CCA Construction Contract Types and Risk Management 3 — Questions and Answers
Question 1: When auditing a unit price contract, which risk is most important to monitor as the project progresses?
- Contractor overhead recovery
- Quantity overruns that significantly increase the total contract value (Correct answer)
- Design completeness at bid time
- Owner-furnished equipment delivery
Correct answer: Quantity overruns that significantly increase the total contract value
Unit price contracts pay per unit of work completed, so quantity overruns can drive total project cost far above the engineer's estimate, creating budget exposure for the owner.
Question 2: Under the Spearin Doctrine, an owner who provides defective plans and specifications to a contractor is responsible for:
- Paying the contractor's home office overhead
- Losses resulting from contractor reliance on those defective documents (Correct answer)
- All change orders regardless of cause
- Extended warranty obligations
Correct answer: Losses resulting from contractor reliance on those defective documents
The Spearin Doctrine holds that when an owner supplies design documents, it impliedly warrants their adequacy, making the owner liable for damages caused by defects in those documents.
Question 3: In a Construction Manager at Risk (CMAR) contract, the construction manager typically provides a Guaranteed Maximum Price at which project phase?
- Project inception
- Completion of design development or construction documents (Correct answer)
- After the first subcontractor bid is received
- During the punch list phase
Correct answer: Completion of design development or construction documents
The CM at Risk typically provides a GMP once design is sufficiently complete (usually at 60-100% construction documents) to accurately price the work.
Question 4: Which insurance type protects an owner against losses arising from contractor-caused property damage during construction?
- Professional liability insurance
- Builder's risk insurance (Course of Construction)
- Contractor's general liability insurance (Correct answer)
- Surety performance bond
Correct answer: Contractor's general liability insurance
Commercial general liability insurance covers third-party bodily injury and property damage caused by the contractor's operations, protecting the owner from those claims.
Question 5: What is the purpose of a liquidated damages (LD) clause in a construction contract?
- Penalize contractors for poor workmanship
- Pre-establish the daily monetary damages for late project completion (Correct answer)
- Allow the owner to terminate the contract without cause
- Require the contractor to post additional bonding
Correct answer: Pre-establish the daily monetary damages for late project completion
Liquidated damages clauses establish a predetermined daily rate for late delivery, avoiding the difficulty of proving actual damages from project delays.
Question 6: A construction auditor reviewing contract modifications should verify that all change orders include which critical elements?
- Subcontractor signature, tax ID, and insurance certificate
- Scope description, cost impact, schedule impact, and proper authorization signatures (Correct answer)
- Architect's seal, building permit number, and inspection report
- Owner's financing approval and lien waiver
Correct answer: Scope description, cost impact, schedule impact, and proper authorization signatures
Valid change orders must document what work changed, how much it costs, how it affects the schedule, and be signed by authorized parties to be enforceable.
Question 7: Which risk allocation strategy involves transferring a specific project risk to the party best able to control or manage it?
- Risk avoidance
- Risk retention
- Optimal risk allocation (Correct answer)
- Risk pooling
Correct answer: Optimal risk allocation
Optimal risk allocation assigns each risk to the party with the most control, knowledge, and capacity to manage it, resulting in the lowest overall project cost.
CCA Construction Contract Types and Risk Management 3
When auditing a unit price contract, which risk is most important to monitor as the project progresses?