Construction Project Financing and Capital Structure Flashcards

Retainage in construction contracts is typically released when:

Answer: Substantial completion or final completion is achieved

Retainage (typically 5–10% withheld from each payment) is released upon substantial or final completion and owner acceptance.

Which type of bond guarantees that a construction contractor will complete the project according to contract terms?

Answer: Performance bond

A performance bond protects the project owner by guaranteeing the surety will complete the project if the contractor defaults.

Under the percentage-of-completion method, contract revenue is recognized based on:

Answer: Costs incurred to date divided by total estimated costs

Revenue is recognized proportionally as the ratio of costs incurred to total estimated contract costs, reflecting work actually performed.

A contractor with negative working capital may signal which risk to lenders and sureties?

Answer: Inability to meet short-term obligations

Negative working capital (current liabilities > current assets) indicates the contractor may struggle to pay suppliers, subcontractors, and short-term debts.

In construction project financing, a 'completion guarantee' is typically provided by:

Answer: The general contractor to the lender

A completion guarantee is a contractor's assurance to the lender that the project will be completed regardless of cost overruns, protecting the lender's collateral.

What is the purpose of a joint check agreement in construction financing?

Answer: To ensure payment is made jointly to the contractor and subcontractor/supplier

A joint check agreement directs the owner to make payment checks payable to both the GC and sub/supplier, ensuring funds reach lower-tier parties.