CPE Engineering Economics & Contract Management 5 — Questions and Answers
Question 1: In engineering economics, the 'MARR' (Minimum Attractive Rate of Return) represents:
- The risk-free treasury bond yield
- The minimum return a company requires to justify an investment (Correct answer)
- The average industry profit margin
- The inflation-adjusted cost of equity
Correct answer: The minimum return a company requires to justify an investment
The MARR is the lowest acceptable return rate set by an organization based on its cost of capital, opportunity costs, and risk tolerance.
Question 2: Which procurement method requires the owner to select the designer and contractor separately?
- Design-Build (DB)
- Construction Manager at Risk (CMAR)
- Design-Bid-Build (DBB) (Correct answer)
- Integrated Project Delivery (IPD)
Correct answer: Design-Bid-Build (DBB)
Design-Bid-Build uses sequential, separate contracts for design and construction, with the owner contracting designer and general contractor independently.
Question 3: The future worth of $10,000 invested for 5 years at 8% compounded annually is closest to:
- $14,000
- $14,693 (Correct answer)
- $15,869
- $17,316
Correct answer: $14,693
FW = $10,000 × (1.08)^5 = $10,000 × 1.4693 = $14,693.
Question 4: A 'pay-if-paid' clause in a subcontract:
- Guarantees the subcontractor will be paid within 30 days
- Makes the general contractor's obligation to pay contingent on receiving payment from the owner (Correct answer)
- Requires the owner to pay subcontractors directly
- Establishes a lien waiver requirement
Correct answer: Makes the general contractor's obligation to pay contingent on receiving payment from the owner
A pay-if-paid clause shifts the risk of owner nonpayment to the subcontractor, making receipt of owner payment a condition precedent to the GC's obligation to pay.
Question 5: Which depreciation method is mandated for US federal income tax purposes under the Modified Accelerated Cost Recovery System (MACRS)?
- Straight-line only
- Sum-of-years-digits
- Double-declining balance switching to straight-line (Correct answer)
- Units of production
Correct answer: Double-declining balance switching to straight-line
MACRS uses the double-declining balance method switching to straight-line when straight-line yields a larger deduction, based on asset class recovery periods.
Question 6: A contractor discovers that a subcontractor's default will delay the project. Under standard contract provisions, the general contractor should first:
- Terminate the subcontractor immediately and hire a replacement
- Notify the owner and provide the subcontractor written notice of default with a cure period (Correct answer)
- File a claim against the surety bond
- Reduce the subcontractor's payment
Correct answer: Notify the owner and provide the subcontractor written notice of default with a cure period
Standard contract provisions require the GC to provide written notice of default and a reasonable cure period before termination, protecting both parties' rights.
Question 7: In cost engineering, the 'law of diminishing returns' applied to project resources means:
- Adding resources always reduces project cost
- Beyond an optimal point, adding more resources yields progressively smaller productivity gains (Correct answer)
- Resource costs decrease as project scope increases
- Labor efficiency improves continuously with crew size
Correct answer: Beyond an optimal point, adding more resources yields progressively smaller productivity gains
The law of diminishing returns states that after a certain optimal level, each additional unit of resource (e.g., workers) contributes less incremental output than the previous unit.
CPE Engineering Economics & Contract Management 5
In engineering economics, the 'MARR' (Minimum Attractive Rate of Return) represents: