Understanding Construction Bonds and Project Financing: A Detailed Analysis, Exams of Nursing

Download Understanding Construction Bonds and Project Financing: A Detailed Analysis and more Exams Nursing in PDF only on Docsity!

AFSB 152 Practice Exam Questions

and Answers 2023/

A. Because the next highest bid ($1 million) is 25 percent more than the low bid ($800,000), which is greater than a 10 percent difference, the bond underwriter would carefully investigate the differences and may not issue the performance and payment bonds. - ✔️Contractor A submits a bid of $800,000, Contractor B submits $1 million, Contractor C submits $1.2 million, and Contractor D submits $1.1 million. Which one of the following explains the outcome of applying the 10 percent rule for bids? A. Because the next highest bid ($1 million) is 25 percent more than the low bid ($800,000), which is greater than a 10 percent difference, the bond underwriter would carefully investigate the differences and may not issue the performance and payment bonds. B. Because the difference between the high and low bids is 50 percent more than the low bid of $800,000, which is greater than a 10 percent difference, the bond underwriter would probably decline to issue the performance and payment bonds. C. Because the average of the next two highest bids is 1.05 million, and the difference between this amount and the low bid is 31.25 percent more than the low bid of $800,000, which is greater than a 10 percent difference, the bond underwriter would carefully investigate the differences and may not issue the performance and payment bonds. D. Because the difference between the average of the other bids ($1.1 million) and the low bid is 37.5 percent more than the low bid of $800,000, which is greater than a 10 percent difference, the bond underwriter would probably decline to issue the performance and payment bonds. D. A basic status report shows specific and limited data for a contract. - ✔️Which one of the following is true regarding types of contact status reports? Select one: A. As comprehensive reports contain cumulative data, analyzing a series of reports is not necessary. B. Only the comprehensive report can prove useful in establishing billing-cost-gross profit relationships. C. Both basic and comprehensive reports provide a complete financial profile. D. A basic status report shows specific and limited data for a contract. D. The parent company's domicile. - ✔️Samuel has been asked to underwrite a contract bond for an entity operating in the U.S. that has an international parent. He is only willing to write the bond through

a cooperative underwriting agreement, with indemnity agreements from the foreign parent and the U.S. entity. Under this arrangement, it is important that the indemnification be perfected and enforceable under the laws of A. The state where the project owner is located. B. The location of the project. C. The state where the U.S. entity is located. D. The parent company's domicile. A. Government requirements may require a seal on the plans from a professional engineer or a registered architect, and the design/build contractor may not have a designer on staff. - ✔️Which one of the following describes a problem a project owner could encounter when using a design/build contractor? A. Government requirements may require a seal on the plans from a professional engineer or a registered architect, and the design/build contractor may not have a designer on staff. B. The design/build contractor charges a separate design fee in addition to the construction overhead and profit, so the overall project cost may be high. C. Increased planning time should be allotted in the project for communication among design professionals, contractors, and the project owner. D. The design/build contractor has no experience with or knowledge of the costs associated with various construction techniques and materials. B. Contractor. - ✔️The party that directly benefits from an enhanced competitive position in private work because of the surety's assurance that its capacity to perform has been carefully reviewed is the A. Taxpayers. B. Contractor. C. Project owner. D. Architect or engineer. B. Additional compensation and an extension of time. - ✔️Stanton Construction was the general contractor on a construction project for Rowe Industries. The project experienced a delay due to a reorganization at Rowe Industries. Because this was classified as a compensable delay under the construction contract, Stanton Construction was entitled to A. An extension of time only. B. Additional compensation and an extension of time. C. Additional compensation only. D. Terminate the contract without penalty. D. Lenders bond -

