SCOPE OF WORK A CANADIAN PERSPECTIVE

Scope of Work; A Canadian Perspective ____________________________________

John Clark, AACI, P.App, Fellow

Wayne Kipp, AACI, P.App, Fellow

This Guide was produced as supplementary notes to the textbook for this workshop: Scope of Work By Stephanie Coleman, MAI, SRA © 2006 by the Appraisal Institute, an Illinois not for profit corporation. All rights reserved. No part of this publication may be reproduced, modified, rewritten, or distributed, either electronically or by any other means, without the express written permission of the Appraisal Institute. This Guide is intended to provide Canadian context to the above resource.

Appraisal Institute of Canada 403 – 200 Catherine Street

Ottawa ON K2P 2K9 www.aicanada.ca

Table of Contents Background on USPAP and CUSPAP ...................................... 1 Scope of Work in The Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) .............................. 4 Conclusion............................................................................... 17

Foreword Real Property can be complex. Owners and investors in property frequently need advice and information, and appraisers are usually in the best position to provide this service. The reasons why owners or investors need advice can range from needs that are simple, or can become very complex. Any property can represent a potential assignment for an appraiser where the work required to reasonably answer a client’s needs can vary greatly. Due diligence in any assignment can extend along a continuum. The purpose of this Guide is to assist Canadian appraisers in understanding the flexibility in the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Any property and any client may present a situation to an appraiser where the intended use of a report can result in an assignment that is relatively simple, very complex, or anything in between. Hopefully, this Guide will give appraisers in Canada information on how to reasonably answer client needs and in the process differentiate types of assignments in relation to the complexity of the property and the complexity of the intended use of the report that results from an assignment.

John Clark, AACI, P.App Wayne Kipp, AACI, P.App

Authors

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Background on USPAP and CUSPAP

he Canadian Uniform Standards of' Professional Appraisal Practice (CUSPAP) evolved from USPAP, a document that listed a series of "musts" for the appraiser to apply in the appraisal/review/consulting processes, to one that emphasizes the appraiser's application of sound

judgment in solving the problem at hand. Among other things, CUSPAP stresses that, to arrive at a credible solution, the practitioner must properly identify the problem to be solved, identify the appropriate way to solve it, and competently apply the solution. The ability to make these judgments is the hallmark of a true professional.

Earlier when the Appraisal Institute of Canada adopted USPAP as the standard for appraisal work in Canada exceptions were managed through the Departure Rule (originally called the Departure Provision). The creators of USPAP saw the need to allow exceptions to the rules they set forth when such exceptions were reasonable and appropriate. When the Appraisal Institute of Canada developed and adopted (in 2001) the Canadian Uniform Standards of Professional Practice (CUSPAP), exceptions to rules were enabled by the Extraordinary Limiting Condition (ELC).

The ELC was intended to be the primary mechanism for flexibility in CUSPAP. It allowed appraisers to do something less than the work required by certain standards rules, as long as doing less did not yield assignment results that weren't credible, and as long as appropriate disclosures were made regarding the exceptions. Scope of work was introduced into Appraisal Institute of Canada Standards in 2001. Similar wording was incorporated in the United States appraisal standards, USPAP in 1999. Before only being complete or limited varied the appraisal development process, depending on whether the appraiser invoked a Departure Rule Scope of work is a primary mechanism, along with Extraordinary Limiting Condition, for flexibility in CUSPAP. It provides the flexibility to perform a variety of appraisal services and describes how those services can be performed without compromising objectivity and impartiality.

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Scope of Work and Extraordinary Limiting Conditions are two components within CUSPAP, with Scope of Work having been incorporated into the Standards after the Appraisal Foundation, the Washington D.C. based creator of USPAP, made a major change to that Standard by eliminating the Departure Provision and creating a comprehensive Scope of Work rule. CUSPAP, created by the Appraisal Institute of Canada, came into effect on January 1, 2001, and there have been no major changes to these Standards since inception. CUSPAP provides for Extraordinary Limiting Conditions in each of the practice standards (Appraisal, Review and Consulting). Each of these practice standards also contains a rule regarding Scope of Work. Scope of Work is one of the Standard Rules (see Section 6.2.4 as an example). An Extraordinary Limiting Condition is defined below, but it must be noted that it is different and distinct from Scope of Work. The following are found in the Definitions section (Section 2.0) of CUSPAP:

