Chapter 32 — Exercises

Work these with a calculator and a blank sheet, not in your head. Selected answers appear in Appendix J; where an exercise has a single numeric answer it is given here in a <details> block so you can check yourself immediately.

Difficulty legend: ⭐ basic · ⭐⭐ applied · ⭐⭐⭐ judgment and synthesis · ⭐⭐⭐⭐ research and extension.

Part A — Conceptual Understanding ⭐

A1. Define, in one sentence each, without looking back: progress payment, schedule of values, retention, stored materials, lien waiver, pay-when-paid.

A2. A pay application's summary page has a line reading "less previous certificates for payment." Explain precisely which number goes there and why it is not always the same as the amount you requested last month.

A3. On a continuation sheet, what is the difference between column E and column F, and what happens to a dollar of value that moves from F to E? Does that movement generate cash?

A4. Name four permissible grounds on which an owner may withhold certification of a payment application, and name two reasons that are not permissible.

A5. Why does retention exist? Give the owner's reason and the contractor's counter-argument, and then state what retention costs the party that carries it.

A6. Explain the rule "conditional for the current period, unconditional for the prior period." Why can a subcontractor not honestly sign an unconditional waiver for the current period?

A7. What does a joint check accomplish? Name three things it does not accomplish.

A8. State the threshold concept of this chapter in your own words in no more than two sentences, and give one concrete mechanism by which a profitable job consumes cash.

A9. A general contractor bills the owner for stored curtain-wall units held in a warehouse. Name five conditions a typical contract imposes before the owner has to pay for them, and give the risk each condition addresses.

A10. Why should general conditions, insurance and bonds, contingency, and fee each occupy their own line on a schedule of values rather than being distributed into the trade lines?

Part B — Applied Analysis ⭐⭐

B1. Your job's pay period closes on the 25th, the architect has seven days to certify, and the owner pays 30 days from the application. Your superintendent installs a piece of equipment on the 27th. Trace the date on which the installing subcontractor's check clears, assuming the subcontract requires payment within seven days of your receipt and three days for funds to clear at each stage. How many days is it from installation to cleared funds, and what would have changed if the equipment had gone in two days earlier?

B2. A subcontractor's pay application shows the interiors line at 68 percent complete. Your superintendent says 50 percent. The line is $2,400,000 and covers framing, board, tape and finish, and ceilings. Describe the process you would run to settle the disagreement with evidence rather than assertion, and identify the underlying schedule-of-values defect that produced the argument.

B3. Your project's contract says retention "shall be reduced to five percent when the Work is fifty percent complete." Write the two questions you must answer before you can forecast the cash effect of that sentence, and explain how the answers change the number.

B4. A supplier two tiers below you refuses to sign a conditional lien waiver because your subcontractor owes it money on a different project. List the six options available to you, and rank them by the risk each carries to the owner rather than to you.

B5. Your monthly billing curve, in thousands, is: 900, 1,400, 2,100, 2,600, 2,400, 1,700, 1,300, 800. Without doing any cash arithmetic, predict the month in which your cumulative cash position will be worst, and explain the mechanism in one sentence.

B6. An owner's representative tells you she will not pay for any stored material at all, on the grounds that "we don't pay for things that aren't in the building." Write the three-sentence response that makes the owner's own financial case for stored-material payments.

B7. Your company has been paying subcontractors thirty days from their application, although twenty-eight of thirty-four subcontracts say seven days after receipt of owner payment. Your CFO wants to move to contract terms. Identify who is helped, who is hurt, what it is worth, and what you would do about the subcontractors most affected.

B8. A project is 96 percent complete and 96 percent billed, on schedule and on budget, and is losing money every month on a cash basis. Explain why in five sentences, listing the specific mechanisms.

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

C1 — Build a schedule of values. ⭐⭐

A negotiated GMP contract totals $9,400,000, built up as: direct cost of work $7,900,000; general conditions $620,000; insurance and bonds $186,000; construction contingency $264,000; fee at 4.0 percent of the subtotal of those four; and an escalation allowance for the remainder.

Compute the fee and the escalation allowance. Then build a schedule of values of 14 to 18 lines that sums exactly to $9,400,000, with general conditions, insurance and bonds, contingency, escalation and fee on their own lines and a discrete closeout line inside the cost of work. State the cost-code group for each line. Finally, write the one paragraph justifying your mobilization allocation that you would give the owner's representative if asked.

