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ARE 5.0 - PcM > Financial & Risk Management > Flashcards

Financial & Risk Management Flashcards

1
Q

General ledger statements

A

Provides statements of firm’s overall financial status so owners can make decisions crucial to firm’s profitability

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2
Q

Project cost accounting

A

Tracks revenue, expenses, profits by individual projects

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3
Q

Current assets

A

Resources of a business that are converted into cash w/in 1 yr.

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4
Q

Fixed assets

A

Resources firm uses + maintains for long periods of time like equipment and property

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5
Q

Direct personnel expense

A

Expense of employee salaries plus cost of mandatory + discretionary expenses and benefits like payable taxes + health benefits

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6
Q

Gross revenue

A

All revenue generated by a business during a given period of time

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7
Q

Indirect labor

A

Labor not charged to a specific project or revenue producing account

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8
Q

Liabilities

A

Claims against the assets of a business

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9
Q

Net revenue

A

$ that remains from billing after deducting fees and expenses

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10
Q

Overhead

A

Expenses incurred to keep a business operating whether or not any revenue is being generated

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11
Q

What are 2 examples of overhead ?

A
  1. Rent

2. Software licenses

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12
Q

What are 2 types of accounting methods?

A
  1. cash accounting

2. Accrual accounting

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13
Q

Cash accounting

A

Income received and all salaries and expenses paid

Revenue + expenses are recognized at time the business receives the cash or pays the bill

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14
Q

Accrual accounting

A

Revenue + expenses are recognized at time they are earned or incurred whether or not cash changes hands

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15
Q

Modified accrual basis method

A

Records revenue earned and billed from fees and expenses including outside project consultant fees and expenses incurred. This means revenue is based only on invoiced fee and expense amounts sent and / or received

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16
Q

Advantages of cash accounting

A
  1. Better at tracking actual cash flow
  2. Simple
  3. Best for small business /individual
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17
Q

Advantages of accrual accounting

A

Gives better idea of long term financial status

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18
Q

Balance sheet

A

Summarizes all assets and liabilities and shows financial position of a business - all assets must equally match liabilities

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19
Q

Net worth

A

Total assets minus the total liabilities

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20
Q

Owner equity

A

$ invested by owners/ stockholders

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21
Q

Profit and loss statement

A

Lists all income and expenses for certain periods of time

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22
Q

Project progress report

A

Shows hours and labor costs for each phase of the project and compares it to the estimated hours and cost

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23
Q

Office earnings report

A

Summarizes projects in terms of amount of revenue generated and expenses incurred , billed services etc

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24
Q

Aged accounts receivable

A

Status of all invoices for all projects whether or not they have been paid and “age’ of each invoice

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25
Q

What is the average collection period for invoices?

A

60-75 days

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26
Q

What generates a chargeable ratio or utilization rate?

A

Time analysis report

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27
Q

Chargeable ratio

A

% Of time on direct labor / total time spent on indirect labs and direct labor, PTO. sick time, etc.

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28
Q

What % is the breakeven point for a chargeable ratio?

A

65%

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29
Q

List the 4 types of financial ratios

A
  1. Current ratio
  2. Net profit before tax
  3. Overhead rate
    4 quick ratio
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30
Q

Current ratio or solvency

A

Measure of a firm’s ability to pay current debts

  1. 0 is the min. Acceptable
  2. 5 is healthy

Formula: total current assets ÷ total current liabilities

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31
Q

Net profit before tax

A

% Of profit is based on net revenue

Total annual revenue - consultant fees + reimbursable expenses

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32
Q

Asset

A

Anything a business owns that can be given a value

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33
Q

Overhead rate

A

Total office overhead/ total direct labor

Should range from 1.30-1.50

When using to calculate fees the overhead rate is multiplied by the estimated cost of direct labor

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34
Q

Quick ratio or liquidity

A

firm’s ability to convert assets to cash

formula: Cash + account receivables + revenue earned but not yet billed ÷ total current liabilities

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35
Q

What are the 2 steps in setting fees?

A

1 determine hourly rates

2. Determine time to complete the work

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36
Q

What is the most common method to set a fee?

A

Billing method

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37
Q

Billing method

A

Charge hourly rate for staff member working on project

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38
Q

How can you simplify the billing rate method?

A

By using a net multiplier

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39
Q

What is the typical net multiplier for most firms?

A

2.7-3.0

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40
Q

How is net multiplier calculated?

A

Net revenue of firm / cost of direct labor

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41
Q

What is break even rate?