2.25 EXTRAORDINARY LIMITING CONDITION: a necessary modification or exclusion of a Standard Rule. May diminish the reliability of the report. 2.50 SCOPE OF WORK: the type and extent of research and analysis in an assignment. Scope of work includes, but is not limited to, the following:

• the degree to which the property is inspected or identified; • the extent of research into physical or economic factors that could affect the

property; • the extent of data research; and • the type and extent of analysis applied to arrive at opinions or conclusions.

Using the Appraisal Standard as an example, the Scope of Work rule is:

In the report, the appraiser must identify the scope of work necessary to complete the assignment (Rule 6.2.4).

The following clauses are found in the Appraisal Standards – Comments section of CUSPAP (Comments are mandatory as are the rules)

7.5 Scope of Work

7.5.1 The amount and type of information researched and analysis applied. Scope includes, but is not limited to, the extent of:

7.5.1.i. inspection 7.5.1.ii. research into physical and economic factors that could affect the

property

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7.5.1.iii. data research, verification, and inspection of comparables 7.5.1.iv. analysis applied 7.5.2 The scope of work applied must be sufficient to result in

opinions/conclusions that are credible in the context of the intended use of the appraisal. The appraiser has the burden of proof to support the scope of work decision and the level of information included in a report.

It can be seen by the above that the Scope of Work, which must be in every report (Appraisal, Review or Consulting) and it must be unique to that report. This does not mean that the Scope of Work does not vary from assignment to assignment. Rather, the Scope of Work must be sufficient in relation to the intended use of the report so that the appraiser is impartial, objective and independent; that the results of the assignment are credible; and that the contents of the report are sufficient so that the intended user will not be mislead. ElC’s are about whether a Standard Rule is excluded, while Scope of Work is about the extent to which research is undertaken in relation to each of the rules.

Illustrations and examples are presented to demonstrate ways in which appraisers can apply the scope of work concept and communicate it effectively in a report. This guide examines the structure of CUSPAP and the way in which scope of work applies within the rules for each of the three practice standards. It also addresses the range of services that a real property appraiser can offer and the practical application of scope of work in a variety of appraisal assignments. The overall objective of Scope of Work is to help appraisers customize their work products and provide their clients with services that meet their needs. The Standards themselves are continuously being revised by the AIC Standards Committee, which maintains direct communication with the Appraisal Standards Board in the United States where in that country USPAP is the standard for practice. Annual communications providing new definitions of terms or detailed explanations about recent revisions to CUSPAP are made available to members, who must remain alert for these updates. Readers are also cautioned to remain aware of the laws governing the activities of appraisers in the province or provinces in which they practice. Some provinces have their own appraisal regulatory legislation.

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Scope of Work in The Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP)

he following provides a Canadian perspective on topics addressed in Chapter Three, Scope of Work, (Chicago: Appraisal Institute, 2006).

The term scope is defined in the ITP Nelson Canadian Dictionary of the English Language as follows:

Scope (sköp) n. 1. The range of one’s perceptions, thoughts, or actions. 2. Breadth or opportunity to function. 3. The area covered by a given activity or subject. 4. The length or sweep of a mooring cable. 5. Informal. A viewing instrument such as a periscope, microscope,

or telescope. [Italian scopo, aim, purpose, from Greek skopos, target, aim. See spek- in Indo-European Roots.]

When the term scope of work was first introduced in the United States, it was only with regard to the appraisal of real property. Subsequently, the phrase was inserted into all the other development standards, including appraisal review and appraisal consulting. In CUSPAP, Scope of Work has been one of the rules for the Appraisal Standard, the Review Standard and the Consulting Standard since inception of the document. To better understand how scope functions as a flexibility mechanism, it is important to examine CUSPAP to see where and how the phrase is used.

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Definition CUSPAP’s definitions section (Section 2.0) includes the following entry:

2.49 SCOPE OF WORK: the type and extent of research and analysis in an assignment.

The Scope of Work definition elaborates further: Scope of work includes, but is not limited to the following:

• the degree to which the property is inspected or identified; • the extent of research into physical or economic factors that could

affect the property; • the extent of data research; and • the type and extent of analysis applied to arrive at opinions or

conclusions.

