Chapter 2 — Exercises

Work these with the chapter open the first time and closed the second. Selected answers appear in Appendix J; numeric answers to the Part C calculations are in <details> blocks below so you can check the arithmetic without checking the reasoning.

Difficulty legend: ⭐ basic recall and comprehension · ⭐⭐ applied analysis · ⭐⭐⭐ judgment, synthesis, and multi-step work · ⭐⭐⭐⭐ extension work outside the book

Part A — Conceptual Understanding ⭐

A1. In two sentences, explain what "construction put in place" measures and why this book will not print a current figure for it.

A2. Name the four sectors of the construction industry. For each, give the typical owner and the typical contract form in one line.

A3. What does it mean to say construction is a fragmented industry, and name two consequences of that fragmentation that show up on an ordinary job site.

A4. Define backlog. Explain why contractors measure it in months rather than dollars.

A5. A surety and an insurer both take a premium and both promise to pay under defined circumstances. State the fundamental difference between them in one sentence, and explain what indemnity means in that context.

A6. What is the difference between a contractor's fee and a contractor's net profit? Name three specific things that consume the difference.

A7. Explain retention (retainage) to somebody who has never worked in construction. Include how much is typically held, when it is released, and why the answer varies by jurisdiction.

A8. What is an AHJ? Name four different AHJs that could plausibly have authority over the Willow Street Community Center.

A9. Define buying work. Name the two conditions under which it is a rational business decision rather than a wager.

A10. Complete and explain: "Risk flows _ the contractual tier structure and money flows _." Then state the problem this creates.

Part B — Applied Analysis ⭐⭐

B1. A regional general contractor tells you their net margin last year was 2.4 percent, and in the same conversation mentions that their fee on most jobs runs "four to five points." Are these two statements in conflict? Explain what is happening, and name what you would ask to see to confirm it.

B2. A subcontractor you want on your job has just been awarded three large projects in the last ninety days by other general contractors. Their price is competitive and their references are excellent. Identify the specific risk this creates for your schedule, explain the mechanism, and describe two things you could do at buyout to manage it.

B3. A public school district and a private hotel developer are each building a $30,000,000 building in the same city, starting the same month. Predict five specific differences in how the two jobs will actually run — not in the contract language, but in what a project manager does on a Tuesday. For each, name the underlying cause.

B4. A subcontractor on your job begins submitting pay applications on the 1st of the month instead of the 25th, and their foreman asks your project accountant twice in one week when the check is going out. Nothing else has changed. What are you looking at, what would you do about it, and what would it cost you if you did nothing? (Ray's story in section 2.4 is the model, but do not simply repeat it.)

B5. Your company is at 3.1 months of backlog. Your competitor across town is at 14 months. A hard-bid public job comes out that both of you will chase. Predict how each firm's bid will differ and why, and state which firm is more likely to win it and whether that is good news for them.

B6. Explain, using the tier diagram in section 2.6, why a scope gap between two subcontracts is the general contractor's problem even when neither subcontractor did anything wrong. Then explain why it is especially the GC's problem on a lump-sum contract.

B7. An owner's representative says, "We can't approve that $38,000 change until the council meets on the 19th of next month, and the agenda closes on the 5th." Your superintendent says the work has to be built in eleven days or the enclosure sequence breaks. Lay out your options, and identify which of them are the ones that get project managers into trouble.

B8. A general contractor self-performs concrete, rough carpentry, and general trades and subcontracts everything else — Kestrel's model. Argue the case for self-performing more trades, and then argue the case against. Which argument does the demand-lumpiness mechanism in section 2.4 support, and under what conditions does it flip?

Part C — Calculations and Deliverables ⭐⭐–⭐⭐⭐

Show your work. Label every unit. State what each answer means for the job in one plain sentence — an unlabeled number is not an answer.

C1 — The fee is not the profit ⭐⭐

A contractor holds a $28,600,000 CM-at-Risk contract. The CM fee is 4.25 percent of a $27,200,000 subtotal. Company home-office overhead runs 2.4 percent of revenue. The contract has a savings split that returns 30 percent of unused contingency to the contractor, and the contractor expects $410,000 of the contingency to go unused.

The contract also carries liquidated damages of $3,900 per calendar day, and the contractor's extended general-conditions rate is $4,200 per calendar day.

(a) Compute the projected net profit in dollars and as a percentage of contract value. (b) Compute the total daily exposure to slipping substantial completion. (c) How many calendar days of delay would erase the entire projected profit?

C2 — Bonding capacity ⭐⭐

A contractor's surety program is $95,000,000 aggregate / $38,000,000 single project. Current bonded backlog:

Plus $12,400,000 of remaining bonded value across all other active jobs.

(a) Compute uncompleted bonded work and remaining aggregate capacity. (b) Can this contractor bond a $41,000,000 project? Show why or why not. (c) Can they bond a $36,000,000 project? What is left afterward, and what does that mean for the rest of their year?

