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Why Project Value on Building Permit Applications Matter

For many contractors, the obvious answer is that the price of the permit increases as the value of the project increases. This creates a temptation to err on the side of undervaluing the project to save money on the permit fee.

There is little upside for the contractor to undervalue the project on the permit. The permit fee is the owner's responsibility. The owner knows the price of the contract and assumes the project is worth the price. If the contractor misrepresents the value on the application, the owner might believe that a contractor who is less than honest about the project value may be untrustworthy in other areas of the project. It may also send a message to the owner that the contractor will try to get away with other things, like building code compliance.

So how is a building permit priced, and how is the project valued? The number reported by an applicant when applying for a building permit is considered by building officials to be only an estimate of the value of the work being performed. The value on which the fee is based may change from the value stated in the application if, in the building official's opinion, the project adds a different amount to the value of the home than the amount estimated on the application.

In most circumstances, contractors use the contract amount as the value of the project. A building official has the authority to decide that the contract price is not an accurate representation of the value of the project. When estimating the value on the application, the Minnesota rule requires that the total value of all construction work be included. While there are exceptions to work requiring a permit, the rule is clear that where a permit is required, the value must be inclusive of all work performed and is not limited to the phases of the project that require permitting or inspection.

The Minnesota rule does not define 'value,' but the common definition is the price that two reasonable parties, in an arm's length transaction, would agree to sell and buy the good or service. The value is not the contractor's cost, and it is not necessarily a 'retail' price. Where homeowners use their costs to value a permit they pull, building officials commonly double the cost to determine the value.

The price a general contractor and its customer agreed to in the contract is evidence of the value each places on the work. The only number that indisputably represents the value of the project is the contract price agreed to by the contractor and its customer.

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