To understand the application of Scope of Work throughout CUSPAP, understanding the concept is critical. As Stephanie Coleman describes it1;

Scope of Work begins with a definition of scope of work. We must remember that the appraiser must be prepared to demonstrate that the scope of work is sufficient to produce credible or duly founded assignment results, which require support by relevant evidence and logic, and that the result is always measured in the context of the intended use. In understanding the requirements, Scope of Work generally involves consideration of three concepts:

• Problem Identification • Scope of Work Acceptability • Disclosure Obligations

Scope of Work in the Appraisal Standard Let’s examine the Appraisal Standard Rules, which sets forth the requirements for developing and reporting a real property appraisal. Included in the 27 rules are ones dealing with the problem solution.

1 Reprinted with permission from Stephanie Coleman, MAI, SRA, Scope of Work (Chicago: Appraisal Institute, 2006).

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6.2.3 states: "In the report, the appraiser must identify the purpose of the assignment, . . .";

6.2.4 states, "In the report, the appraiser must identify the scope of work necessary to complete the assignment";

6.2.14 states, "In the report, the appraiser must define and resolve the highest and best use";

6.2.16 states, "In the report, the appraiser must describe and apply the appraisal procedures relevant to the assignment."

These rules succinctly summarize the steps to solving the appraisal problem: Note also how the goal of the appraisal process is a “credible appraisal.” This is covered more in the next chapter. The phrase “scope of work” is specifically found in Appraisal Standard Rule section 6.2.4. Comments section (7.5) provides greater detail. CUSPAP Section 7.5.1. The amount and type of information

researched and analysis applied. Scope includes but is not limited to the extent of:

CUSPAP Section 7.5.1.i inspection CUSPAP Section 7.5.1.ii research into physical and economic factors

that could affect the property CUSPAP Section 7.5.1.iii data research, verification and inspection of

comparables CUSPAP Section 7.5.1.iv analysis applied

The next section summarizes the intent: CUSPAP Section 7.5.2 The scope of work applied must be

sufficient to result in opinions/conclusions that are credible in the context of the intended use of the appraisal. The appraiser has the burden of proof to support the scope of work decision and the level of information included in a report.

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Scope of Work in the Review Standard (Sections 8. and 9. of CUSPAP) The first sentence in the Preamble underscores the importance of scope of work in the process of developing an appraisal review opinion and the importance of disclosing the scope of work in the appraisal review report: CUSPAP Section 8.1.1 In performing an appraisal review assignment, an appraiser acting as a reviewer must develop and report a credible opinion as to the quality of another appraiser’s work and must clearly disclose the scope of work performed in the review assignment. The requirement to determine the scope of work appropriate for the assignment is addressed in the Review Standard Rules. Review Standard Rule 8.2.6 "In the report, the review appraiser must identify the scope of work of the review process that was conducted." In completing an appraisal review, the reviewer must determine the scope of work necessary to produce credible assignment results. The reviewer’s scope of work should not be confused with the appraiser’s scope of work. The reviewer’s scope of work is the problem-solving process of the reviewer, or what the reviewer would do to answer the question about the quality of the work done by the appraiser. In the appraisal review process there are myriad ways to adjust the scope of work. For example, the reviewer’s scope might be limited to simply checking the math in the work under review. Or, it might include the development of the reviewer’s own opinion of value. If the reviewer develops his or her own opinion of value, the scope involved may or may not include additional research into market data, an inspection of the subject property, or a reanalysis of highest and best use, or not. In this situation, the reviewer/appraiser must develop a scope of work that covers both the review and the appraisal activities. CUSPAP permits the results of the review and a separate opinion of value to be included in one report. It is therefore necessary to be aware of the scope of work requirements in both the Appraisal Standard and the Review Standard. The phrase “scope of work” is found in Review Standard Rule 8.2.8. CUSPAP Section 8.2.8 In the report, the review appraiser must provide an opinion as to the completeness of the report under review within the scope of work applicable in the review assignment. While scope of work is not specifically mentioned, these rules are also relevant:

