Construction Cost Principles & Accounting Flashcards

A contractor submits a claim for extended general conditions costs due to an owner-caused delay. The auditor should verify these costs against:

Answer: Contemporaneous daily cost records and payroll during the delay period

Extended general conditions claims must be supported by contemporaneous records showing the actual costs incurred during the delay period attributable to the owner.

In construction cost accounting, the term 'underbillings' represents:

Answer: Revenue earned but not yet billed to the client

Underbillings (costs in excess of billings) reflect revenue recognized under the percentage-of-completion method that has not yet been invoiced to the client.

Which overhead allocation base is most appropriate for a labor-intensive construction contractor whose overhead costs are primarily driven by supervision?

Answer: Direct labor hours or direct labor cost

For labor-intensive operations where overhead is driven by supervision, direct labor hours or direct labor cost is the most equitable allocation base.

A joint check agreement in construction is designed to:

Answer: Ensure subcontractors and suppliers are paid by issuing checks payable to both parties

A joint check is made payable to both the subcontractor and its material supplier, ensuring the supplier receives payment and reducing the risk of mechanic's liens.

Which of the following best describes the 'total cost method' used in construction claims?

Answer: Comparing actual total project costs to the original bid estimate as the measure of damages

The total cost method computes damages as the difference between actual total costs and the original estimated cost, though courts scrutinize it because it assumes the entire overrun is the owner's fault.

A construction auditor reviewing a cost-plus-fixed-fee contract notices that the contractor's project manager salary is allocated 100% to this contract but the manager also supervises another project. This represents:

Answer: Cost misallocation — only the portion of time spent on this contract is allowable

Costs charged to a contract must reflect actual effort; allocating 100% of a shared employee's salary to one contract when they split time is a misallocation.

Which financial ratio is most useful to a construction auditor for evaluating a contractor's ability to meet short-term obligations on a bonded project?

Answer: Current ratio

The current ratio (current assets divided by current liabilities) measures short-term liquidity and indicates whether the contractor can meet near-term financial obligations.