Chapter 2 — Quiz

C. Two to four percent net of revenue is typical for a general contractor, and one to three is common. Trade contractors often do somewhat better as a percentage because more of their revenue is their own labor rather than pass-through subcontract value. Industry financial benchmarking studies published periodically by groups such as the AGC and the Construction Financial Management Association are where to check current figures. D is wrong because the range genuinely is narrow and consistent — that narrowness is the whole point of the chapter.

B. Allocated home-office overhead at 2.10 percent of revenue is $997,500, which takes over half the fee. That overhead pays for estimating, accounting, safety, IT, insurance, marketing, rent, and the cost of pursuing jobs the company never won. The fee is not the profit.

B. `$5,150/CD of extended general conditions + $5,500/CD of liquidated damages = $10,650/CD.` The general-conditions rate comes from the $2,900,000 general-conditions line divided across the 565-calendar-day contract; the liquidated damages come from the contract.

C. A bond is a three-party credit instrument, not ordinary insurance. The surety guarantees the contractor's performance to the owner, expects zero losses, and if it pays a claim it pursues indemnity against the contractor — typically including the owners personally under a general indemnity agreement. That is why bonding capacity, not licensing, is the real ceiling on a contractor's growth.

C. Aggregate available is `$150,000,000 − $99,355,000 = $50,645,000`. A $48,000,000 project fits both the aggregate and the $60,000,000 single-project cap. A $58,000,000 project clears the single-project cap but exceeds the available aggregate by $7,355,000. A $62,000,000 project fails the single-project cap outright. Always check both limits — different projects fail different ones.

B. It is a deliberate below-cost bid made to capture revenue, betting on recovery through change orders, subcontractor squeeze, or an unidentified efficiency. Curtis Boone's Rivermont Elementary School #12 bid of $22,400,000 — $780,000 below the second bidder and $1,700,000 below the independent estimate — is the chapter's example.

C. Heavy civil and infrastructure work is typically bid as a price per cubic yard, per linear foot, or per ton, with payment made against measured quantities actually installed. Cottonwood Creek Bridge Replacement — $18,700,000, state DOT owner, 210 working days — is the book's example.

B. Demand lumpiness is the mechanism. A steel erection crew is needed for fourteen weeks and a roofing crew for six; no single GC can keep either continuously busy. A specialty contractor aggregates demand across many GCs and smooths its utilization curve. Shedding risk (A) is a benefit, not the cause — and it is only partly true, since the GC remains responsible to the owner. The price paid for this efficiency is a contract boundary at every trade, and every boundary loses information.

B. They pay crews weekly starting in week one but bill monthly, the GC submits by the 25th, the owner pays roughly 30 days later, and the GC then pays down the chain — 45 to 90 days on a rolling basis. On top of that, 5 to 10 percent of everything earned sits as retention until closeout, often six to twelve months past the work.

B. You cannot foreclose on public property, so public work substitutes a payment bond. On federal work the Miller Act requires it above a contract threshold; nearly every state has a Little Miller Act for state and local work. The performance bond (C) protects the owner against the contractor's failure to perform — a different bond for a different party. Notice and suit deadlines for payment-bond claims vary by jurisdiction, are short, and are strictly enforced.

B. The fatal decisions are made in the trough, when firms bid work at prices that barely cover cost in order to keep the organization loaded. The bill arrives in the recovery, when that backlog gets built at escalated costs — you carried 3 percent escalation and got 11 — and every job in the book goes underwater at the same time.

C. Construction accounts for roughly one in five U.S. workplace fatalities while employing a considerably smaller share of the workforce, and the ratio has been persistent for decades. The Bureau of Labor Statistics publishes the Census of Fatal Occupational Injuries; OSHA's Focus Four framing — falls, struck-by, caught-in/between, electrocution — organizes the leading causes.

False. A GMP caps the contractor's exposure for the agreed scope. Scope changes still move the number, and the owner's total project budget includes design fees, FF&E, equipment, owner contingency, permits, and financing — on Northgate, a $47,500,000 GMP sits inside a $61,000,000 owner budget. This is the threshold concept of Chapter 4.

False, as a general rule, and jurisdictionally specific. Most publicly funded construction must be awarded to the lowest responsive, responsible bidder. Qualifications-based and alternative-delivery procurement on public work is generally available only where a statute specifically authorizes it, and those statutes vary substantially by state and by agency type. Never assume — read the procurement code.