✔️Which one of the following guarantees completion of a project if the principal fails to perform, in accordance with the plans and specifications, in the given time limit and free of liens? A. Timber contract bond B. Conventional bond C. Subdivision bond D. Lenders bond A. Its income is not taxed at the corporate level. - ✔️Kim operates a small business out of her home. She decided to file the company as a Subchapter S corporation. The primary advantage of a Subchapter S corporation for small businesses with a limited number of owners is that A. Its income is not taxed at the corporate level. B. Its income is taxed at the corporate level. C. Its income is taxed at both the corporate and individual level. D. Its income is taxed at a percentage of the corporate level. A. Set-aside programs were developed to assist minority-owned, disadvantaged, or women-owned business enterprises. - ✔️Which one of the following statements is true regarding set-aside programs? A. Set-aside programs were developed to assist minority-owned, disadvantaged, or women-owned business enterprises. B. Set-aside programs require that, based on their value, the top twenty-five percent of contracts and subcontracts are awarded to contractors who have experience in completing billion-dollar contracts. C. Set-aside programs are adopted by small, private-sector building contract owners. D. Set-aside programs are reserved for specialty design/build contractors only. D. Sal and Georgette should be able to recognize the method used by EBC by examining the company's balance sheet. - ✔️Recently formed Elsinore Building Company's (EBC) owner Jose, producer Sal, and underwriter Georgette are discussing EBC's tax reporting and financial reporting requirements and preferences. Which one of the following concerning this will be true? A. Because of EBC's small size, Sal and Georgette explain that federal laws will require it to use the percentage-of-completion method for its tax reporting. B. Sal and Georgette explain that the vast majority of contractors like EBC use one method for both tax reporting and financial reporting. C. Sal and Georgette explain to Josh that the primary object of most contractors' selection of a tax-reporting method is accuracy. D. Sal and Georgette should be able to recognize the method used by EBC by examining the company's balance sheet.

D. By ensuring that the bond does not require the surety to finance the principal or to engage a completing contractor - ✔️Hazardous waste is a genuine concern for the surety underwriters at Welsh Surety. They are aware that they can expect changes as the laws on hazardous waste liability continue to evolve. Which one of the following is a way for the underwriters to protect Welsh Surety from exposure to third-party liability outside the protection of the bond penalty? A. By ensuring that the bond requires the surety finance its principal to complete the bonded project B. By accepting title to real estate as a way for the indemnitor to satisfy its obligation C. By ensuring that the bond requires that the surety arrange for the completion of the contract, rather than finance its principal D. By ensuring that the bond does not require the surety to finance the principal or to engage a completing contractor C. Forfeiture bond - ✔️William has been asked to underwrite a surety bond for a construction project with efficiency guarantees. Even though the contractor seems familiar with the plans and specifications of the project, and has successfully completed similar projects, William is still concerned about the efficiency guarantees. Which one of the following type of bond will limit the surety's exposure to paying the bond penalty to the obligee? A. Specific performance bond B. Indemnity bond C. Forfeiture bond D. Payment bond B. The obligee may forgive a delay or liquidated damages. - ✔️Which one of the following is an advantage of the takeover option? A. The surety waives the penal sum of its performance bond as a defense. B. The obligee may forgive a delay or liquidated damages. C. The surety must complete the contract irrespective of cost. D. The surety must collect funds from the obligee as the work progresses. C. Overbilling of $30,000. - ✔️A contract status report provides costs incurred to date of $40,000, gross profit recognized to date of $10,000, and billings to date of $80,000. This reflects an A. Underbilling of $40,000. B. Overbilling of $40,000. C. Overbilling of $30,000. D. Underbilling of $30,000. D. $75,000 - ✔️Major Office Complex Financial Data

25% Complete Total Contract: Contract price $1,100,000 Estimated price 1,000, Estimated gross profit $100,000 Cumulative From Inception: Billings to date $300,000 Costs incurred to date 250,000 Billings in excess of cost $50, Collections to date $200,000 Costs paid to date 125,000 Collections in excess of payments $75, Financial Data is shown above for Construction Company's $1,100,000 contract for its Major Office Complex project. Based on 25 percent completion, what is the recognized/earned gross profit using the cash accounting method? Select one: A. $ B. $25, C. $50, D. $75, A. In the private sector, owners and architects often select the bidders informally from among their friends and acquaintances. - ✔️Contractor Roger Ellis is considering taking his construction company in a new direction, planning to transition from working in the public sector to projects in the private sector. Roger will find that one notable difference between construction contracts for public work and those for private work is that A. In the private sector, owners and architects often select the bidders informally from among their friends and acquaintances B. Bidders must usually prequalify with the project owner to win work in the private sector. C. A sealed competitive bid process is used in most private projects. D. Private work is generally bid at a lower price than similar public work. D. Review. - ✔️A procedure designed to express limited assurance that financial statements conform to generally accepted accounting principles is a(n) A. Compilation. B. Audit. C. Preparation. D. Review. A. Estimating, planning, and managing the work to be performed. - ✔️The quality of the plans and specifications can greatly influence three tasks that can determine whether the contractor can successfully perform the work. The three tasks are A. Estimating, planning, and managing the work to be performed. B. Determining where, when, and how the project should be built.

