Project Budget and Financing Flashcards
A building project has just been completed in city A at a cost of $3,000,000. An identical building is planned for city B. A published cost index indicates an index of 1250 for construction in city A and an index of 1350 for construc tion in city B. The same index suggests that inflation will increase 2% by the time construction of the building in city B is completed. Approximately how much should be bud geted for construction of the building in city B?
A. $3,180,000
B. $3,300,000
c. $3,305,000
D. $3,366,000
The answer is C.
Solution
First determine the multiplying factor
cost index factor = cost index of city B/cost index of city A
= 1350/1250
= 1.08
Multiply this factor by the project cost in city A.
cost of similar project in city B = (cost in city A)
x (cost index factor)
= ($3,000,000)(1.08)
= $3,240,000
Finally, increase for inflation
budget after inclation = (cost in city B)
= x (finflation factor)
= ($3,240,000)(1.02)
= $3,304,800 ($3,305,000)
There are two other methods that can be used to achieve the same result. Inflation can be calculated first and then the cost index factor can be used, or the inflation factor and cost index factor can be multiplied and applied to the cost in city A.
Study Note: Cost indexes are commonly used on the ARE. Variations on this type of question may include just using indexes without other factors, such as inflation. The examinee may also be asked to find the cost in a city with a lower index. In this case, the factor will be a dec imal number less than one.
Which of the following need NOT be accounted for in a project development budget?
A. professional services
B. debt service
C. site development
D. a contingency
The answer is B.
Solution
Debt service is the cost to pay off the construction loan for a project and is generally considered an ongoing cost over many years, not part of the original cost of the project.
During the programming process for a building pro ject, the client asks the architect to diffuse costs by building in stages. The architect should identify this requirement as which of the following programming concepts?
A. flexibility
B. phasing
C. expansibility
D. priority
The answer is B.
Solution
The concept of phasing states that a project must be completed in stages to accommodate cost or time constraints.
Study Note: Know all of the 24 programmatic concepts listed in the book Problem Seeking, by William M. Pefia.
A published cost index gives a figure of 1440 to con struction in city A and 1517 to construction in city B. The same index suggests that inflation will increase by 5% by the midpoint of a project’s construction. The project is now budgeted to cost $1,500,000 in city A. Approximately how much should be budgeted for an identical project in city B?
A. $1,430,000
B. $1,500,000
c. $1,660,000
D. $1,720,000
The answer is C.
Solution
There are a number of ways of arriving at the same answer for this question. City B has a higher cost index, so divide the lower into the higher.
1517/1440 = 1.053
Multiply this factor by the cost in city A ($1,500,000) to get $1,580,208. Then increase this by the 5% inflation factor.
($1,580,208)(1.05) = $1,659,218 ($1,660,000)
Alternately, increase for inflation first, then use the cost index factor.
Contractor’s overhead and profit typically amount to what percentage of the construction cost?
A. 5% to 15%
B. 10% to 20%
C. 15% to 30%
D. 15% to 40%
The answer is D.
Solution
Contractor’s overhead and profit are typically 15% to 40% of the construction cost.
A school district is planning a new elementary school to replace an outdated facility. A preliminary budget made during programming has shown that the available funds set aside for the school have been exceeded by 8%. What should the architect do?
I. Suggest that additional funds from other school building projects be used.
II. Review the design from a value engineering standpoint for approval by the client to see if costs can be reduced without sacrificing quality.
Ill. Discuss with the client the possibility of reducing the required area.
IV Modify the statement of need concerning the desired level of finish and construction quality on noncritical portions of the facility after consultation with the client.
V Propose that building be postponed for a school term until more money can be allocated.
A. V, then IV
B. III, then IV
C. II, then III
D. IV, then I
The answer is B.
Solution
Because the amount is only 8%, this could probably be made up through a slight reduction in area (statement Ill) and modifying some levels of quality (statement IV).
Because it is only the programming phase, value engineer ing is not possible. School districts cannot borrow money from other accounts and usually need to have schools com pleted as originally scheduled.
The architect typically has the LEAST control over which element of project cost?
A. escalation budget
B. percentage of site work relative to building costs
C. professional fees and consultant services
D. financing costs
The answer is D.
Solution
Financing costs are set by the owners lender and the architect has no control over this fee.
The architect can, of course, control his or her own fees and, to a certain extent, can negotiate with consultants, so C is incorrect. Because the architect can control building costs and site work through design, B is not correct. Although the rate of escalation cannot be controlled, the amount depends on the base cost of construction, which can be controlled through design.
A developer who is purchasing farmland to convert to a housing development would most likely finance the pro ject with a
A. bridge loan
B. mezzanine loan
C. blanket loan
D. conventional mortgage
The answer is C.
Solution
A blanket loan is a common tool of developers and is used for the purchase ofland that a developer intends to subdi vide and resell. Generally it includes a clause that releases each subdivided plot from the loan as it is purchased and a portion of the debt is repaid.
A bridge loan is a short-term loan used to close quickly on a property or to finance a project that must begin immedi ately while waiting for another lender to approve a long term loan. A hard money loan is similar and is based on the value of the property against which the loan is made. The amount of the loan depends on the quick-sale value of the property or the loan-to-value ratio.
Mezzanine loans, which are often used by developers, are large loans with a variable interest rate that increases sub stantially near the time that the repayment is due. Stock in the developer’s company is used as collateral, as opposed to a conventional loan, where the property itself would serve as collateral. The loan requires a gamble that the property will produce enough revenue to repay the loan when the interest rates escalate.
A conventional mortgage, which may have either a fixed or adjustable interest rate, is secured by the property pur chased. The party borrowing the money agrees to repay the loan over a period of time, and when the debt is repaid, the borrower has clear title to the property. If the borrower defaults, the lender may begin foreclosure and seize the property.
On average, where do construction costs tend to be lowest?
A. in urban areas
B. in suburbs
C. in rural areas
D. construction costs for a project are the same regardless of the locale
The answer is B.
Solution
Construction costs tend to be lowest in suburban areas. Workers in urban areas tend to demand higher wage rates, escalating the cost, while access and transportation to remote rural areas can also force the cost to rise. Suburban areas are generally well connected to urban areas by major transportation routes, but they are not so remote that the cost of transporting materials from the city to the site becomes prohibitive.
Which of the following has the greatest impact on labor costs?
A. a requirement to use union labor
B. the interest rate
C. the geographic location of the project
D. overhead
The answer is A.
Solution
Labor unions have been a part of the United States economy since the country was founded. These organizations of workers, which began in the colonial era as systems of guilds, strive to improve working conditions, benefits, and wage rates for their membership.
However, the demands of labor unions come with a price, often raising the cost of labor and making union labor much more expensive than labor offered by open shops (businesses that use nonunion workers). This can put a contractor who usses union labor at a disadvantage when competing with a nonunion contractor on a project out for bid. If use of union labor is required by the owner, such as on some public construction projects, prices for the work may be significantly higher.
The other three answer choices have much less or no impact on labor costs. Interest rates affect the volume of construction as a whole, which in tum may affect the prices of labor and materials. Labor rates can vary by geographic location, and the cost of labor in suburban areas tends to be lower than in urban or extremely rural areas. Neither of these affects labor costs as much as a requirement to use union labor does. Overhead costs are not considered to be part of labor costs and are not included in calculations of labor rates.
