One of the things ive watched in several videos and even some books is coming up with concept designs quickly using existing images. For instance you sketch out some quick thumbnails to get a decent silhouette. Then begin to sketch out the concept image like a mech for instance. Then instead of rendering everything out in photoshop they cut images from existing machinery like shocks and control panels from inside of planes to achieve a quick result rather than rendering everything by hand. Ive read that this is used tons by artists and I was wondering how far this resulting image is taken into the pipeline. Because your taking random bits and pieces of a real image to create the image how does copyright remain ok. or are the images to stretched and butchered to have any copyright left. or is it a matter of only used as a preliminary sketch and it goes no further.

I have heard this cut and paste details phase is used often but when I look at most concept art on the web it does not look like a copy and paste job. most of it seems fully rendered in photoshop.

I don't think concept art could infringe copyrights. As long as the final work is original you can use things you found to make some prototypes.

Maybe you don't find copy pasted concept art because noone cares to share them. It's probably better for a company to share some concept art of something really original than a quick and dirty character made stretching a Mario image. Also, concept art and prototypes are usually private and most companies have a confidenciality policy that prevent them to be leaked to the public, or any other company could steal the idea.

This kind of thing isn't 'finished' concept art, it's technically a collage. Generally they are used by a non-artist to show a basic idea to an artist who will draw a proper concept art. So no it doesn't go very far down the pipeline.

Because your taking random bits and pieces of a real image to create the image how does copyright remain ok.

If you take it with a grain of salt, then it would most likely be copyright infringement (it is derived work). If it is copyright infringement, then the question is, does it hurt the copyright owner rights enough to file in a law suit ?

Some rule of thumbs for copyright infringements:

1. Is cash involved, either by gaining a profit when selling the derived material or by profit loss on sides of the copyright owner ?

2. Is the material used to break some laws ?

3. Is there the danger of hurting the copyrights owner reputation/image ?

4. Is it a well-known brand ?

5. Does someone just seek to make a quick coin by settling this copyright infringement case out of court ?

Eventually it depends on the copyright owner. As long as he doesn't release his work with an according license (eg CC), then using it this way is dangerous, once the copyright owner get aware of it. Showing this in a internal meeting to show of some quick concept bears less risk then posting it on facebook...

If we are talking about adding all the small details to technical (or other) objects in images and 3D Models:

Apparently this is used quite often, in movies, 3D CGI and most probably also by 2D artists. What images or models they use to "kitbash" IDK, though you will find multiple blogs and tutorials dedicated to it on the web (example for 3D CGI: http://www.creativebloq.com/3d/how-model-3d-spaceship-11135144)

There is even a specific name for that, though I cannot remember it at the moment (grime? grebles? something with a G at the beginning I think )

I GUESS if its going to be a production image used for a large scale public, the artists will be most probably quite selective what images they use (open source ones), or even go with buoght resources (there are many kitbash model kits for 3D available, I guess similar things also exist for 2D Kitbashing)

If we are talking about quick image kitbashing for rough concepts, others have answered the question better than I ever could. Only thing to add is: if its an internal concept not shown to anyone outside of the company or group, IP doesn't matter that much. If its shown to investors or other people outside the company, you need be more concerned.

Never ever use it in imagery released to the public... might NOT be punished by the original IP holder, it still is an infringement and will not paint you as artist or developer in a positive light.

Feng Zhu uses and talks about the technique in his video.

When he uses larger pieces that could be recognizable in the final concept handed off to a client, such as a specific background a character needs to fit in, he will either use a photograph he took himself or given to him by his client to avoid any copyright issues.

When used to create small details or textures these photos are generally layered, manipulated and painted over to such an extent that they are no longer recognizable by the original photographer and pose little problem.