CCA Construction Cost Principles & Accounting 3 — Questions and Answers
Question 1: Which accounting method is most commonly used by small home builders for tax purposes because it defers income recognition?
- Percentage-of-completion method
- Completed-contract method (Correct answer)
- Cost-recovery method
- Installment sales method
Correct answer: Completed-contract method
The completed-contract method defers all revenue and expense recognition until the contract is substantially complete, providing a tax deferral benefit for qualifying small contractors.
Question 2: A bid bond guarantees that if a contractor is awarded a project, the contractor will:
- Complete the project within the agreed budget
- Enter into the contract and furnish required performance bonds (Correct answer)
- Pay all subcontractors and suppliers promptly
- Correct defects discovered within one year of completion
Correct answer: Enter into the contract and furnish required performance bonds
A bid bond ensures the contractor will execute the contract and provide performance and payment bonds if awarded the project.
Question 3: Front-loading a schedule of values inflates early payment applications by:
- Understating the cost of early work items and overstating later items
- Overstating the cost of early work items and understating later items (Correct answer)
- Evenly distributing costs across all line items
- Shifting costs to change orders rather than base contract work
Correct answer: Overstating the cost of early work items and understating later items
Front-loading assigns higher values to early-schedule line items than their actual cost, enabling the contractor to collect cash in excess of work performed early in the project.
Question 4: An auditor discovers that equipment depreciation charged to a government contract exceeds the actual cost of the equipment over the contract period. This is a violation of which cost principle?
- Reasonableness
- Allocability
- Allowability (Correct answer)
- Consistency
Correct answer: Allowability
Charging depreciation that exceeds actual equipment cost violates allowability because the government cannot be charged more than the asset's actual cost.
Question 5: The formula for calculating cost variance (CV) in earned value management is:
- Planned Value (PV) minus Actual Cost (AC)
- Earned Value (EV) minus Actual Cost (AC) (Correct answer)
- Earned Value (EV) minus Planned Value (PV)
- Actual Cost (AC) minus Budget at Completion (BAC)
Correct answer: Earned Value (EV) minus Actual Cost (AC)
Cost Variance equals Earned Value minus Actual Cost; a negative CV indicates the project is over budget.
Question 6: Which document formally authorizes a contractor to begin work on a change in scope before a change order is fully executed?
- Notice to proceed
- Construction change directive (CCD) (Correct answer)
- Request for information (RFI)
- Architect's supplemental instruction (ASI)
Correct answer: Construction change directive (CCD)
A Construction Change Directive (CCD) directs the contractor to proceed with changed work immediately while the price and time impact are still being negotiated.
Question 7: Under FAR Part 31, which of the following costs is expressly unallowable on government construction contracts?
- Reasonable wages paid to construction workers
- Entertainment costs and lobbying expenses (Correct answer)
- Depreciation on owned construction equipment
- Insurance premiums required by the contract
Correct answer: Entertainment costs and lobbying expenses
FAR Part 31 expressly identifies entertainment and lobbying costs as unallowable charges to government contracts.
CCA Construction Cost Principles & Accounting 3
Which accounting method is most commonly used by small home builders for tax purposes because it defers income recognition?