C3 — Backlog, the revenue gap, and the cost of chasing it ⭐⭐⭐

A firm does $168,000,000 of revenue a year, carries a 2.2 percent net margin, and has $52,600,000 of remaining backlog. Management wants 10 months of backlog. Their historical hit rate on competitive bids is 22 percent, the average pursued job is $9,000,000, and each bid costs about $34,000 in estimating and preconstruction labor.

(a) What is the current backlog in months? (b) How much new work must they win to reach 10 months? (c) How much work must they bid to win it, and how many bids is that? (d) What is the estimating cost of that campaign, and what is the net profit on the work won after subtracting it?

C4 — The subcontractor is the bank ⭐⭐⭐

A drywall subcontractor holds a $1,840,000 subcontract on a 9-month job, billing roughly $204,000 per month. The payment chain: the sub bills the GC by the 20th; the GC submits to the owner by the 25th; the owner pays in 45 days; the GC pays subs within 10 days of receipt. Retention is 10 percent with no step-down. The subcontractor's net margin is 6 percent.

(a) Roughly how many days pass between the start of a month's work and payment for it? (b) At steady state, approximately how much of the sub's own money is outstanding in unpaid progress billings? (c) What is the retention balance at the end of the job, and what is the sub's peak total exposure? (d) Compare the peak exposure to the profit on the job. What does that ratio tell you about how to treat this subcontractor?

C5 — Delay cost and the revenue required to replace it ⭐⭐

A job carries liquidated damages of $4,750 per calendar day and an extended general-conditions rate of $3,900 per calendar day. The company's net margin is 1.9 percent. The job finishes 18 calendar days late, entirely due to the contractor.

(a) Compute the total cost of the delay. (b) Compute the revenue the company must win and build to replace that lost profit. (c) In one sentence, explain to a superintendent why this arithmetic makes a two-week slip a company problem and not a job problem.

C6 — Derive the construction budget from the owner's pro forma ⭐⭐⭐

A developer is evaluating a 64-unit apartment project. Units average 910 net square feet. Rent is $1.88 per net SF per month. Other income is $58,000 per year. Vacancy and credit loss is 7 percent of gross income. Operating expenses run $8,200 per unit per year. The exit capitalization rate is 5.75 percent and the investment committee requires a 6.75 percent yield on cost.

Land, soft costs, developer fee, financing, and owner contingency together total $4,560,000.

(a) Compute gross potential rent, effective gross income, and NOI. (b) Compute the stabilized value and the maximum total development cost. (c) Compute the hard-cost ceiling — the largest construction contract this deal can carry — and express it per unit. (d) The general contractor bids $7,240,000. State the gap in dollars and percent, and write the one sentence you would say to that contractor to explain why "the owner should just find the money" is not an option.

C7 — Sector classification and the daily cost of being late ⭐⭐

Build a single table with a row for each of the book's five projects — Northgate Outpatient Pavilion, Rivermont Elementary School #12, Cottonwood Creek Bridge Replacement, Harbor Ridge, and the Willow Street Community Center. Columns: sector, owner type (public or private), contract form, contract time, liquidated damages per day where stated in Chapter 1 or Chapter 2, and — for the two where the book gives you the figure — the total daily exposure including extended general conditions.

Then answer: for Willow Street, at $1,200 per calendar day of liquidated damages on a 425-calendar-day contract, what percentage of the $6,800,000 contract value would a 30-day delay cost in LDs alone? Why is that number an understatement of what the delay actually costs the contractor?

Part D — Judgment and Ethics ⭐⭐⭐

D1 — The hungry bid. Your firm is at 3.1 months of backlog. A $19,000,000 job is bidding in three weeks. Your estimate says your true cost plus a minimum acceptable margin is $19,600,000. Your VP of Operations believes the winning number will be about $18,400,000, and points out that your overhead is already covered by existing work, so the marginal contribution of even a zero-margin job is positive. Write a one-page recommendation. It must state a number, name the two conditions under which bidding below your estimate is defensible, and say plainly whether either condition is met here.

D2 — After the award. You win a job using a masonry subcontractor's number of $1,340,000. Two days after award, a different masonry contractor who did not bid calls and offers $1,232,000 for the same scope. Nothing about the scope has changed. Describe what you would do and why. Then describe what the market does over five years to a general contractor known for taking the second call, and put a rough dollar figure on that consequence. Finally, note how your answer would change if this were a public project.

D3 — The schedule of values. Your project accountant proposes shifting value in the schedule of values toward mobilization, sitework, and foundations — work that happens early — so that billings run ahead of cost through the first four months. She argues, correctly, that this improves the job's cash position and that every contractor does it. Write the rule you will follow, stated so precisely that someone could apply it without you in the room. Your rule must distinguish a legitimate allocation from a misrepresentation, and it must survive an owner reading it.

