Financial & Risk Management

Question 1

cash accounting

Answer 1

• Cash accounting
○ Revenue and expesnes recognized at time received or paid
○ Better at tracking cash flow
Usually used by smaller offices

Question 2

accrual accounting

modified accrual basis

Answer 2

• Accrual accounting
○ Revenue and expenses recognized when earned or incurred whether nor not the money has come in / gone out
○ Better for long term financial status
○ Used by larger offices
○ Double entry bookkeeping
§ Entries listed chronologically in journal
§ Listed again in ledger by individual account categories
• Modified accrual basis
Includes everything but fees that have been earned but not yet billed

Question 3

balance sheets

Answer 3

Balance sheets
• Summarizes all assets and liabilities and shows financial position of the business
• All assets = all liabilities
• Shows net worth
○ Total assets - total liabilities
○ Owners equity = money invested in a business by owners
Total assets = total liabilities + net worth

Question 4

profit and loss / income statements

Answer 4

Profit and loss (income) statement
• Lists all income and expenses for certain period of time
Differences gives profit or loss

Question 5

cash flow statements

Answer 5

Cash Flow statement

Shows inflow and outflow of cash or cash equivalent/ anything accepted by banks

Question 6

project progress report

Answer 6

Project progress report
• Shows hours and labor costs for each phase of project to date compared to estimates
• Allows PM to adjust and correct as needed
Shows costs overhead & reimbursments

Question 7

office earnings report

Answer 7

Office Earnings report

projects in terms of revenue generated, expenses, % complete, unbilled services, and profit / loss

Question 8

aged accounts receivable

Answer 8

Aged accounts receivable
• Shows status of all invoices for all projects and their age
Invoice over 60 days old needs attention… older than 90 days firm is losing on interest

Question 9

time analysis report

Answer 9

Time analysis report
• Lists employees and hours they’ve worked and on what projects
• Chargeable ratio - percentage of time spent on direct and indirect labor
○ 65% chargeable ratio for whole firm is usually break even point
○ Tech staff should be 75-85
Principals are usually less

Question 10

financial ratios

Answer 10

Financial Ratios
• Used to compare against industry benchmarks
• Current ratio- totall current assets / total current liabilities
○ Firms ability to meet obligations
○ Higher the ratio the better 1.5 healthy 1.0 min accepted level
• Net profit before tax
○ Total annual revenue - fees and expenses
• Overhead
○ 1.30-1.50 - multiply ration by estimated cost of direct labor
• Quick ratio
○ Refinement of current ratio with cash, accounts receivable, revenue earned but not billed… all divided by current liabilities
○ More conservative bc it only includes most liquid assets
○ Commonly included on balance sheets along with current ratio
• Revenue per technical staff
○ Amount of net revenue produced, used to estimate reuqired net operating revenue for future budgers
• Revenue per total staff
○ Amount o net revenue per staff member per year
Annual net operating revenue divided by the total number of employees

Question 11

billing rates

Answer 11

Billing rates
• Based on employees salary benefits and overhead plus allowance for profit
• Net multiplyer = net revenue/cost of direct labor
○ Typ 2.7-3
Multiplier is slightly lower with DPE bc benefits are included in salary - not used as frequently

Question 12

agent

Answer 12

Agent
• One person who acts on behalf of another
Usually architect is agent to owner and the third party is the contractor

Question 13

duties

Answer 13

Duties
	• What one person owes another in a particular relationship
	• Defined 3 ways
		○ By contract - written or oral
		○ By legislature -  code or law 
By implied duties

Question 14

liability and negligence

Answer 14

Liability and Negligence
• Liability - legal responsibility for injury or damage
• 3 conditions for architect to be found negligent
○ Legal duty must be established
○ Must be shown that architect breached duty
Must be shown that breach of duty was cause of damage

Question 15

defense claims

Answer 15

• Viable defenses for claims against architect
○ Betterment
§ Architect should only have to pay for the difference ($$) in change orders / mistakes
□ Ie painted wall is shown but wood paneling was approved
○ Statute of limitations
§ Time limit within which a claim can be made
§ Determined by state usually 3-10 years
○ Statute of repose
§ Does not begin until problem is first discovered
Usually a second time limit with in which the claim can be made

Question 16

risk management

Answer 16

Risk Mangagement
• Know the client
• Use well written contracts and follow them - standard AIA contracts or written contracts reviewed by attorney
• Appropriate employees are assigned to each project
• Maintain quality control program
• Maintain thorough documentation
• Be very careful about last minute changes- bc of claims and lawsuits
Carry liability insurance

Question 17

privity

Answer 17

Privity: architects are protected from claims by parities with whom they have no direct contract with

Question 18

indemnification

Answer 18

• Indemnfication clause - holds harmless owner and architect for damages or losses due to contractors with no contractual relationship
May not always be supported by courts if architected directed such work

Question 19

minimizing third party claims

Answer 19

• Minimizing third party claims
○ Do not give construction method directions
○ Don’t include language that implies responsibility
Point out obvious contruction safety problems

Question 20

copyright

Answer 20

Copyright
• Architect has copyright for drawings and formal arrangement
• Must be explained in contract
• Architect can grant owner license to use drawings for consturction
Officail registration is not mandatory but is helpful

Question 21

architects insurance

Answer 21

Architects insurance
	• Owner is required to cover cost of any additional insurances more than what is typ required
	• Professional liability/ malpractice insurance - like mistakes in specs 
	• General liability 
	• Property insurance
	• Personal injury
	• Auomobile 
Workers comp

Question 22

owners insurance

Answer 22

Owners insurance
• Liability insurance
• Property insurance for full value of work
• Policies must be all risk rather than specified peril (broad coverage)
• Any costs not covered bc of deductibles are paid by owner
General conditions insurance / boiler / machinery

Question 23

contractors insurance

Answer 23

Contractors Insurance
	• General conditions require protection from claims of 
		○ Workers comp
		○ Injury / sickness to employees
		○ Injury / sickness to others
		○ Personal injury includes legal actions
		○ Damage other than to the work 
		○ Motor vehicle damage
		○ Property damage
Liability insurance

Question 24

managing accounts receivable

Answer 24

Managing accounts receivable
• Put terms of fee collections and late penalties in the contract
• Submit invoices promptly
• Make each invoice complete and easy to read and consistent
• Regular procedures for tracking accounts
○ Written record of all collections should be kept
Controlling Overhead