A

Method to calculate fee

Employee’s base salary x break-even rate = hourly rate charged to client

Accounts for employee salary + amount of overhead attributed to employee

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42
Q

How do you calculate the break-even rate?

A

Overhead rate + the unit cost of 1.0 for an hour of salary

Target range= 2.5-2.75

43
Q

What is a typical range of break-even rate?

A

2.3-2.5

44
Q

What is the single largest overhead expense?

A

Non-billable labor

45
Q

What are 3 examples of non-labor direct expenses?

A
  1. Prints
  2. Postage
    3 travel expenses
46
Q

In regards to fee, what should the contract outline?

A

Basis of fee, when invoices will be sent, when payment is due + penalties for late payment, provisions for non-payment

47
Q

In addition to project fee, what other 3 fees should be included?

A
  1. Non-reimbursable direct expenses
  2. Consultants fees
  3. Contingency(if any)
48
Q

Who must sign change orders?

A

The owner and the architect

49
Q

Duties

A

In a contract duties are terms/requirements

50
Q

List 3 ways to establish duties

A
  1. contract
  2. Legislative enactment (codes)
  3. Established by architect’s conduct (implied duties)
51
Q

List 4 implied duties of an architect

A
  1. Cooperating with the contractor
  2. Not interfering with contractor’s work
  3. Giving relevant info to contractor
  4. Assisting owner in coordinating work
52
Q

Liability

A

Legal responsibility for injury to a person or damage to a property

53
Q

How can the architect be found liable?

A

Through negligence

54
Q

What 4 conditions must be met for an architect to be found negligent?

A
  1. there must be a legal duty established between parties
  2. It must be proven that the architect breached a duty
  3. it must be proven that the breach of duty caused damage or injury
  4. It must be proven that there was actual damage or harm to a second party
55
Q

Statute of limitations

A

Set time limit within which a claim can be made

56
Q

Statute of repose

A

Sim. To statute of imitations but has a much longer time limit and does not begin until substantial completion or other fixed date

57
Q

What is the typical limit for statute of repose?

A

5- 10 years

58
Q

List 7 risk management strategies

A
  1. know the client
  2. use and follow well -written contracts
  3. Assign appropriate employees to the project
  4. Maintain active quality control program
  5. Thorough documentation
  6. Be careful of last-minute changes
  7. carry liability insurance
59
Q

Indemnification clause

A

Holds harmless both owners and architects for any damages, claims or losses resulting from the performance of any work on the project whether by contractors or others who architects have no contractual relationship with

60
Q

What AIA contract outlines the indemnification clause?

A

AIA Doc 201

61
Q

What are 3 ways to minimize 3rd party claims?

A
  1. Exclude language in contract that explicitly states to provide management of construction unless those services are specifically provided
  2. Do not give direction for means / methods of construction
  3. Point out obvious construction safety issues to contractor
62
Q

When may courts not enforce the indemnification clause?

A

If the advice an architect did / did not give Was primary cause of damage or injury

63
Q

What AIA document outlines copyright rules?

A

AIA Doc B101 - Standard form of agreement between the owner and architect

64
Q

What document outlines types of insurance architects must purchase?

A

AIA Doc B101

65
Q

What 5 types of insurance must architects maintain according to AIA Doc B101?

A
  1. workers comp.
  2. Professional liability insurance
  3. General liability insurance
  4. Automobile liability insurance
  5. Employee liability insurance
66
Q

According to AIA Doc B101 what happens if the owner requests the architect to carry insurance at greater limits?

A

The owner is responsible for paying any additional cost

67
Q

What type of insurance protects the architect if one of their actions in prof. Duties causes injury or damage?

A

Professional liability insurance

68
Q

Project professional liability insurance

A

Project specific - paid for by client

Similar to regular professional liability insurance

69
Q

What type of insurance protects against claims of damage or injury that may occur on or off policy holder’s premises?

A

General liability insurance

70
Q

What type of insurance protects the architect’s building/office and contents from fire, theft, and flood?

A

Property insurance

71
Q

What type of insurance protects against slander, libel, defamation?

A

Personal injury protection

72
Q

What type of insurance protects against claims brought by employees, like sexual harassment?

A

Employment practices liability insurance

73
Q

What type of insurance is mandatory in all states and protects employees in event of workplace injuries?

A

Worker’s compensation

74
Q

What type of insurance is the owner required to carry according to AIA Doc A101?