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CUSPAP Section 8.2.9 In the report, the review appraiser must

provide an opinion as to the apparent adequacy and relevance of the data and the propriety of any adjustments to the data;

CUSPAP Section 8.2.10 In the report, the review appraiser must provide an opinion as to the appropriateness and proper application of the appraisal methods and techniques used;

CUSPAP Section 8.2.11 In the report, the review appraiser must provide an opinion as to whether the analyses, opinions and conclusions in the report under review are appropriate and reasonable;

CUSPAP Section 8.2.12 In the report, the review appraiser must provide the reasons developed for any disagreement or agreement with the appraisal report being reviewed.

The degree to which Rules 8.2.8, 8.2.9, 8.2.10, 8.2.11 and 8.2.12 are applicable depends entirely on the reviewer’s scope of work. For example, the reviewer’s scope might (or might not) include an independent search for market data and analysis of that data. The applicability of the rules will also depend on what is being reviewed. Clearly, if the subject of the review is only a portion of an appraisal report, the reviewer will develop these opinions with regard to just that portion. Scope of Work in the Consulting Standard The rules for the standard address the three steps to problem solving. CUSPAP Section 10.2.3 In the report, the consultant must identify

the purpose of the consultation; CUSPAP Section 10.2.7 In the report, the consultant must identify

the scope of work and the extent of the data collection process;

CUSPAP Section 10.2.10 In the report, the consultant must collect, verify, reconcile and report all pertinent data as may be required to complete the consulting service;

CUSPAP Section 10.2.11 In the report, the consultant must describe and apply the consulting procedures relevant to the assignment;

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CUSPAP Section 10.2.12 In the report, the consultant must detail the reasoning that supports the analyses, opinions and conclusions.

Likewise, Consulting Standard Rule 10.2.7 is similar to Appraisal Standard Rule 6.2.4 and Review Standard Rule 8.2.6, requiring the determination of the correct scope of work for the assignment. It can be seen by the above that the Scope of Work must be in every report (Appraisal, Review or Consulting) and it must be unique to that report. CUSPAP provides for Extraordinary Limiting Conditions in each of the practise standards (Appraisal, Review and Consulting). Each of these practise standards also contains a rule regarding Scope of Work. Scope of Work is one of the Standard Rules (see Section 6.2.4 as an example). An Extraordinary Limiting Condition is defined below, but it must be noted that it is different and distinct from Scope of Work. Scope of work along with Extraordinary Limiting Condition, is critical for flexibility in CUSPAP. Extraordinary Limiting Conditions Extraordinary Limiting Conditions (ELC), as separate from Scope of Work, is a less frequently used tool, where an appraiser modifies or excludes one of the Standard Rules. ELC’s cannot be applied to some rules within the practise standards. In that regard, the word “necessary” is germane. While not specifically stated, it would be inappropriate (i.e., unnecessary) to use an ELC to opt out of including a Scope of Work section in any report. Section 7.11.3 states: “Extraordinary Limiting Condition refers to a necessary modification or exclusion of a Standard Rule. The burden is on the appraiser to explain and justify such necessity in the report, and to conclude before accepting an assignment and invoking an Extraordinary Limiting Condition that the scope of work applied will result in opinions/conclusions that are credible.” Typically, ELC’s are used sparingly, if at all in an appraisal report. They are used where a complete inspection of the subject property could not be made, for example. Other examples are where there was no subject property title search or where one of the usual valuation approaches is not undertaken. The Practice Notes (12.32) explain. Certain conditions are unacceptable in any assignment where they:

• compromise an appraiser’s impartiality, objectivity or independence;

• limit the scope of work to such a degree that the results are not credible given the purpose of the assignment and the intended use of the results;

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• limit the contents of a report that results in the report being misleading.

It is therefore unacceptable to use an ELC if any of the above would result from such use. This does not mean that the Scope of Work does not vary from assignment to assignment. Rather, the Scope of Work must be sufficient in relation to the intended use of the report so that the appraiser is impartial, objective and independent; that the results of the assignment are credible; and that the contents of the report are sufficient so that the intended user will not be mislead. ELC’s are about whether a Standard Rule is excluded, while Scope of Work is about the extent to which research is undertaken in relation to each of the rules. USPAP and CUSPAP alike recognize that identification of the scope of work is an essential activity in any development of an opinion of value.

