CEC CEC Risk Management & Contingencies 2 — Questions and Answers
Question 1: Which contract type transfers the most cost risk to the contractor?
- Cost-plus-percentage-of-cost
- Time and materials (T&M)
- Lump sum (fixed price) (Correct answer)
- Guaranteed maximum price (GMP)
Correct answer: Lump sum (fixed price)
A lump sum contract fixes the contract price, making the contractor responsible for all cost overruns beyond the agreed amount.
Question 2: Escalation risk in a multi-year construction project is best managed by the estimator through:
- Using current prices for all future years equally
- Applying published escalation indices and including escalation allowances in the estimate (Correct answer)
- Requesting a no-escalation clause from all subcontractors
- Ignoring future inflation since prices may drop
Correct answer: Applying published escalation indices and including escalation allowances in the estimate
Published escalation indices (e.g., ENR cost indices) provide a data-backed basis for projecting future material and labor price increases, which should be built into the estimate.
Question 3: In risk management, the expected monetary value (EMV) of a risk event is calculated as:
- Probability × Impact cost (Correct answer)
- Impact cost ÷ Probability
- Probability + Impact cost
- Impact cost − Probability
Correct answer: Probability × Impact cost
EMV equals the probability of a risk occurring multiplied by its financial impact, giving a dollar-weighted measure for comparing and prioritizing risks.
Question 4: A 'risk register' in construction estimating serves primarily to:
- Track all subcontractor invoices
- Document identified risks, their likelihood, impact, and assigned owners for the project (Correct answer)
- Record material delivery logs
- List all RFIs submitted on a project
Correct answer: Document identified risks, their likelihood, impact, and assigned owners for the project
A risk register is a structured log of project risks including probability, potential cost impact, mitigation strategies, and the party responsible for each risk.
Question 5: Which of the following is a risk transfer mechanism commonly used in construction contracts?
- Using a cost-loaded schedule
- Requiring subcontractors to carry and name the GC as additional insured on their insurance policies (Correct answer)
- Performing a constructability review
- Applying a Pareto analysis to bid costs
Correct answer: Requiring subcontractors to carry and name the GC as additional insured on their insurance policies
Requiring subcontractors to name the general contractor as an additional insured transfers a portion of liability risk from the GC to the subcontractor's insurance.
Question 6: What is the primary difference between a risk allowance and a contingency in an estimate?
- They are identical; the terms are interchangeable
- A risk allowance is tied to a specific identified uncertainty; contingency is a general reserve for undefined unknowns (Correct answer)
- Contingency applies only to labor; risk allowance applies only to materials
- Risk allowances are set by the owner; contingencies are set by the contractor
Correct answer: A risk allowance is tied to a specific identified uncertainty; contingency is a general reserve for undefined unknowns
A risk allowance addresses a specific, identified risk item with a quantified potential cost, while contingency is a broader reserve for collectively unidentified uncertainties.
CEC CEC Risk Management & Contingencies 2
Which contract type transfers the most cost risk to the contractor?