C. Evaluating the plans, evaluating the contractor's expertise needed for the contract, and noting any errors or omissions. D. Examining the plans and specifications, rejecting any unclear details, and approving the corrected documents. A. Genkins might consider opening a regional office in the new region with the expectation of competing for work there on an ongoing basis. - ✔️Genkins Construction is a general contractor. Because of the highly competitive market in the area surrounding its office, where it typically bids jobs, Genkins began bidding jobs outside its usual territory. Genkins won bids on five projects that are 400 miles west of its normal operating territory in a nearby state. Genkins expects those jobs to continue over the next two years, but development in the area appears promising, so Genkins might bid additional jobs in this new location. Aside from project-specific risk, what other possibility might Genkins consider? A. Genkins might consider opening a regional office in the new region with the expectation of competing for work there on an ongoing basis. B. Genkins might consider extreme differences in the weather conditions between the two general locations when bidding jobs. C. Genkins might consider the effect of bid spreads on those jobs that it negotiates with private owners. D. Genkins might consider subcontracting all five jobs entirely, rather than sending its own employees to that area. A. Financial statement analysis - ✔️As underwriter Justin examines various forms needed for trend analysis and forecasting, which one of the following will provide a basis for comparing the as- given and as-allowed amounts related to a financial statement? A. Financial statement analysis B. Completed surety application C. Contract status report D. Gross profit comparison A. Soliciting an architect's comments regarding performance of the work - ✔️Which one of the following best describes the reason for a status inquiry? A. Soliciting an architect's comments regarding performance of the work B. Gaining the underwriter's perspective on a project's performance to date C. Procuring progress status reports from producers while visiting job sites and conversing with contractors D. Confirming the status of a project at the time a contract status report is being furnished D. Second-tier claimant -

✔️Farrell Lighting is involved in the construction of a new government building in Washington D.C. Farrell Lighting is supplying all of the indoor lighting fixtures to Reid Electrical. Reid Electrical is the electrical subcontractor on the job. Under the Miller Act, Farrell Lighting could file a payment bond claim as a A. Mechanic B. Supplier to a supplier C. First-tier claimant D. Second-tier claimant

• ✔️All of the following are events that must occur before a surety has any obligation to act under its performance bond, EXCEPT: A. The obligee must have performed its obligations under the contract. B. The principal must be in default under the contract. C. The principal must terminate the obligee's right to proceed under the contract. D. The obligee must declare the principal to be in default under the contract. D. A surety needs additional information, such as the contractor's overall capacity and financial capacity, to adequately evaluate the work-backlog risk of granting this bond. - ✔️A highly-experienced contractor has two low-risk jobs and one medium-risk job in its backlog that are all to begin in the spring. Which one of these statements is accurate with regard to the surety's work-backlog risk analysis? A. A surety needs additional information, such as project-specific risks, which include weather conditions, to adequately evaluate the work-backlog risk of granting this bond. B. A surety's risk analysis of this work backlog would not result in its granting the bond. C. A surety's analysis of this work backlog would result in its granting the bond. D. A surety needs additional information, such as the contractor's overall capacity and financial capacity, to adequately evaluate the work-backlog risk of granting this bond. C. $250,000. - ✔️Eastown Contracting's balance sheet shows $100,000 in cash, $300,000 in accounts receivable, $50,000 in equipment, and $150,000 in accounts payable amounts; the contractor's working capital is A. $500,000. B. $300,000. C. $250,000. D. $150,000.