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The following provides a Canadian perspective on topics addressed in Chapters Four through Seven, Scope of Work, (Chicago: Appraisal Institute, 2006).

Credibility Problem Identification Scope Determination Scope Disclosure

Credibility The concept of credibility is as key to CUSPAP as it is to USPAP. The Preamble to the Appraisal Standard (6.1.1) reads as follows (note the wording to the Review and Consulting standards is either identical or very similar): CUSPAP 6.1.1 “This Standard deals with the procedures for the development and communication of a formal opinion of value, and incorporates the minimum content necessary to produce a credible report that will not be misleading.” In other words, a report and the conclusions of it must be "credible" or duly-founded. The foundation of an opinion must be reasonable, and supported by relevant evidence and logic. Practice Notes found in CUSPAP provide further guidance:

CUSPAP Section: 12.17.1 refers to the due diligence undertaken by the appraiser including the terms of reference from the client. NOTE: The Scope Section of the report should reflect the circumstances of each particular assignment. An appraiser must have sound reasons to support the scope of work decisions, and must be prepared to support the decision to exclude any information or procedure that would appear to be relevant to the client, an intended user or the “reasonable appraiser”. Problem Identification The critical task of problem identification is addressed in CUSPAP’s rules for each of the Standards, including a Scope of Work rule for each. These rules apply to any assignment (appraisal, appraisal review, or consulting).2

2 The Extraordinary Limiting Condition provision is not applicable to these rules (subject to the details contained in the Comments), therefore an appraiser would most

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Within the rules there are sections on problem identification. For example, in the Appraisal Standard: The assignment elements necessary for problem identification are addressed in the applicable standards rules (i.e., 6.2, 8.2 and 10.2). In an appraisal assignment, for example, identification of the problem to be solved requires the appraiser to identify the following assignment elements: In the report, the appraiser must: CUSPAP Section 6.2.1 identify the client and any other

intended users; CUSPAP Section 6.2.2 identify the intended use of the

appraiser’s opinions and conclusions;

CUSPAP Section 6.2.3 identify the purpose of the assignment, including a relevant definition of value;

CUSPAP Section 6.2.5 identify whether the appraisal is current, retrospective, prospective or an update;

CUSPAP Section 6.2.7 identify the effective date of the appraiser’s opinions and conclusions;

CUSPAP Section 6.2.9 identify the location and characteristics of the property and the interest appraised;

CUSPAP Section 6.2.10 identify all assumptions and limiting conditions;

CUSPAP Section 6.2.11 identify any hypothetical conditions (including proposed improvements).

Also, pursuant to 3.6, any Jurisdictional Exceptions must be identified and explained. An understanding of the term assignment is also important to success in problem identification. CUSPAP’s definition section includes the following entry: likely have to refuse an assignment in which one or more of these parameters is not known, or if the client will not reveal enough information for them to be known.

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CUSPAP Section 2.11 ASSIGNMENT: an appraisal, consulting or review service provided

as a consequence of an agreement between an appraiser and client.

Other critical definitions with respect to the understanding of assignment as CUSPAP explains it: Client CUSPAP Section: 2.15

CLIENT: the party or parties who engage an appraiser in a specific assignment.

Note: The client identified by the appraiser in an appraisal, appraisal review, or

consulting assignment is the party or parties with whom the appraiser has an appraiser-client relationship in the related assignment, and may be an individual, group, or entity.

Intended Users CUSPAP Section: 2.32 INTENDED USER: the client and any other party as identified, by name

or type, as users of the appraisal, consulting or review report, by the appraiser based on communication with the client at the time of the assignment.

Intended Use CUSPAP Section: 2.31 INTENDED USE: the use or uses of an appraiser’s reported appraisal,

consulting or review assignment opinions and conclusions, as identified by the appraiser based on communication with the client at the time of the assignment.

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EXTRAORDINARY ASSUMPTION: an assumption, directly related to a specific assignment,

which, if found to be false, could alter the appraiser’s opinions or conclusions.

Comment: Extraordinary assumptions presume as fact otherwise

uncertain information about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.

