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Fixed Costs
What are Fixed Costs?
Fixed costs, in the context of the construction industry, are the expenses that a contractor has to pay regardless of the level or volume of building activity. These costs, also known as overhead costs, remain constant and do not change with the fluctuations in work demand or project size. They typically include items such as rent or mortgages for office space, salaries for permanent staff, insurances, property tax, machinery depreciation, among other expenditures. The ability to manage fixed costs effectively is vital for a construction company's profitability and viability, as they represent a substantial portion of the total expenses.
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Other construction terms
What is a Pay-When-Paid Clause?
A Pay-When-Paid Clause refers to a contractual provision often used within the construction industry. This clause essentially stipulates that a contractor or a subcontractor is not obliged to pay their subcontractors or suppliers until they themselves receive payment from the project owner. It serves to manage the risk associated with the delay or failure of payment in the construction chain, allowing the contractor to pass on the financial risks to the subcontractors. Such a clause can have significant implications on cash flows and may affect the commercial viability of construction projects, particularly for smaller subcontractors. It's crucial for all parties involved to carefully negotiate these provisions.
What is a G703?
A G703 is a continuation sheet used in the construction industry. It's part of the AIA (American Institute of Architects) document set for contract documents. The G703 form includes a schedule of values listing portions of the work, scheduled values, work completed, materials stored, total completed and stored, percentage of work completed, balance to finish, and the amount of change orders. Hence, it is primarily used for breaking down the contract sum into portions of work in accordance with a schedule of values prepared by the contractor. It provides a running total of completed work and can be updated as work progresses.
What is a Risk-Shifting Mechanism?
A Risk-Shifting Mechanism in the construction industry involves the transfer of potential financial risk from one party to another. Traditional contracts often place the responsibility for risks on the contractor. However, through risk-shifting methods such as sub-contracting, insurance, or performance bonds, some or all of the potential risks can be shifted away from the contractor and onto other parties, like subcontractors or insurance companies. The aim is to balance the risks more equitably, based on which party is best capable of managing those risks and to ensure that the project is not jeopardized due to unforeseen complications or accidents. Properly implemented, a risk-shifting mechanism can provide financial stability and predictability, thus improving the overall management and execution of construction projects.
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