D4 — Pay-if-paid. You are the general contractor. The owner is 62 days late on a $1,900,000 payment because of a dispute unrelated to the work. Your subcontracts contain a pay-if-paid clause that your attorney believes is enforceable in this jurisdiction. Your drywall and electrical subs are owed $610,000 between them and both have said they cannot make payroll past next week. Set out your options, name what each one costs you, and state what you would do. Then answer separately: what should you have negotiated differently at buyout?

D5 — Classification. An open-shop subcontractor bidding your prevailing-wage public project proposes to classify workers who will spend most of their day performing carpentry as laborers, at the lower published rate, on the theory that they are "assisting." Their number is $84,000 below the next bidder. What are your obligations here — to the owner, to the workers, and to your own company — and what do you do with the bid? Note that the answer depends in part on the applicable statute and wage determination; identify who you would ask.

Part M — Mixed and Interleaved Practice ⭐⭐–⭐⭐⭐

These deliberately combine this chapter with Chapter 1. Interleaving feels harder than blocked practice and produces more durable learning — that difficulty is the point, not a defect.

M1. In Chapter 1 you drafted a project charter for the Willow Street Community Center, including a written definition of what success means. Revise that definition now that you know Willow Street has a public owner. Name three things you would add or change, and for each, cite the specific mechanism from Chapter 2 that caused the change — public procurement, prevailing wage, the payment bond in place of lien rights, the appropriated-budget constraint on changes, or the decision-speed difference.

M2. Chapter 1 defined your role and your authority. Take the nine-row player table in section 2.5 and sort every party into three buckets: those you have contractual authority over, those you have influence over, and those you have neither over but who can stop your job. For the third bucket, write one sentence per party describing how you would build the relationship before you need it.

M3. Take your Chapter 1 stakeholder list for Willow Street. For each stakeholder, write one sentence describing what they would say — out loud, in their own voice — if the job finished 30 calendar days late. Then identify which two of those reactions would actually change your behavior today, and why the others would not.

M4. Chapter 1 introduced the idea that a construction manager's core work is closing the gap between the drawings and the schedule. Using the tier diagram in section 2.6, identify the three contract boundaries on the Willow Street job where that gap is most likely to open, and name the specific document or meeting that is supposed to close each one.

M5. Combine the sector table in 2.2 with the margin arithmetic in 2.4. Pick two of the book's five projects from different sectors. For each, write a short paragraph explaining how that sector's dominant risk — differing site conditions, design coordination, cycle time, or process startup — would show up as a dollar figure on the contractor's income statement, and which chapter of this book is where you would go to manage it.

M6. Your Chapter 1 charter named a definition of success. Argue, in one paragraph, whether Curtis Boone's Rivermont Elementary School #12 could satisfy that definition even while losing money — and then argue the opposite. What does the difficulty of this question tell you about writing definitions of success?

Part E — Research and Extension ⭐⭐⭐⭐

E1 — Build a real market brief. Go to the U.S. Census Bureau's construction spending series and pull the most recent figure for total construction put in place, along with the residential, nonresidential, private, and public splits. Then look at Engineering News-Record's most recent Top 400 Contractors ranking and record: the revenue of the largest firm, the revenue of the four-hundredth firm, and the sector mix of the top ten. Write a two-page brief answering three questions: Is the market currently expanding or contracting, and in which sectors? How concentrated is the industry, quantitatively? And if you were advising a $200,000,000 regional contractor on where to grow, what would you tell them and why? Cite your sources precisely, including the date of each data pull, because these numbers move.

E2 — Learn your own jurisdiction. For the state where you live or intend to work, find and document, with citations to the actual primary source (statute, agency, or regulation — not a summary article or a law-firm blog post):

1. The contractor licensing requirement, including whether general contractors are licensed and at what thresholds.
2. Whether a state prevailing-wage statute exists, what it covers, and what the dollar threshold is.
3. Any statutory cap on retention for public work, and whether retention must be escrowed or bear interest.
4. The state's Little Miller Act — the bond requirement for public work — and specifically the notice and suit deadlines for a subcontractor claiming against a payment bond.
5. The mechanic's lien notice deadline for a subcontractor on private work.

Then write one page on what surprised you. Bring anything ambiguous to a construction attorney — the purpose of this exercise is to learn where the answers live and how quickly a confident-sounding summary can be wrong, not to give yourself legal advice.

E3 — Read a real bid tab. Public bid tabulations are public records, and most state DOTs and many municipalities publish them online. Find a recent tabulation for a building or civil project of at least $5,000,000 with four or more bidders. Record every bid, the engineer's estimate if published, and the award. Then compute: the spread between low and second, low and high, and low and the engineer's estimate, each as a percentage. Write a one-page analysis answering: does the low bidder look like a competitive winner or a buyer of work? What would you want to know about the low bidder before congratulating them? And if you had been the second bidder, what would you take away from this tabulation about your own estimating?