CUSPAP Section: 2.28 HYPOTHETICAL CONDITION: that which is contrary to what exists, but is supposed for

the purpose of analysis. Comment: Hypothetical conditions assume conditions contrary to

known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.

CUSPAP Section: 2.34 JURISDICTIONAL EXCEPTION:

permits the appraiser to disregard a part or parts of these Standards (i.e., CUSPAP) that are determined to be contrary to law or public policy in a given jurisdiction and only that part shall be void and of no force or effect in that jurisdiction.

Jurisdictional exceptions arise because the assignment is subject to law or public policy, and that law or public policy contradicts a part of CUSPAP. That is, the law or public policy requires X, but CUSPAP requires Y, and X and Y are polar opposites. In such a case, the law or public policy effectively trumps CUSPAP—but only with regard to the conflicting requirement. The rest of CUSPAP remains intact and applicable to that assignment. Scope Determination Tell the client what you propose to do, anticipated research, and the level of detail to which the results of the assignment will be reported. In other words, a work plan needs to be developed and communicated to the client in advance of the assignment being started. Reporting to the client should include a statement on the Scope of Work that was proposed, and the results that were able to be achieved.

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Reasonable Appraiser is another defined term in CUSPAP. CUSPAP Section 2.45: Reasonable Appraiser: one who maintains a level of performance that would be acceptable to the professional practice peer group. Elaboration is found at CUSPAP Section 5.5.2 if reasonable appraisers conclude that there is no rational foundation for an analysis or opinion, then such analysis or opinion would not be justified. The rule in the Ethics Standard (Rule 4.2.5) reads, it is unethical for a member to knowingly complete an assignment that reasonable appraisers could not support. The ultimate test of credibility is therefore whether the appraiser’s opinions and conclusions are found to be credible by his or her peers. Similarly, one of the tests of whether the scope of work decision is appropriate is what one’s peers’ actions would be in a similar assignment. The appraiser must be able (competent) to recognize what it takes to produce credible assignment results. Scope Disclosure

Guidance on Scope Disclosure in CUSPAP is found in The Appraisal Standard Scope of Work rule, comment and practice notes:

Appraisal Standard Rules

CUSPAP Section 6.2.4: In a report an appraiser must identify the scope of work necessary to complete the assignment;

Appraisal Standard Comments

CUSPAP Section 7.5 Scope of Work

CUSPAP Section 7.5.1 The amount and type of information researched and analysis applied. Scope includes, but is not limited to, the extent of:

CUSPAP Section 7.5.1.i. inspection

CUSPAP Section 7.5.1.ii. research into physical and economic factors that could affect the property [see 7.16]

CUSPAP Section 7.5.1.iii. data research, verification, and inspection of comparables

CUSPAP Section 7.5.1.iv. analysis applied

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CUSPAP Section 7.5.2 The scope of work applied must be sufficient to result in opinions/conclusions that are credible in the context of the intended use of the appraisal. The appraiser has the burden of proof to support the scope of work decision and the level of information included in a report.

Practice Notes

CUSPAP Section 12.17 Scope of Work

CUSPAP Section 12.17.1 Refers to the due diligence undertaken by the appraiser including the terms of reference from the client (see Box 12.17.1).

NOTE: The Scope Section of the report should reflect the circumstances of each particular assignment. An appraiser must have sound reasons to support the scope of work decisions, and must be prepared to support the decision to exclude any information or procedure that would appear to be relevant to the client, an intended user or the “reasonable appraiser”.

Reporting Requirements Section 6 of CUSPAP sets out the 27 elements that must be considered and/or included in an appraisal report.

Chapters 8 and Nine

The sample scope of work discussions and assignment examples are easily adapted to application of CUSPAP.

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Conclusion Stephanie Coleman says it best:

Scope of work gives appraisers the ability to customize assignments in order to better serve their clients. In an ever-changing business environment, and an expanding global economy, such flexibility is increasingly important. Scope of work allows appraisers to expand their range of services beyond the traditional ones and opens doors to new opportunities.3

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3 Reprinted with permission from Stephanie Coleman, MAI, SRA, Scope of Work (Chicago: Appraisal Institute, 2006).