Financial & Risk Management Flashcards
General ledger statements
Provides statements of firm’s overall financial status so owners can make decisions crucial to firm’s profitability
Project cost accounting
Tracks revenue, expenses, profits by individual projects
Current assets
Resources of a business that are converted into cash w/in 1 yr.
Fixed assets
Resources firm uses + maintains for long periods of time like equipment and property
Direct personnel expense
Expense of employee salaries plus cost of mandatory + discretionary expenses and benefits like payable taxes + health benefits
Gross revenue
All revenue generated by a business during a given period of time
Indirect labor
Labor not charged to a specific project or revenue producing account
Liabilities
Claims against the assets of a business
Net revenue
$ that remains from billing after deducting fees and expenses
Overhead
Expenses incurred to keep a business operating whether or not any revenue is being generated
What are 2 examples of overhead ?
- Rent
2. Software licenses
What are 2 types of accounting methods?
- cash accounting
2. Accrual accounting
Cash accounting
Income received and all salaries and expenses paid
Revenue + expenses are recognized at time the business receives the cash or pays the bill
Accrual accounting
Revenue + expenses are recognized at time they are earned or incurred whether or not cash changes hands
Modified accrual basis method
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
Advantages of cash accounting
- Better at tracking actual cash flow
- Simple
- Best for small business /individual
Advantages of accrual accounting
Gives better idea of long term financial status
Balance sheet
Summarizes all assets and liabilities and shows financial position of a business - all assets must equally match liabilities
Net worth
Total assets minus the total liabilities
Owner equity
$ invested by owners/ stockholders
Profit and loss statement
Lists all income and expenses for certain periods of time
Project progress report
Shows hours and labor costs for each phase of the project and compares it to the estimated hours and cost
Office earnings report
Summarizes projects in terms of amount of revenue generated and expenses incurred , billed services etc
Aged accounts receivable
Status of all invoices for all projects whether or not they have been paid and “age’ of each invoice
What is the average collection period for invoices?
60-75 days
What generates a chargeable ratio or utilization rate?
Time analysis report
Chargeable ratio
% Of time on direct labor / total time spent on indirect labs and direct labor, PTO. sick time, etc.
What % is the breakeven point for a chargeable ratio?
65%
List the 4 types of financial ratios
- Current ratio
- Net profit before tax
- Overhead rate
4 quick ratio
Current ratio or solvency
Measure of a firm’s ability to pay current debts
- 0 is the min. Acceptable
- 5 is healthy
Formula: total current assets ÷ total current liabilities
Net profit before tax
% Of profit is based on net revenue
Total annual revenue - consultant fees + reimbursable expenses
Asset
Anything a business owns that can be given a value
Overhead rate
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
Quick ratio or liquidity
firm’s ability to convert assets to cash
formula: Cash + account receivables + revenue earned but not yet billed ÷ total current liabilities
What are the 2 steps in setting fees?
1 determine hourly rates
2. Determine time to complete the work
What is the most common method to set a fee?
Billing method
Billing method
Charge hourly rate for staff member working on project
How can you simplify the billing rate method?
By using a net multiplier
What is the typical net multiplier for most firms?
2.7-3.0
How is net multiplier calculated?
Net revenue of firm / cost of direct labor
What is break even rate?
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
How do you calculate the break-even rate?
Overhead rate + the unit cost of 1.0 for an hour of salary
Target range= 2.5-2.75
What is a typical range of break-even rate?
2.3-2.5
What is the single largest overhead expense?
Non-billable labor
What are 3 examples of non-labor direct expenses?
- Prints
- Postage
3 travel expenses
In regards to fee, what should the contract outline?
Basis of fee, when invoices will be sent, when payment is due + penalties for late payment, provisions for non-payment
In addition to project fee, what other 3 fees should be included?
- Non-reimbursable direct expenses
- Consultants fees
- Contingency(if any)
Who must sign change orders?
The owner and the architect
Duties
In a contract duties are terms/requirements
List 3 ways to establish duties
- contract
- Legislative enactment (codes)
- Established by architect’s conduct (implied duties)
List 4 implied duties of an architect
- Cooperating with the contractor
- Not interfering with contractor’s work
- Giving relevant info to contractor
- Assisting owner in coordinating work
Liability
Legal responsibility for injury to a person or damage to a property
How can the architect be found liable?
Through negligence
What 4 conditions must be met for an architect to be found negligent?
- there must be a legal duty established between parties
- It must be proven that the architect breached a duty
- it must be proven that the breach of duty caused damage or injury
- It must be proven that there was actual damage or harm to a second party
Statute of limitations
Set time limit within which a claim can be made
Statute of repose
Sim. To statute of imitations but has a much longer time limit and does not begin until substantial completion or other fixed date
What is the typical limit for statute of repose?