C2 — Complete an application for payment. ⭐⭐

Contract sum: $4,200,000, no change orders. Retention: 10 percent, applied to completed work and stored material alike. One item of stored material: 12 percent of line 5, documented and approved.

Complete the continuation sheet (columns D, E, F, G, percent, balance) and the summary page through current payment due. Then verify your payment independently.

C3 — Roll it forward. ⭐⭐

Next period on the same job. On line 5, $60,000 of the previously stored enclosure material is installed, $102,000 of new enclosure work is performed, and column F closes at $124,000. Every other line is unchanged.

Compute line 5's new D, E, F and G, and state (a) how much new value was added to the line and (b) how much cash the line generates this period.

C4 — Model the retention and price it. ⭐⭐⭐

A $12,000,000 contract runs 16 months. Retention is 10 percent throughout, with no step-down, released 60 days after final completion. Cumulative billings, in thousands, at the end of each month are: 240, 720, 1,440, 2,280, 3,240, 4,320, 5,400, 6,480, 7,440, 8,400, 9,240, 10,080, 10,800, 11,400, 11,760, 12,000.

(a) Build the retention balance table. (b) Compute the sum of the monthly balances, including the two months of tail after the last billing. (c) At a borrowing rate of 9.0 percent, compute the carrying cost. (d) If the contractor's fee on this job is 3.5 percent of contract, what fraction of the fee does the retention consume? (e) The contractor flows retention down to subcontractors covering 68 percent of its cost. Estimate the net carrying cost and say who carries the rest.

C5 — Build a cash-flow model and find the trough. ⭐⭐⭐

A $4,700,000 contract runs eight months. Monthly gross billings, in thousands: 300, 520, 740, 900, 860, 640, 480, 260.

Assumptions: cost incurred each month equals 96 percent of that month's billing. Owner retention is 10 percent and the owner pays 45 days after the period close, so a period's money arrives two months later. Disbursements are 30 percent of a month's cost in that month, 30 percent the following month, and 40 percent two months later to subcontractors, net of the 5 percent retention withheld from them.

Build the month-by-month model (billing, cost, cash in, cash out, net, cumulative) through month 12. Identify the trough and the month it occurs. Then state what the cumulative position would be if the owner paid at 30 days instead of 45, and explain the difference in one sentence.

C6 — Price a front-loading decision. ⭐⭐⭐

A contractor moves $450,000 of scheduled value out of lines that would bill in months 14 through 18 and into lines that bill in months 2 through 6, on a 20-month job with 5 percent retention and a borrowing rate of 9.0 percent. The average acceleration is 12 months.

(a) Compute the interest value of the move. (b) The owner's representative notices in month 6 and begins requiring quantity substantiation, which lengthens certification from 4 days to 12 days and pushes the average $1,400,000 monthly payment past a month-end for the remaining 14 months. Compute that cost. (c) State the net, and then state the two costs you cannot compute.

C7 — Build the waiver matrix. ⭐⭐

You have eight first-tier subcontractors and four second-tier suppliers who have served preliminary notices. It is the 21st of the month and you submit on the 25th. Build the waiver matrix for the current and prior pay periods, showing which document each party owes and for which period. Then write the escalation procedure for a party that does not respond by the 23rd — three steps, with who does what and by when.

C8 — Count the days and write the memo. ⭐⭐

Your contract requires the application by the 5th of the month for the period ending the last day of the prior month; the architect has 14 days to certify; the owner pays within 30 days of certification; you pay subcontractors within 10 days of receipt. Compute the elapsed days from work performed on the 2nd of a month to a subcontractor's cleared funds, allowing 3 days for clearing at each stage. Then write the half-page memo you would give a new subcontractor at the preconstruction meeting so that its own cash planning is accurate.

Part D — Judgment and Ethics ⭐⭐⭐

D1. Your company is $600,000 short of cash this month. You have $1,850,000 of subcontractor payments due on the 4th under contracts requiring payment seven days after receipt of owner funds, which you received on the 28th. Your controller proposes releasing the checks on the 18th and telling anyone who calls that "the owner was late." Identify every line that crosses, and write the alternative you would propose to your CFO instead, with the cost of each option.

