A contractor plans to fund early project cash flow using company reserves but has limited liquidity. Which risk should be recognized in the evaluation phase?

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Question restatement: A contractor plans to fund early project cash flow using company reserves but has limited liquidity. Which risk should be recognized in the evaluation phase?

Option 1: Overstated bonding capacity
- This risk concerns the contractor's ability to obtain performance or payment bonds based on perceived capacity. While important, it focuses on bond limits rather than day-to-day liquidity for early cash needs. It is less directly tied to using reserves with limited liquidity for early cash flow.

Option 2: Delayed material submittals
- Delays in submitting required materials can impact project schedule, potentially increasing carrying costs or penalties. However, the scenario centers on liquidity and funding early cash flow, not primarily on procurement delays or submittal timing. This is a schedule/materials risk rather than a liquidity risk.

Option 3: Inaccurate cost estimates
- Inaccurate estimates can lead to budget shortfalls or overruns, but the core issue here is the plan to use reserves with limited liquidity. While cost misestimation can exacerbate liquidity problems, the question asks which risk should be recognized in the evaluation phase specifically related to funding early cash flow, not general budgeting accuracy. It’s relevant but not the direct liquidity risk posed by limited reserves.

Option 4: Insufficient working capital for payroll and procurement
- This option directly targets liquidity. If a contractor relies on reserves but has limited liquidity, there is a risk that there won’t be enough working capital to cover payroll and procurement early in the project. This jeopardizes ongoing operations and procurement cadence and is the most immediate liquidity risk associated with the described funding plan. It captures the core concern that reserves may be insufficient to sustain initial cash needs.

Summary perspective: Among the listed risks, the primary issue raised by funding early cash flow from reserves with limited liquidity is the probability of not having enough working capital to cover essential ongoing costs such as payroll and procurement. The other options describe genuine risk areas, but they address bond capacity, schedule-related submittals, or budgeting accuracy more indirectly, whereas insufficient working capital is the most pertinent liquidity risk in this evaluation context.

2258-1_20CM3034001 Exam

A contractor plans to fund early project cash flow using company reserves but has limited liquidity. Which risk should be recognized in the evaluation phase?

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