Construction Project Financing and Capital Structure Flashcards

Which financial document is most critical for a construction company seeking a surety bond?

Answer: CPA-prepared financial statements (reviewed or audited)

Sureties require CPA-prepared reviewed or audited financial statements to assess the contractor's financial strength and bonding capacity.

The 'backlog' figure reported by construction companies represents:

Answer: Revenue remaining to be earned on signed contracts

Backlog is the dollar value of work under contract that has not yet been performed, indicating future revenue pipeline.

In construction, the term 'underbilling' refers to a situation where:

Answer: The contractor has earned more revenue than it has billed

Underbilling (costs in excess of billings) occurs when earned revenue based on completion exceeds amounts invoiced, creating a contract asset.

Which ratio measures the relationship between a construction company's total liabilities and its tangible net worth?

Answer: Leverage ratio (liabilities to net worth)

The leverage ratio (total liabilities / tangible net worth) is a primary surety underwriting metric indicating how much creditor capital funds operations versus owner equity.

A construction company's 'over/under billing schedule' is used primarily to:

Answer: Reconcile contract billing status with earned revenue across all projects

The over/under billing schedule (WIP schedule) compares billed amounts to earned revenue on each project, identifying overbilled and underbilled positions.

When a construction company uses project-specific financing, the lender typically requires the borrower to establish a:

Answer: Controlled project account with disbursement oversight

Project-specific lenders require controlled or escrow accounts so disbursements can be monitored and funds are used exclusively for that project.