(SEM 1/2) Construction Finance and Risk

Question 1

What types of entities are there in construction?

Answer 1

The two types of entities in construction are financial entities and non-financial entities.

Question 2

What is a “Financial entity” in regards to construction?

Answer 2

An financial entity is am organisation that makes financial intermediary
operations such as granting of credits and loans, capital
investments, and insurance brokerage.

Question 3

What are “Non-financial entities” in regards to construction?

Answer 3

Any organisation other than a financial institution. These
type of entities can be classed as Active or Passive.

• Active entities typically rely on Incomes for which they
  provide direct services.
• Passive entities on the other hand rely on incomes that are typically regular such as rent.

Question 4

What is the business rational of construction companies?

Answer 4

Secure orders, perform work operations and generate profit.

Question 5

What is the definition of a construction market?

Answer 5

People or organisations with a qualified interest in purchasing a company’s products or services.

Question 6

What are the three main characteristics of a market?

Answer 6

Demand, Supply and Competition.

Question 7

What are the characteristics of a “Fragmented market”?

Answer 7

A fragmented market is where no single supplier provides a full solution.

Question 8

What is the definition of an “Emerging market”?

Answer 8

An emerging market is a market for potential in substantial growth.

Question 9

What is the definition of an “Mature market”?

Answer 9

A mature market is a market that has attained maximum growth potential.

Question 10

What is the definition of an “Declining market”?

Answer 10

A declining market is a market that is reducing in demand.

Question 11

What is the definition of an “Geographical market”?

Answer 11

A geographical market is a market that exists on a global, national, regional or local scale.

Question 12

What are the general assumptions for contractors when seeking orders in the construction industry?

Answer 12

• Contractor’s sole objective is to maximise profit on any given contract.
• There is little difference in cost estimate of a particular project for all the competing contractors.
• Competitors will continue to bid the same way they have done in the past.
• These assumptions underlie the entity’s significant risks.

Question 13

What are all the stages of a construction project (in order)?

Answer 13

1. Project Phase.
2. Pre-Project Planning.
3. Detail Design.
4. Demolition/Abatement.
5. Bidding and Advanced Mobilisation.
6. Construction/Production.
7. Startup/Commission.

Question 14

What are the two terms of risk that construction companies consider before taking on a project?

Answer 14

• Express Risk: Terms specifically written in the contract or
  from express oral agreements.
• Implied Risk: Common law and other Acts that govern
  the conduct of business and society, and terms from past and continuing relationships.

Question 15

What is the definition of “Financial history” in the construction finance world?

Answer 15

Financial history are the post financial results, e.g. sales, costs, net profit or loss, for last three years.

Question 16

What are the origins of risk in relation to construction for the roles: Designers, contractors and workers?

Answer 16

Designers create many of the risks.

Contractors can mostly manage the risks.

While the workers have to endure the risks.

Question 17

What are “Express terms” in relation to contracts?

Answer 17

Express terms are always in the contract.

Question 18

What are “Implied terms” in relation to contracts?

Answer 18

Implied terms are not mentioned in the contract.

Question 19

What is the definition of “Risk reductionalism”?

Answer 19

Risk reductionalism deals with mitigating potential losses by reducing the likelihood and severity of a possible loss

Question 20

What are some of the many ways to describe risk?

Answer 20

Combination of probability of an event and it’s consequences.

Chance of something happening that shall have an adverse impact upon the achievement of objectives.

Threat or possibility of an action or event (known) adversely affecting ability to achieve objectives of an organisation or project.

Question 21

What is the definition of “Loss” in relation to risk?

Answer 21

A negative accounting measure that represents the outcome of adverse or undesirable consequences from an event.

Question 22

What is the definition of “Return” in relation to risk?

Answer 22

Return is the measure of benefit that accrues from an investment and indicates performance of that investment.

Question 23

What is the rule associated with investment in relation to risk?

Answer 23

Investments that offer higher potential for total return carry a higher potential for risk.

Question 24

What is the definition of an “Emergent Risk”?

Answer 24

An Emergent Risk is a new or unforeseen risk that we haven’t yet contemplated.

Question 25

What is the definition of “Risk Management”?

Answer 25

The Management Function that systematically assesses and addresses the causes and effects of uncertianty and risk.

Question 26

What is the definition of a “Risk Register”?

Answer 26

A “Risk Register” is a listing of all the identified risks and the results of their analysis evaluation. Information on the status of the risk is also included.

Question 27

What is the definition of “Elements” in relation to risk?

Answer 27

Elements are various axes for evaluating risk.

Question 28

What is the definition of “Impact” in relation to risk?

Answer 28

Impact is the extent of loss or negative effects on the project should the risk occur.

Question 29

What is the definition of “Probability” in relation to risk?

Answer 29

Probability is the likelihood of the risk occurring.

Question 30

What is the definition of “Timeframe” in relation to risk?

Answer 30

Timefrma is the period when you must take action in order to mitigate the risk.

Question 31

What are the three MAIN parties of a project?

Answer 31

Client, consultant and contractor.

Question 32

What can clients use “Bonds” for in order to mitigate vulnerability?

Answer 32

Bonds are an undertaking of a bondsman or surety to make a payment to the client in the event of a non-performance of the contractor.

Question 33

What type of bonds are used in construction?

Answer 33

A construction bond, it is used to ensure the contractor abides by the condition of the contract.

Question 34

What are the three main types of a construction bond?

Answer 34

Bid bond.
Perfromance bond.
Payment bond.

Question 35

What is a “Bid bond”?

Answer 35

A bid bond is used to award the project to the lowest bidder. As such resulting in the best possible financial price for the client.

Question 36

What is a “Performance bond”?

Answer 36

A performance bond is a financial guarantee to one party in a contract against the failure of the other party to meet its obligations.

Usually held by a financial entity such as a bank/insurance company.

Question 37

What is a “Payment bond”?

Answer 37

A payment bond is a financial guarantee issued by a surety company on behalf of a contractor, ensuring that subcontractors and suppliers will be paid for their services and materials.