methodology and documentation to be explained and supported.

This relationship is important because the Survey or Letter Approach should not be understood as an isolated shortcut.

It is part of the larger ATG methodology framework.

Illustrative Example

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 newly constructed commercial property has a documented electrical system cost of $1 million.

The engineer identifies several property items that require more detailed cost analysis.

Property Item	Quantity	Contractor Unit Cost	Estimated Cost
Electrical panels	20	$4,000	$80,000
Dedicated equipment connections	40	$3,000	$120,000
Branch circuit installations	200	$1,500	$300,000
Specialized electrical components	50	$2,000	$100,000
Other identified electrical items	—	—	$150,000
Subtotal			$750,000

The engineer then compares the $750,000 allocation with the actual electrical system cost.

Suppose the project records show:

Actual electrical system cost: $800,000

The $50,000 difference requires investigation.

It might represent:

• Additional indirect costs
• Unidentified electrical components
• Differences in contractor scope
• Costs not included in the survey response

The engineer investigates the difference rather than simply accepting the $750,000 figure.

That is the important part of the methodology.

The contractor supplied useful evidence.

The engineer still tested it.

Engineering Principle

Contractor Data Can Inform the Estimate. Engineering Must Still Test the Evidence.

The Survey or Letter Approach gives engineers access to valuable project-specific information.

Contractors and subcontractors may know exactly what they installed and what it cost.

But the ATG does not treat every contractor response as automatically reliable.

The engineer still needs to determine:

• What property is being analyzed
• Where the cost information came from
• Whether the data is actual or estimated
• Whether the source is comparable
• What the unit cost includes
• How the costs reconcile to the actual project
• Whether the resulting allocation is reasonable

The survey is therefore a tool for gathering evidence.

It is not a substitute for engineering judgment.

Contractor data can inform the estimate. Engineering must still test the evidence.