A. Assessing owner Jim Johnson as to his appropriate business practices and standards - ✔️Surety analyst Bill Haywood is using the 10-step process to analyze Johnson Construction Company for trending and forecasting using its financial statements and other relevant sources of information. Which one of the following will be one of Bill's last steps to be done? A. Assessing owner Jim Johnson as to his appropriate business practices and standards B. Looking at status reports for open jobs as of the analyzed dates C. Assessing the cash or capital position of the company D. Making financial comparisons using the company's financial statements B. The contractor can often influence the timing of collection of receivables and payment of payables. - ✔️Which one of the following is an advantage of the cash method of construction accounting? A. It provides an accurate measure of the balance sheet condition at a point in time. B. The contractor can often influence the timing of collection of receivables and payment of payables. C. Cash requirements to fund income tax payments are easily forecast. D. Job revenue and costs are likely to match the business activity that generated them. B. Financing activities - ✔️Short-term borrowing, proceeds from issuance of common and preferred stock, and dividends paid are analytical considerations for which one of the following portions of the statement of cash flows? A. Operating activities B. Financing activities C. Investing activities D. Reconciliation of net income to net cash provided by operating activities C. The scope of the certified public accountant's (CPA's) engagement - ✔️Jonathan, a surety underwriter, has received the annual financial statement from Way Construction, and begins his assessment. Which one of the following does Jonathan consider when first assessing the quality of a financial statement? A. The number of years the CPA has been in business B. The name of the CPA that has been engaged C. The scope of the certified public accountant's (CPA's) engagement D. The page count for the complete financial statement C. Marla conducts a review of the individual and corporate indemnitors' financial condition, doing this after evaluating the principal's own financial condition. -

✔️Marla is a claims representative with Wilson Sureties gathering information needed for claims relating to Greyson Enterprises. As part of this process, which one of the following best describes Marla's activities in her official capacity? A. Marla's most extensive and time-consuming component of gathering information for the surety occurs at each of the principal's project sites. B. Marla begins her investigation by meeting with each of the principal's lenders, including the principal's bank, to get their financial assessments of the principal before contacting the principal. C. Marla conducts a review of the individual and corporate indemnitors' financial condition, doing this after evaluating the principal's own financial condition. D. Marla contacts the principal's subcontractors and suppliers, especially appropriate when the principal has requested financial assistance. C. Although owner Morris has life insurance in place, the contracting firm lacks a business continuity plan or buy-sell agreement. - ✔️Whitewood Surety Company is evaluating the Winston Company for contracting bonding of a new school project. Involved in discussions and compiling of information are producer Gene, Whitewood branch underwriter Hamish, and Jeremiah Morris, founder and owner of the Winston Company contracting firm. From the underwriter's perspective, which one of the following should cause the most concern for Hamish? A. Winston lacks the support of subsidiaries or affiliates, and so must be underwritten by Whitewood Surety as a stand-alone entity. B. Hamish has not received a report back from a credit reporting agency concerning Winston but was given schedules of accounts payable from the contractor, and local suppliers vouched for its bill payment promptness. C. Although owner Morris has life insurance in place, the contracting firm lacks a business continuity plan or buy-sell agreement. D. Winston does not own any equipment for its contracted projects, but has leased all of them with an established company over the last twenty years, as long as Winston has been in business. B. Is limited to verifying the accuracy of schedules the contractor provides. - ✔️An underwriter's direct verification of a contractor's financial data A. Includes verification of the contractor's financial statement. B. Is limited to verifying the accuracy of schedules the contractor provides. C. Typically involves testing performed by an auditor. D. Can usually be obtained from outside parties without informing the contractor.

C. The contractor is responsible for cost overruns, and the owner and contractor share cost underruns. - ✔️Which one of the following correctly describes a sharing clause in a construction contract? A. The owner and contractor share cost overruns and cost underruns. B. The contractor is responsible for cost overruns, and the owner receives the benefit of cost underruns. C. The contractor is responsible for cost overruns, and the owner and contractor share cost underruns. D. The owner is responsible for cost overruns, and the contractor receives the benefit of cost underruns. A. The Schedule of construction in progress is one of the most important schedules used by producers and underwriters when analyzing a contractor's financial statement. - ✔️Rochelle is studying the supplemental data provided in Babcock Builders' financial report. As she does this, which one of the following will she find is correct as to its description? A. The Schedule of construction in progress is one of the most important schedules used by producers and underwriters when analyzing a contractor's financial statement. B. The Schedule of selling, general, and administrative expenses is usually associated with acquisitions and dispositions or refinancing of construction equipment and real estate. C. Detailing of sources of other income and expenses, such as interest income and expense included in the income statement, is found in the Schedule of changes in working capital. D. Itemizing of expenses known as overhead, critical to analyzing a contractor's results and trends, is found in the Schedule of changes in property, plant and equipment. A. An obligation of the principal in a bid bond that is not a manuscript bid bond form is that it must furnish performance and payment bonds with an acceptable surety. - ✔️Which one of the following statements is a principal's obligation in a bid bond that is not a manuscript bid bond form? A. An obligation of the principal in a bid bond that is not a manuscript bid bond form is that it must furnish performance and payment bonds with an acceptable surety. B. An obligation of the principal in a bid bond that is not a manuscript bid bond form is that it must complete the job for the bid price.

