CPC CPC Construction Business Management & Finance 2 — Questions and Answers
Question 1: What is a 'performance bond' and who benefits from it on a construction project?
- Insurance that covers workers on-site; the contractor
- A surety bond guaranteeing the contractor will complete the project per contract; the owner is the obligee (Correct answer)
- A bank guarantee securing material supplier payments; the supplier
- A bond covering design errors; the architect
Correct answer: A surety bond guaranteeing the contractor will complete the project per contract; the owner is the obligee
A performance bond is a three-party agreement where the surety guarantees that if the contractor defaults, the surety will complete the project or compensate the owner.
Question 2: How is 'overhead' typically allocated to individual construction projects in job costing?
- Charged entirely to the largest project
- Distributed as a percentage of direct labor costs, revenue, or total direct costs (Correct answer)
- Excluded from project cost reports
- Allocated equally across all projects
Correct answer: Distributed as a percentage of direct labor costs, revenue, or total direct costs
Overhead allocation rates are typically calculated as a percentage of direct labor, revenue, or total direct costs so that each project bears a fair share of indirect costs.
Question 3: What is the 'contractor's all-risk' (CAR) insurance policy designed to cover?
- Worker compensation claims only
- Physical loss or damage to the works, plant, equipment, and third-party liability during construction (Correct answer)
- Professional liability for design errors
- Only the contractor's owned equipment
Correct answer: Physical loss or damage to the works, plant, equipment, and third-party liability during construction
CAR insurance provides broad all-risk coverage for the construction works in progress, contractor's plant/equipment, and third-party bodily injury and property damage.
Question 4: Which method of project delivery places design and construction responsibility under a single contract with one entity?
- Construction Manager at Risk (CMAR)
- Design-Bid-Build (DBB)
- Design-Build (DB) (Correct answer)
- Multiple Prime Contracting
Correct answer: Design-Build (DB)
In Design-Build, a single entity is responsible for both design and construction, allowing design and construction phases to overlap and simplifying owner-contractor relationships.
Question 5: What is a 'mechanic's lien' and when can a contractor or supplier file one?
- A court order for equipment repossession; when a payment dispute arises
- A statutory claim against a property securing payment for labor or materials; when the contractor or supplier is not paid (Correct answer)
- A permit required before starting demolition work
- A tax lien filed by the IRS for unpaid payroll taxes
Correct answer: A statutory claim against a property securing payment for labor or materials; when the contractor or supplier is not paid
Mechanic's liens are statutory security interests against property that attach when contractors, subcontractors, or suppliers furnish labor or materials and are not paid.
Question 6: In the context of contractor financial statements, what is 'underbillings' (costs in excess of billings)?
- Extra work not yet formally approved by change order
- A current asset representing earned revenue not yet billed, indicating the contractor is behind on invoicing (Correct answer)
- Disputed invoices withheld by the owner
- Materials stored off-site not included in billings
Correct answer: A current asset representing earned revenue not yet billed, indicating the contractor is behind on invoicing
Underbillings (costs in excess of billings) indicate that the contractor has incurred costs and performed work beyond what it has invoiced, representing earned but uncollected revenue.
CPC CPC Construction Business Management & Finance 2
What is a 'performance bond' and who benefits from it on a construction project?