Utah Contractor Practice Exam

How could a cash flow problem best be prevented in construction projects?

1. Contract should specify 10% down and 80% along the way with a 10% retention

2. Each payment should relate to a definite stage of the project

3. Owner should pay in full at the start of the job

4. Owner should pay 50% of total contract at start of the job

The correct answer is: Each payment should relate to a definite stage of the project

The best way to prevent a cash flow problem in construction projects is to ensure that each payment relates to a definite stage of the project. This approach ties the payment schedule to the progress of the work, allowing contractors to receive funds when they complete specific milestones. By doing so, it aligns cash inflows with cash outflows, helping contractors manage their expenses more effectively throughout each phase of the project. For instance, if a contractor knows they will receive payment upon completion of the foundation, this assists them in planning their expenditures for materials and labor required for that phase. This correlated payment plan helps maintain liquidity, ensuring that the contractor has access to funds as needed to cover ongoing project costs. It also encourages accountability, as clients are assured that payment is directly linked to tangible progress, thus reducing the likelihood of disputes over completed work. Other payment arrangements may not provide the same level of assurance and financial stability. An upfront lump sum payment could leave the contractor without funds for ongoing expenses later in the project, while retaining a large percentage of funding until the end could create cash flow strain if significant expenses arise during construction.