CSLB C-27 Landscaping ContractorPlanning and EstimatingHard
A C-27 contractor is preparing a bid for a complex commercial landscape project. The project specifications include a clause for 'Liquidated Damages' of $500 per day for each day the project exceeds the stipulated completion date. The contractor estimates a 5% risk of delay due to unforeseen weather conditions, which could add 10 days to the project. What is the expected cost of liquidated damages to factor into the bid due to this specific risk?
- A$2,500
- B$5,000
- C$500
- D$250
Show answer & explanationAnswer & explanation
Correct answer: D. $250
Expected cost is calculated by multiplying the probability of an event by the cost of that event. In this case, the cost of the delay is 10 days * $500/day = $5,000. The probability of this delay is 5%. Therefore, the expected cost to factor into the bid is $5,000 * 0.05 = $250.
Why the other options are wrong
- A. This is the cost if the delay occurs, but does not factor in the probability of it occurring.
- B. This is the total liquidated damages if the delay occurs, without considering the probability.
- C. This represents only one day of liquidated damages, not accounting for the duration or probability.
Expected Value of Risk (Liquidated Damages)
A quantitative risk assessment technique where the potential cost of a risk event (like liquidated damages) is multiplied by its probability of occurrence to determine an average expected cost to include in a bid.
- Expected Value = Probability x Impact.
- Helps incorporate uncertain costs into a bid.
- Liquidated damages are daily penalties for delays.
Memory trick: Risk is 'Probable Penalty', so multiply the 'Delay Damage' by 'Chance'!