A

Liability insurance and property insurance for full insurable value of the work

Should be the “all risk” type

75
Q

According to AIA Doc A101, what 4 types of insurance are contractors required to carry?

A
  1. Commercial General Liability Insurance
  2. Automobile liability coverage insurance
  3. Worker’s Compensation Insurance
  4. Employer’s liability insurance
76
Q

Umbrella insurance

A

Provides higher limits for general liability, automobile, and employer’s liability policies

77
Q

What are the 5 most common methods of compensation?

A
  1. Stipulated sum (fixed fee)
  2. Cost plus fee
  3. Percentage of construction cost
  4. Unit cost
  5. Progress payments
78
Q

Describe the stipulated sum method of compensation

A

Owner pays architect a fixed sum for a specific set of services. Usually paid out monthly according to % of compilation of the 5 basic phases of services - reimbursable expenses are additional fee

79
Q

Describe the cost plus fee method of compensation

A

Architect is compensated for actual expenses of doing job plus a reasonable fee for profit

Actual expenses include employee salaries, employee benefits, direct expenses and office overhead

80
Q

List the 3 variations of the cost plus fee compensation method

A
  1. Multiple of direct personnel expense
  2. hourly billing rates method
  3. Multiple of direct salary expense
81
Q

Multiple of direct personnel expense

A

Direct salary of employees is determined and multiplied by a factor to account for req. Personnel expenses like sick time, taxes, health care etc.

Ex: if an employee’s direct personnel expense is $30 /hour and the multiplier is 2.5 then the cost to the client for that person is $75/hour

82
Q

Hourly billing rate compensation method

A

A multiplier is built into the hourly rate and the client only sees one number for each type of employee on the project.

83
Q

Multiple of direct salary expense compensation method

A

Sim. To multiple of direct personnel expense but with a larger multiplier to provide for employee benefits

84
Q

Percentage of construction cost compensation method

A

Fee is a fixed % of the cost of construction. Less commonly used today

85
Q

Unit cost compensation method

A

Fees based on a definable unit like square footage. works well for projects with a large amount of repetition

86
Q

Progress payments compensation method

A

Calculated by multiplying agreed on percentages by owner’s most recent budget. Updates to the budget will affect future payments

87
Q

Direct labor

A

Time charged to projects whether invoiced or not

88
Q

Indirect labor

A

Time charged to non-project related activities

89
Q

Utilization rate

A

Direct labor expressed as a percentage of total labor

90
Q

Net operating revenue

A

Net dollars remaining after deducting the invoiced consultants fees and expenses and all reimbursable and non-reimbursable project-related expenses

91
Q

Net multiplier

A

Ratio of Net operating revenue to total direct labor - measure of return for every dollar of direct labor

92
Q

Net profit

A

Dollars remaining after deducting all direct and indirect labor and indirect expenses, before any distributions are made or taxes are paid

93
Q

Current earnings

A

Net dollar amount after all distributions are made and all applicable taxes have been deducted

94
Q

Leverage

A

Firm’s ability to manage debt effectively

Formula: total liabilities ÷ total equity X 100

95
Q

Return on equity

A

Measures accumulated amount of money returned on a stockholders investment for their risk and efforts

Formula: total net operating revenue - total expenses ÷ total equity x 100

96
Q

What 4 indicators from a financial report does a balance sheet include?

A
  1. Solvency
  2. Liquidity
  3. Leverage
  4. Return on equity
97
Q

What are the 6 fee basis types?

A
  1. Stipulated lump sum
  2. Fixed fee + expenses (with or without a cap on expenses)
  3. Percentage of construction cost
  4. Hourly to a maximum + expenses
  5. Hourly-open-ended + expenses
  6. Fee per unit/st + expenses
98
Q

What are the 4 greatest risk factors?

A
  1. negotiation and contracts
  2. Client Selection
  3. Project team capabilities
  4. Communication
99
Q

What are 4 strategies to manage risks?

A
  1. Avoid risk
  2. Transfer risk
  3. Assume risk
  4. Control risk
100
Q

What are some things a firm can do to avoid risk?

A

Pick projects that match prior experiences & work with reputable clients

101
Q

What are some things a firm can do to manage risk?

A

Contracts and insurance

102
Q

What are some things a firm can do to assume risk?

A

Accept appropriate work, but make sure there’s enough cash to satisfy insurance deductibles

103
Q

What are some things a firm can do to control risk?

A

Adopt best practices & educate staff

ARE 5.0 - PcM (3 decks)

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