CPC CPC Construction Business Management & Finance 1 — Questions and Answers
Question 1: What is the primary purpose of a 'Schedule of Values' submitted by a general contractor at project start?
- Establish the owner's budget
- Allocate the contract sum across project components as the basis for progress payment applications (Correct answer)
- Define the subcontractor bid amounts
- List material delivery schedules
Correct answer: Allocate the contract sum across project components as the basis for progress payment applications
The Schedule of Values breaks the contract sum into components so that progress payments can be calculated based on the percentage of each component completed.
Question 2: In construction accounting, what does 'overbilling' (billing in excess of costs) on a percentage-completion contract indicate?
- The contractor has completed more work than billed
- The contractor has billed for more work than its cost-to-date supports, representing deferred revenue (Correct answer)
- The project is ahead of schedule
- The owner has paid all invoices early
Correct answer: The contractor has billed for more work than its cost-to-date supports, representing deferred revenue
Overbilling means the contractor has collected more cash than its percentage of completion justifies, creating a liability (deferred revenue or billings in excess of costs).
Question 3: What is a construction company's 'bonding capacity' and why is it important?
- The maximum number of concurrent projects allowed by the licensing board
- The maximum dollar value of work a surety will bond, determining how much the contractor can bid (Correct answer)
- The interest rate on the company's line of credit
- The company's insurance policy limit
Correct answer: The maximum dollar value of work a surety will bond, determining how much the contractor can bid
Bonding capacity is the aggregate dollar limit a surety will provide, directly capping the contractor's ability to bid and win bonded public and private projects.
Question 4: Which financial ratio is most useful for assessing a construction contractor's short-term ability to pay current obligations?
- Debt-to-equity ratio
- Current ratio (current assets ÷ current liabilities) (Correct answer)
- Return on equity
- Gross profit margin
Correct answer: Current ratio (current assets ÷ current liabilities)
The current ratio measures liquidity by comparing current assets to current liabilities; a ratio above 1.0 means the contractor can cover short-term obligations.
Question 5: What is the purpose of a 'retainage' clause in a construction contract?
- Require the contractor to maintain on-site security
- Withhold a percentage of each progress payment as security for project completion and correction of defects (Correct answer)
- Retain ownership of materials until full payment
- Require the owner to pay in advance
Correct answer: Withhold a percentage of each progress payment as security for project completion and correction of defects
Retainage (typically 5–10%) is withheld from progress payments and held until substantial completion and correction of punchlist items, protecting the owner.
Question 6: In project accounting, what does the 'cost-to-complete' estimate represent?
- The total contract price
- The estimated remaining direct and indirect costs needed to finish the project (Correct answer)
- The amount already billed to the owner
- The contingency reserve
Correct answer: The estimated remaining direct and indirect costs needed to finish the project
Cost-to-complete is the project manager's forecast of remaining costs, which combined with costs incurred to date, predicts the total cost at completion.
CPC CPC Construction Business Management & Finance 1
What is the primary purpose of a 'Schedule of Values' submitted by a general contractor at project start?