False. The GC performs a minority of the work and carries a majority of the risk. Subcontracting transfers performance down but leaves the GC responsible to the owner for the whole of it — and when a subcontractor with no balance sheet fails, the risk ricochets straight back up as a schedule problem the GC now owns without the money it thought it had transferred.

False. Pay-when-paid is generally read as a timing provision — the GC may wait a reasonable time but eventually owes the subcontractor regardless. Pay-if-paid attempts to make the owner's payment a condition precedent, shifting the risk of owner insolvency down the tier. Enforceability of pay-if-paid varies substantially by state, and the law changes; find the clause in both your prime contract and your subcontract and take them to a construction attorney licensed where the project sits.

False, and the reverse can be true. Sureties size a program against working capital and net worth, not revenue. Growing revenue faster than equity deteriorates the ratios, and a surety that sees deteriorating ratios plus a bad job in the work-in-progress schedule will reduce the program you already have — which evaporates everything you have bid but not yet bonded. Case Study 2-1 works this through.

False. It permanently deletes six months of income from the life of the deal. On the Larkspur Flats pro forma in Case Study 2-2, that is $597,000 of NOI the project will never earn — on top of $440,000 of additional loan interest and $96,000 of carry, against liquidated damages that recover only about 38 percent of the total.

A construction project's production system is not one organization but dozens of independent firms assembled temporarily. A tool that only pays off when every trade uses it must therefore be sold, funded, and learned twenty separate times, by companies with twenty different balance sheets and no shared incentive. Critically, the firm that pays is frequently not the firm that captures the benefit — a subcontractor asked to invest in coordination software often absorbs the cost while the general contractor and owner realize the savings. That misalignment, not resistance to change, is the honest reason diffusion is slow.

(1) Nobody at the bottom of the structure has a relationship with anybody at the top, so information that must travel four contract levels arrives late, distorted, or not at all. (2) Risk is pushed downward until it lands on a party with no leverage to refuse it and no balance sheet to absorb it — and when that party fails, the risk returns to you with none of the money you thought you had transferred. (3) The general contractor sits in the middle and finances the entire operation, paying subcontractors before the owner pays the GC.

The second is the most dangerous, because it looks like successful risk management right up to the moment it isn't. Risk transferred to a party who cannot carry it has not been transferred; it has been deferred and disguised.

The largest item probably reduced the building's income — rent, unit count, parking, or amenity appeal — and the value of a stabilized asset is its NOI divided by a capitalization rate, so a small annual income loss capitalizes into a large value loss. On Larkspur Flats, deleting the below-grade parking saved $610,000 of construction cost and destroyed $693,048 of asset value: a net loss of $83,048. Add an income-effect column to the VE log — even a rough estimate of the annual NOI change and its capitalized value — so every option can be judged on net value rather than net cost.

(a) Monthly capacity $260,000,000 ÷ 12 = $21,667,000. Backlog $91,000,000 ÷ $21,667,000 = 4.2 months — thin. Below the nine-to-eighteen-month range most firms this size want, which means the organization is hungry and the temptation to bid badly is real. Name that pressure out loud, because unnamed pressure becomes an optimistic number in the estimate.

(b) Aggregate available: `$110,000,000 − $74,300,000 = $35,700,000`. The single-project cap of $45,000,000 is fine, but $40,000,000 exceeds available aggregate by $4,300,000. Not today. The question becomes when the bond must be executed and what your uncompleted bonded work looks like on that date — plus whether the surety will consider a one-time increase supported by your working capital and reviewed WIP.

(c) Expected net profit: $40,000,000 × 0.021 = $840,000. Days to erase it: $840,000 ÷ $9,300/CD = 90.3, so 91 calendar days of delay wipes out the entire profit. On a public job with prevailing wage, certified payroll, and a procedural change-order process, ninety days is not an unimaginable slip.

(d) A defensible recommendation: pursue it conditionally. Confirm (1) with the surety, in writing, that a bond executed on the actual required date fits the program; (2) with the owner, the bond execution date, the retention terms, and the change-order approval cycle; and (3) internally, that you have a superintendent and project manager who will genuinely be free at the start date — because if you win this and staff it with your fourth-best team, you are running the Argosy Builders experiment from Case Study 2-1 on purpose. If any of the three fails, decline. The complete bid/no-bid framework, including the qualitative factors this analysis omits, is in Chapter 15.