C. An obligation of the principal in a bid bond that is not a manuscript bid bond form is that it must enter into a contract with the obligee. D. An obligation of the principal in a bid bond that is not a manuscript bid bond form is that it must hire a certain number of subcontractors. D. May not contain specific penal sums or bond penalties. - ✔️Unlike performance and payment bonds, bid bonds A. Allow contractors to offer their own bid bond form containing a forfeiture clause. B. Offer no alternatives for a contractor. C. Have no standardized forms available. D. May not contain specific penal sums or bond penalties. A. The type, size, and location of work for the past three to five years; the largest previous backlog; and the gross profit or loss on all major jobs completed. - ✔️So that the underwriter can evaluate the contractor's completed jobs, work programs, and experience, the principal should provide A. The type, size, and location of work for the past three to five years; the largest previous backlog; and the gross profit or loss on all major jobs completed. B. The type, size, and location of work for the past two years; the current backlog; and the gross profit or loss on all major jobs completed. C. The type, size, and location of work for the past three to five years; the backlogs from the past five years; and the gross profit or loss on all jobs completed. D. The type, size, and location of work for the past two years; the largest previous backlog; and the gross profit or loss on all jobs completed. B. Balance sheets, income statements, cash flow statements, and supporting notes and schedules for the past three to five years, including interim statements for the current fiscal year and concurrent statements for all indemnitors. - ✔️Underwriter Albert of Smithson Insurance and Surety would be most interested in which one of the following groups of financial statements? A. Balance sheets, income statements, cash flow statements, and supporting notes and schedules for the past three to five years, including all concurrent interim statements and current fiscal year statements for all indemnitors. B. Balance sheets, income statements, cash flow statements, and supporting notes and schedules for the past three to five years, including interim statements for the current fiscal year and concurrent statements for all indemnitors. C. Balance sheets, income statements, cash flow statements, and supporting notes and schedules for the past two years, including all concurrent interim statements.

D. Balance sheets, income statements, cash flow statements, and supporting notes and schedules for the past two years, including interim statements for the current fiscal year. A. "Current", "noncurrent or secondary", and "fixed." - ✔️The principal asset classifications in the contractor's balance sheet are commonly termed A. "Current", "noncurrent or secondary", and "fixed." B. "Fixed", "short term", and "long term." C. "Current", "fixed", and "long term." D. "Fixed", "current", and "unclassified." A. Work on the project is completed early in the contract term, and the contract spans multiple years. - ✔️The payment of retainage held by the contractor is of particular interest in underwriting a subcontractor whose A. Work on the project is completed early in the contract term, and the contract spans multiple years. B. Work on the project is completed throughout the entire contract term, and the contract spans a year or less. C. Work on the project is completed in the last ninety days of the contract term, and the contact spans multiple years. D. Work on the project is completed throughout the entire contract term, and the contract spans multiple years. D. The owner and the architect. - ✔️The responsibility for presenting project plans and specifications from which bidders can readily determine how the project should be built and its costs is that of A. The contractor. B. The architect. C. The owner and the contractor. D. The owner and the architect. B. That any payments the surety made were in bad faith - ✔️Valley Construction and several of its investors have signed an indemnity agreement with Action Sureties. Which one of the following actions must this principal and indemnitors show to escape their obligation to indemnify the surety? A. That the surety has issued a manuscript contract B. That any payments the surety made were in bad faith C. That the surety did not have standing to request indemnification D. That the surety had previously issued bonds to the principal B. Collateral -

✔️In addition to accounting for expected loss payments and contract balances, a surety must also account for which one of the following items when calculating its net case loss reserve? A. Incurred but not reported (IBNR) losses B. Collateral C. Premium paid D. Inception date of the contract B. This clause gives the prime contractor reasonable time to collect from the owner before payment to the subcontractor. - ✔️Which one of the following correctly describes the effect on payment of subcontractors when there is a pay-when-paid clause in a construction contract? A. This clause allows the prime contractor to withhold payment to subcontractors for nonpayment by the project owner. B. This clause gives the prime contractor reasonable time to collect from the owner before payment to the subcontractor. C. This clause requires a subcontractor to be paid as soon as the subcontractor finishes work. D. This clause has no effect on payment of subcontractors. C. Keeping the contractor and producer informed of the bonding company's ability to serve the contractor's bonding needs. - ✔️Jason is a branch-office underwriter. Jason is responsible for A. Appealing home-office underwriting decisions to decline bond requests when it is clear that the best decision has been made. B. Making underwriting decisions for handling contractors' bonding needs on projects larger than those the contractor has completed in the past. C. Keeping the contractor and producer informed of the bonding company's ability to serve the contractor's bonding needs. D. Analyzing and interpreting contractors' financial underwriting information but refering any nonfinacial information to the home office for a final underwriting decision. D. A bonding company prefers a shareholders'/owners' equity ratio expressed as a percentage of backlog of 10 percent. - ✔️Which one of these shareholders'/owners' equity ratios, expressed as a percentage of backlog, is preferred by a bonding company when considering the extension of bonding credit? A. A bonding company prefers a shareholders'/owners' equity ratio expressed as a percentage of backlog of 50 percent.

B. A bonding company prefers a shareholders'/owners' equity ratio expressed as a percentage of backlog of 30 percent. C. A bonding company prefers a shareholders'/owners' equity ratio expressed as a percentage of backlog of 70 percent. D. A bonding company prefers a shareholders'/owners' equity ratio expressed as a percentage of backlog of 10 percent. C. Billing basis backlog - ✔️Jamie is examining some financial reports and documents from Highland Construction. Calculating the backlog on a revenue basis requires first calculating which one of the following from information on a contract status report? A. Profit margin B. Backlog profit C. Billing basis backlog D. Cost basis backlog B. Maintaining lists of ineligible contractors—those that have failed to complete projects, face legal charges, or have committed fraudulent or dishonest business practices. - ✔️The federal government and many state and local authorities help project owners select desirable contractors for prequalification by A. Offering selective bid lists of eligible contractors that have successfully completed projects and that follow regulations and conduct business according to fair practices. B. Maintaining lists of ineligible contractors—those that have failed to complete projects, face legal charges, or have committed fraudulent or dishonest business practices. C. Offering services to help select contractors that are proven to be financially competent, with proven track records for quality construction. D. Maintaining lists of all contractors that are registered to complete building projects within federal, state, and local jurisdictions according to appropriate guidelines. D. Johann can consult the applicable and relatively stable case law that does define the terms. - ✔️Johann is a new claims representative with Raymond Surety who is learning how to handle payment bonds proficiently. As he is studying the Miller Act, he continues to see "labor and materials" and could not find these terms defined in the Act itself. Where will Johann find clarity as to what these terms mean? A. Johann will find case law is evolving, but remains consistent between jurisdictions. B. Johann finds that manuscript payment bonds also cannot define exactly what is covered.

C. Even though not found in the Miller Act, Johann can find them defined in the Little Miller Acts. D. Johann can consult the applicable and relatively stable case law that does define the terms. D. After the architect and owner solicit bids, when the contractors begin their estimating processes. - ✔️The Forest Lane project will ultimately involve project owner Forest Lane Development Company, architect Raymond Haskins, and contractor Winsell Builders, although several other contractors were bidding on the project. Three different subcontractors will be contributing to the construction effort. For this project, the tender preparation stage of estimating most specifically began A. When each subcontractor estimates its own portion of the construction project. B. When the contractor begins estimating the materials that are needed to complete the project. C. When the architect prepares a preliminary estimate that is used to solicit bids. D. After the architect and owner solicit bids, when the contractors begin their estimating processes.