Construction Cost Principles & Accounting Flashcards

A contractor uses an equipment rate that includes both ownership and operating costs. Which cost component should NOT be included in the ownership cost rate?

Answer: Fuel and lubricants

Fuel and lubricants are operating costs, not ownership costs; ownership costs cover depreciation, insurance, taxes, and major repairs.

When reviewing a contractor's overhead rate, an auditor finds personal automobile expenses included in the G&A pool charged to a cost-plus project. The correct audit response is to:

Answer: Disallow the personal portion and recommend a credit to the contract

Personal automobile expenses that are not for legitimate business purposes are unallowable and must be removed from the overhead pool with a corresponding credit to the contract.

The Schedule Performance Index (SPI) is calculated as:

Answer: Earned Value divided by Planned Value

SPI = EV / PV; an SPI below 1.0 indicates the project is behind schedule relative to the baseline plan.

Retainage withheld by an owner on a progress payment is best described as:

Answer: A portion of earned funds held as security for project completion

Retainage is a percentage of each progress payment withheld by the owner as security to ensure the contractor completes the work and corrects deficiencies.

Which internal control best prevents duplicate payments to subcontractors on a large construction project?

Answer: Matching each invoice to a unique purchase order and lien waiver before payment

Matching invoices to unique purchase orders and lien waivers prevents the same invoice from being paid twice and confirms the payment extinguishes the lien risk.

A construction auditor identifies that labor hours reported on daily field reports are consistently lower than hours charged to the job cost system. This discrepancy most likely indicates:

Answer: Labor cost misallocation or time card fraud

A persistent gap between field-reported hours and job cost hours suggests employees may be clocking more time than worked, a classic indicator of time card fraud.

Which method of inventory valuation, when prices are rising, results in the lowest reported net income for a construction materials supplier?

Answer: LIFO (Last-In, First-Out)

LIFO assigns the most recent (highest) costs to cost of goods sold first, resulting in lower net income when prices are rising compared to FIFO or weighted average.