It calculates which files it needs to download, copy over or replace. It calculates which files are modified and allocates space for them. Now, when Steam gets to know that there is an update available for any of your games, it compares the new manifest against that which is already present on your computer. If it is something entirely new, it divides them into new chunks. When any update is released, Steam analyzes the update and calculates how it can make the files out of chunks that are already saved in its database. For each game available, there is a manifest available which tells how to assemble these chunks into the game files. Every game present on Steam is broken down into chunks of around 1MB in size.