D2. Your schedule of values allocates 2.8 percent of contract value to mobilization on a job where 1.2 percent would be typical. The estimator's backup shows genuine mobilization costs of 1.4 percent. Where is the line, what would you submit, and what would you say if the owner's representative asked you directly how you built the line?

D3. A subcontractor asks you to release its retention early because it is in financial difficulty. Its scope is 92 percent complete, not accepted, with an open punch list. Your contract permits early release at your discretion with the owner's consent. Analyze the decision from three positions — your company's cash, your project's risk, and your obligation to the owner — and decide.

D4. A general contractor operating in a state that enforces pay-if-paid inserts the clause in every subcontract, including for subcontractors it knows cannot evaluate the owner's credit. It is legal and enforceable. Is it right? Construct the strongest argument on each side, then state your own position and what you would do about it if you ran the company.

D5. Your project accountant discovers that a subcontractor has been submitting unconditional waivers for the current period for eighteen months — that is, releasing lien rights before being paid, every month. Your job is fully protected as a result. What do you do, and why?

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

M1 — With Chapter 28 (cost control). Your pay application says a trade is 62 percent complete. Your cost report says you have spent 74 percent of that code's forecast at completion. Both were prepared by people you trust. List the four things that could each independently explain the gap, describe the test that distinguishes them, and state which one would worry you most.

M2 — With Chapter 30 (earned value) and Chapter 28. Your job's earned value is $8,600,000, actual cost is $9,050,000, and planned value is $9,200,000. You have billed $8,900,000 gross with 10 percent retention. Compute CPI and SPI, compute your billing position relative to earned value, and write the three sentences you would say to your CFO. Which of those two problems is more urgent, and why are they different problems?

M3 — With Chapter 31 (change orders). Your change-order aging report shows $143,347 of pending exposure, of which $27,400 is over 60 days old. Translate that report into three numbers a CFO cares about: the monthly carrying cost at 8.5 percent, the effect on this month's application, and the effect on your cash forecast for the next 90 days. Then write the escalation you would send the owner.

M4 — With Chapter 16 (buyout) and Chapter 19. You are writing the subcontract terms for a $3,400,000 curtain-wall package with 14 months of fabrication lead time. Draft the payment provisions: retention rate and release, stored-material requirements, payment timing, and waiver requirements. For each one, state what it costs you and what it buys you, and identify the two provisions the subcontractor will push back on hardest.

M5 — With Chapter 4 and Chapter 5. You are bidding two jobs of identical size and margin. Job A is private, 5 percent retention, 30-day payment, no pay-if-paid, non-bonded. Job B is public, 10 percent retention held to final completion, 60-day payment, prevailing wage, 100 percent bonds. Quantify the cash difference between them on a $6,000,000 contract over 14 months, and state what you would add to your bid on Job B to be indifferent between the two.

M6 — With Chapter 13 (estimating). Take a bid you have built or been given, and convert it into a schedule of values without changing the total. Identify every place where the estimate's structure and a billable SOV structure disagree, and decide which one moves. Then state which decisions you made for measurement reasons and which you made for cash reasons — and be honest about the second list.

Part E — Research and Extension ⭐⭐⭐⭐

E1. Find the prompt-payment statute for the state in which you live or work. Answer six questions from the primary source: how many days does the owner have to pay a contractor on private work, and on public work; how many days does a contractor have to pay a subcontractor after receipt; what is the interest rate for late payment; can the parties contract around any of it; and what remedies does the statute give an unpaid party. Write one page. Cite the statute you actually read; do not rely on a summary article.

E2. For the same jurisdiction, research the retainage rules: is there a statutory cap on public work, is private retainage regulated, is escrow or interest required, and is there any provision requiring release of retention for subcontractors whose work is complete. Then find out whether pay-if-paid clauses are enforceable there, and under what conditions. Bring both to a construction attorney if you have access to one — the ten-minute conversation will teach you more than the ten-page article.

E3. Obtain a real, completed schedule of values from a project you have access to — your employer's, a public agency's bid documents, or a published project record. Evaluate it against the four criteria in §32.2: enough lines to measure, aligned to cost codes, aligned to schedule activities, and non-work items on their own lines. Then compute what percentage of the contract sits in the three largest lines, and write a paragraph on what that concentration would do to a monthly percent-complete negotiation.