CPE Engineering Economics & Contract Management 3 — Questions and Answers
Question 1: A contract clause stating that no oral modifications are valid is known as a:
- Force majeure clause
- Parol evidence rule
- No-damages-for-delay clause
- Integration clause (Correct answer)
Correct answer: Integration clause
An integration (or merger) clause specifies that the written contract represents the complete agreement and cannot be modified by prior or contemporaneous oral statements.
Question 2: Which economic concept explains why $1 received today is worth more than $1 received in the future?
- Opportunity cost principle
- Sunk cost fallacy
- Time value of money (Correct answer)
- Diminishing marginal utility
Correct answer: Time value of money
The time value of money reflects that money available now can be invested to earn returns, making it worth more than an equivalent future sum.
Question 3: In competitive bidding, a bid bond typically guarantees that:
- The contractor will complete the work at the bid price
- The contractor will enter into a contract if selected (Correct answer)
- Material prices will not escalate
- Subcontractors will be paid
Correct answer: The contractor will enter into a contract if selected
A bid bond guarantees that the successful bidder will enter into a contract at the submitted bid price and provide required performance bonds.
Question 4: An economic analysis comparing alternatives with different useful lives should use:
- Simple payback period
- Annual Worth (AW) method or Least Common Multiple of lives (Correct answer)
- Benefit-Cost Ratio only
- Straight-line depreciation analysis
Correct answer: Annual Worth (AW) method or Least Common Multiple of lives
Comparing alternatives with unequal lives requires either the Annual Worth method or analysis over the Least Common Multiple period to ensure a fair comparison.
Question 5: Under the American Institute of Architects (AIA) A201 General Conditions, a 'Change Order' requires agreement from:
- Owner only
- Contractor only
- Owner, contractor, and architect (Correct answer)
- Owner and architect only
Correct answer: Owner, contractor, and architect
AIA A201 defines a Change Order as a written instrument signed by the Owner, Contractor, and Architect agreeing to a change in the Work.
Question 6: The double-declining balance (DDB) depreciation method produces:
- Equal annual depreciation charges
- Higher depreciation in early years, lower in later years (Correct answer)
- Lower depreciation in early years, higher in later years
- Depreciation based on actual usage
Correct answer: Higher depreciation in early years, lower in later years
DDB is an accelerated depreciation method that applies twice the straight-line rate to the declining book value, resulting in larger charges in earlier years.
Question 7: Which document typically establishes the contractor's obligation to protect third parties from project-related harm?
- Performance bond
- Payment bond
- General liability insurance certificate (Correct answer)
- Bid bond
Correct answer: General liability insurance certificate
A general liability insurance certificate demonstrates the contractor carries coverage for bodily injury and property damage to third parties during construction.
CPE Engineering Economics & Contract Management 3
A contract clause stating that no oral modifications are valid is known as a: