CCA Construction Contract Types and Risk Management 2 — Questions and Answers
Question 1: Under a Guaranteed Maximum Price (GMP) contract, what happens when actual project costs fall below the GMP?
- The owner retains all savings
- Savings are typically shared between owner and contractor per a agreed ratio (Correct answer)
- The contractor keeps all savings as additional profit
- The GMP is retroactively reduced for future projects
Correct answer: Savings are typically shared between owner and contractor per a agreed ratio
GMP contracts commonly include a shared savings clause where cost underruns are split between owner and contractor according to a pre-negotiated percentage.
Question 2: Which contract type is most appropriate when the project scope is well-defined, design is complete, and the owner wants maximum price certainty?
- Cost-plus-fee contract
- Time and materials contract
- Lump sum (fixed price) contract (Correct answer)
- Unit price contract
Correct answer: Lump sum (fixed price) contract
Lump sum contracts are ideal when scope is fully defined because the contractor bears cost risk and the owner gains price certainty.
Question 3: A subcontractor 'flow-down' clause in a construction contract serves what primary purpose?
- Reduces the general contractor's bonding requirements
- Passes prime contract obligations and liabilities down to subcontractors (Correct answer)
- Allows subcontractors to bill the owner directly
- Establishes payment terms between the owner and architect
Correct answer: Passes prime contract obligations and liabilities down to subcontractors
Flow-down clauses ensure subcontractors are bound by the same terms and conditions that govern the prime contract, maintaining consistent obligations throughout the project.
Question 4: In construction risk management, what is the primary purpose of a project contingency allowance?
- To cover contractor profit margins
- To fund scope changes requested by the owner
- To absorb unforeseen costs and uncertainties within the defined scope (Correct answer)
- To pay for design errors and omissions
Correct answer: To absorb unforeseen costs and uncertainties within the defined scope
Project contingency is reserved for unknown-unknowns and uncertainties within the existing scope, not for scope additions or contractor profit.
Question 5: Which construction contract delivery method transfers the most design risk to the contractor?
- Design-Bid-Build (DBB)
- Construction Manager as Advisor (CMa)
- Design-Build (DB) (Correct answer)
- Multiple prime contracts
Correct answer: Design-Build (DB)
In Design-Build, the contractor is responsible for both design and construction, bearing design errors, omissions, and coordination risk.
Question 6: What is the key audit concern with 'open book' cost-plus contracts?
- The owner cannot verify actual costs incurred by the contractor
- The contractor has little incentive to control costs (Correct answer)
- The contract lacks a defined completion date
- The owner assumes no financial risk
Correct answer: The contractor has little incentive to control costs
Because the owner reimburses actual costs plus a fee, the contractor has limited incentive to minimize expenses, making cost control auditing critical.
Question 7: A construction contract's 'no damage for delay' clause primarily benefits which party?
- The subcontractor
- The contractor
- The owner (Correct answer)
- The surety
Correct answer: The owner
No damage for delay clauses protect the owner by limiting contractor monetary recovery for owner-caused delays, restricting remedies to time extensions only.
CCA Construction Contract Types and Risk Management 2
Under a Guaranteed Maximum Price (GMP) contract, what happens when actual project costs fall below the GMP?