CBC CBC Financial Management & Estimating 2 — Questions and Answers
Question 1: Retainage in a construction contract is best described as:
- A fee paid to the architect for inspections
- A percentage of each payment withheld until project completion (Correct answer)
- Interest charged on late invoices
- The contractor's profit set aside in escrow
Correct answer: A percentage of each payment withheld until project completion
Retainage is typically 5–10% of each progress payment withheld by the owner as security against incomplete or defective work.
Question 2: Which financial statement shows a contractor's assets, liabilities, and net worth at a specific point in time?
- Income statement
- Cash flow statement
- Balance sheet (Correct answer)
- Work-in-progress schedule
Correct answer: Balance sheet
The balance sheet provides a snapshot of the company's financial position by listing what it owns (assets), owes (liabilities), and the owner's equity.
Question 3: A contractor submits a 'Pay Application.' What document typically accompanies it to support the amounts billed?
- A certified payroll report
- A lien waiver and updated Schedule of Values (Correct answer)
- An OSHA 300 log
- A surety bond renewal
Correct answer: A lien waiver and updated Schedule of Values
Pay applications are supported by an updated Schedule of Values showing percent complete per line item and often conditional lien waivers for amounts being billed.
Question 4: What is 'over-billing' (overbilling) in construction accounting?
- Charging more than the contract price
- Billing for more work than has actually been completed (Correct answer)
- Adding markup above the agreed percentage
- Issuing invoices before subcontractors are paid
Correct answer: Billing for more work than has actually been completed
Overbilling occurs when a contractor invoices for a higher percentage of completion than has actually been achieved, creating a liability on the balance sheet.
Question 5: Which cost is considered a 'direct cost' on a construction project?
- Company vehicle insurance
- Project manager's cell phone bill
- Concrete materials installed on the job (Correct answer)
- Marketing and advertising expenses
Correct answer: Concrete materials installed on the job
Direct costs are expenses directly attributable to a specific project, such as labor, materials, and equipment used on that job.
Question 6: What does a contractor's 'profit margin' represent?
- Total revenue minus overhead costs only
- Net profit as a percentage of total revenue (Correct answer)
- The markup percentage applied to subcontractors
- Retainage withheld on a given project
Correct answer: Net profit as a percentage of total revenue
Profit margin is calculated by dividing net profit by total revenue and expressing the result as a percentage, indicating overall profitability.
CBC CBC Financial Management & Estimating 2
Retainage in a construction contract is best described as: