167 Midterm 1 Review

8/8/2019 167 Midterm 1 Review

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167 Midterm 1 Review

CONSTRUCTION METHODS

A. Construction Industry

a.

Accounts for $800 billion in expenditures per year in new construction alone andconstitutes 7 to 11 percent of the gross domestic product

b. 15 percent of the industrial workforce is directly or indirectly involved in construction

B. Manufacturing Vs. Construction

a. Manufacturing

i. Mass production

b. Construction

i. Construction industry is characterized by custom-build project

ii. Relatively complex and generally are completed through the combined efforts

of different crafts

iii. Location is unique to each project, unique demands are made on constructionworkers

C. Public vs. Private Construction

a. Public

i. Financed by government agencies in municipalities, counties, state and the

federal government

ii. Ex. Highways, bridges, sewers, water supply projects, land reclamation projects,

and public buildings

iii. Funded through: bonds, endowments and special taxation assessments

b. Private

i. Accounts for an average of 70 to 80 percent of the construction volumeii. Funded through direct loans from outside creditors, sales and fixed assets

D. General Contract Method

a. Consists of a contract drawn up between the owner and a general contractor

i. Public works projects

1. Begins with public advertisement which advises all interested parties of

the particulars of the project and the upcoming bid date.

2. Purpose of the guidelines is to establish a competitive spirit in which

every bidder has an equal opportunity to be awarded the contract

ii. Private sector

1. The owner may elect to award the contract to a contractor other thanthe lowest bidder, or the owner may try to negotiate a price lower than

those stated in the bids.

b. Design-Bid-Build

i. Undertaken in succession without overlap



ii. The general contractor’s bid includes profit for both the subcontractor’s work

and the general contractor’s work, thus the owner will expect additional

markup.

iii. Many owners place contractual limits on the amount of work that can be

subcontracted or stipulate that a certain amount of work, such as 15 to 20

percent, must be performed by the general contractor’s own workers

iv. Often extends the project duration

v. Disadvantage- owner does not have an agent or “friendly” party involved in the

contractual arrangement.

vi. This method is not desirable because it leads to tight bids and small profit

margins.

vii. Creates an incentive for GC to “beat up” on subcontractors, cut corners on

performance, and to look for loopholes in the contract that might bolster

profits.

E. Separate Contract Method

a. Multiple prime contracts method is an arrangement by which the owner lets contracts

directly to specialty contractors for various portion of the work.

b. Benefits to the owner- profit that would have been earned by the GC Is kept by the

owner

F. Design-Build Method

a. Owner lets a single contract for both the design and construction of a project

b. Utilizes the construction firm’s experience in the design phase

c. Very popular in constructing large, industrial-type projects such a petrochemical plants

d. Fewer changes will arise during constriction due to designer error

e. Disputes between the design/ construction firm must be resolved without of the

involvement of the owner

f. Possible for construction to begin before completion of the design for the project

g. Overlapping of design and construction is referred to as fast-tracking

h. In periods of high-inflation, the approach has increased viability

G. Method of Payment

a. Cost-Reimbursement terms and Fixed-price terms

i. Performed entirely on the owner’s funds

ii. As the provider of the contract services incurs costs in providing the services,

the owner periodically reimburses the provider for these incurred costs.

1. Cost plus percentage fee-simplest form of cost-reimbursable

commercial terms

a. The owner agrees to reimburse the costs incurred by the

provider of the services and , in addition , to pay a fee equal to

the fixed percentage of incurred costs that is stipulated in the

contract.

2. Cost plus fixed fee



a. The owner reimburses all of the service provider’s costs and

pays a fee that is fixed at the beginning of the contract.

b. Fixed-price terms

i. There is no relation between the costs that the provider of services may be

incurring and payment received from the owner on fixed-price contracts

ii. The owner pays the fixed price stipulated in the contract regardless of what

costs the provider is incurring.

iii. Also called a lump sum- the provider will be paid an agreed fixed price for

providing the contractually stipulated services.

LAWS AND CONTRACTS

A. Laws, Statues, and Regulations of Governmental Agencies

a. A second important source of rules governing the construction process consists of three

separate categories of laws, statutes, and regulations of governmental agency

i. Statues

1. Basic rules and authority for the contracting regulation

b. Tort Laws

i. The laws covering wrongful acts, damages, and injuries

ii. The central concept of tort law is that in living our daily lives we cannot with

impunity, either intentionally or unintentionally, conduct our affairs in a manner

that will injure or damage others.

B. Contracts

a. Three elements for contracts formation are necessary: an offer, an acceptance, and

consideration.

i.

Offer1. A manifestation of interest or willingness to enter into a bargain made

in such a way that the receiving party will realize that furnishing

unqualified acceptance will seal the bargain

ii. Acceptance

1. Must be an acceptance of whatever was offered

2. A contract between two parties cannot be legally binding until and

unless there is meeting of the minds- that is, the mutual agreement is

not made under duress- at the time the contract is formed.

iii. Consideration

1. Consideration can be money, but not always. It can just as well be someother “cash good” thing , such as the discharge of an obligation that has

a value.

2. The main point is that consideration for both parties to the contract

must always be present in one form of another in order for a contract to

be formed.

b. The contract must not contravene the law



C. Privity of Contract

a. If a party has been damaged by another and seeks redress through a lawsuit under a

theory of contract liability, that party must first establish the existence of a contract

with the party who caused the damage by breaching that contract. This existence of

such a contractual relationship is called privity of contract.

D. Third Party Beneficiary

a. When two or more separate entities has a valid contract with a common third party m

they may be third-party beneficiary of the contract between the “common” entity and

the other non-common entities.

TIME VALUE OF MONEY

A. Life of an asset

a. Physical Life

b. Economica Life

c. Profit Life

d. Accounting or Depreciation Life

B. Value of Money

a. The essential problem in evaluating projects over time is that money has a time value

b. A dollar now is not the same dollar a year from now

c. A dollar today is worth more than a dollar in the future because it can be used

productively between now and then.

d. Any given amount of money now is typically worth more than the same amount in the

future because of inflation

e. As prices go up as a result of inflation, the current buy power of the dollar erodes

C.

Interesta. Represents the earning power of money, the power of money to satisfy wants.

b. Premium paid to compensate a lender for the administrative cost for making the loan,

the risk that the long will not be repaid, and the loss of use.

D. Discount Rate

a. Is one way of translating cash flows in the future to the present

b. Can be used to determine by how much any future receipt or expenditure is discounted;

that is, reduced to make it correspond to an equivalent amount today

E. NPV

a. Is a way of comparing the value of money now with the value of money in the future

b. The term discount rate refers to a percentage used to calculate the NPV, and reflects thetime value of money.

c. NPV does not equal the present value of profit

d. A positive NPV for a project indicates the present value of the net gain corresponding to

the project cash flows

F. Benefit Cost Ratio



a. Defined as the ratio of discounted benefits to the discounted costs at the same point in

time

b. If the ratio exceeds 1, the project is profitable irrespective of different interpretations of

such benefits or costs.

G. Internal Rate of Return

a. Defined as the discount rate which sets the net present value of a series of cash flows

over the planning horizon equal to zero.

b. The rate of interest earned on the unrecovered balance of an investment where the

terminal balance is zero.

H. Payback Period

a. The length of time within which the benefits received from an investment can repay the

costs incurred during the time in question while ignoring the reaming time periods in

the planning horizon.

b. Initial investment/Annual Net Undiscounted Benefits

I. MARR

a. Minimum acceptable rate of return is the lowest level at which an alternative ( or an

incremental cash flow between two mutually exclusive alternatives) is attractive to an

individual or organization

J. Sensitivity and Breakeven Analysis

a. When small variations in a particular estimate would change the alternative selected,

the decision is said to be sensitive to the estimate

b. Describes the relative magnitude of a particular variation in one or more elements of a

problem that is sufficient to alter a particular decision

TAXES AND STRAIGHT LINE DEPRECIATION

A. Effects of Tax and Depreciation

a. Earnings before depreciation and taxes do not represent the actual benefits realized by

a firm

b. Depreciation can be viewed as an expense and thus reduces gross income for tax

purposes

c. Depreciation expense is recorded in the income statement of a business

BONDS

A. Sold by an organization to raise money

a. Each bond has a stated redemption amount, called the face value, at which it can beredeemed at maturity.

b. Bonds sell for less than their face value when buyers are not satisfied with the rate of

interest promised, call the bond rate, and more than the face value when market

interest rates drops below the bond’s face rate.

c. Interest



i. Paid in premiums: Annuity=face value* bond rate, the number of payments per

year is a function of the bond rate structure

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167 Midterm 1 Review