5- 10 years
List 7 risk management strategies
- know the client
- use and follow well -written contracts
- Assign appropriate employees to the project
- Maintain active quality control program
- Thorough documentation
- Be careful of last-minute changes
- carry liability insurance
Indemnification clause
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
What AIA contract outlines the indemnification clause?
AIA Doc 201
What are 3 ways to minimize 3rd party claims?
- Exclude language in contract that explicitly states to provide management of construction unless those services are specifically provided
- Do not give direction for means / methods of construction
- Point out obvious construction safety issues to contractor
When may courts not enforce the indemnification clause?
If the advice an architect did / did not give Was primary cause of damage or injury
What AIA document outlines copyright rules?
AIA Doc B101 - Standard form of agreement between the owner and architect
What document outlines types of insurance architects must purchase?
AIA Doc B101
What 5 types of insurance must architects maintain according to AIA Doc B101?
- workers comp.
- Professional liability insurance
- General liability insurance
- Automobile liability insurance
- Employee liability insurance
According to AIA Doc B101 what happens if the owner requests the architect to carry insurance at greater limits?
The owner is responsible for paying any additional cost
What type of insurance protects the architect if one of their actions in prof. Duties causes injury or damage?
Professional liability insurance
Project professional liability insurance
Project specific - paid for by client
Similar to regular professional liability insurance
What type of insurance protects against claims of damage or injury that may occur on or off policy holder’s premises?
General liability insurance
What type of insurance protects the architect’s building/office and contents from fire, theft, and flood?
Property insurance
What type of insurance protects against slander, libel, defamation?
Personal injury protection
What type of insurance protects against claims brought by employees, like sexual harassment?
Employment practices liability insurance
What type of insurance is mandatory in all states and protects employees in event of workplace injuries?
Worker’s compensation
What type of insurance is the owner required to carry according to AIA Doc A101?
Liability insurance and property insurance for full insurable value of the work
Should be the “all risk” type
According to AIA Doc A101, what 4 types of insurance are contractors required to carry?
- Commercial General Liability Insurance
- Automobile liability coverage insurance
- Worker’s Compensation Insurance
- Employer’s liability insurance
Umbrella insurance
Provides higher limits for general liability, automobile, and employer’s liability policies
What are the 5 most common methods of compensation?
- Stipulated sum (fixed fee)
- Cost plus fee
- Percentage of construction cost
- Unit cost
- Progress payments
Describe the stipulated sum method of compensation
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
Describe the cost plus fee method of compensation
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
List the 3 variations of the cost plus fee compensation method
- Multiple of direct personnel expense
- hourly billing rates method
- Multiple of direct salary expense
Multiple of direct personnel expense
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
Hourly billing rate compensation method
A multiplier is built into the hourly rate and the client only sees one number for each type of employee on the project.
Multiple of direct salary expense compensation method
Sim. To multiple of direct personnel expense but with a larger multiplier to provide for employee benefits
Percentage of construction cost compensation method
Fee is a fixed % of the cost of construction. Less commonly used today
Unit cost compensation method
Fees based on a definable unit like square footage. works well for projects with a large amount of repetition
Progress payments compensation method
Calculated by multiplying agreed on percentages by owner’s most recent budget. Updates to the budget will affect future payments
Direct labor
Time charged to projects whether invoiced or not
Indirect labor
Time charged to non-project related activities
Utilization rate
Direct labor expressed as a percentage of total labor
Net operating revenue
Net dollars remaining after deducting the invoiced consultants fees and expenses and all reimbursable and non-reimbursable project-related expenses
Net multiplier
Ratio of Net operating revenue to total direct labor - measure of return for every dollar of direct labor
Net profit
Dollars remaining after deducting all direct and indirect labor and indirect expenses, before any distributions are made or taxes are paid
Current earnings
Net dollar amount after all distributions are made and all applicable taxes have been deducted
Leverage
Firm’s ability to manage debt effectively
Formula: total liabilities ÷ total equity X 100
Return on equity
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
What 4 indicators from a financial report does a balance sheet include?
- Solvency
- Liquidity
- Leverage
- Return on equity
What are the 6 fee basis types?
- Stipulated lump sum
- Fixed fee + expenses (with or without a cap on expenses)
- Percentage of construction cost
- Hourly to a maximum + expenses
- Hourly-open-ended + expenses
- Fee per unit/st + expenses
What are the 4 greatest risk factors?
- negotiation and contracts
- Client Selection
- Project team capabilities
- Communication
What are 4 strategies to manage risks?
- Avoid risk
- Transfer risk
- Assume risk
- Control risk
What are some things a firm can do to avoid risk?
Pick projects that match prior experiences & work with reputable clients
What are some things a firm can do to manage risk?
Contracts and insurance
What are some things a firm can do to assume risk?
Accept appropriate work, but make sure there’s enough cash to satisfy insurance deductibles
What are some things a firm can do to control risk?
Adopt best practices & educate staff
