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Consulting Engineer study materials
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Consulting Engineer: Business and Financial Management

Consulting Engineer · Work through your exam, one topic at a time.

All guide sections

Business and Financial Management

The Business and Financial Management domain tests commercial judgment: whether a project or practice is financially viable, how consulting fees recover cost and profit, how cash moves, and how contract terms allocate financial risk.

Core rules and concepts

  • Build a business case using NPV, IRR, payback, and benefit-cost ratio. Discount nominal cash flows at a nominal rate and real cash flows at a real rate; never mix them.
  • NPV = sum of CF_t / (1+r)^t minus initial investment. Accept positive-NPV projects. IRR is the rate at which NPV equals zero; it can mislead for mutually exclusive projects or non-conventional cash flows.
  • Profit is not cash. Depreciation is non-cash; working capital, retainage, and billing lag consume cash. A profitable project can still fail on liquidity.
  • Overhead multiplier = (direct labor + overhead + indirect cost) / direct labor. Markup on cost differs from gross margin: price = cost / (1 - margin), while markup price = cost x (1 + markup).
  • Contract types allocate risk: lump sum transfers quantity risk to the contractor; cost-plus leaves cost risk with the owner; time and materials shares risk and needs a cap; unit price pays measured quantities.
  • Revenue recognition under percentage-of-completion (IFRS 15 / ASC 606) drives over- and under-billings on the WIP schedule. Track retainage, lien rights, and prompt-payment terms.

Worked example

A project costs $100,000 at t0 and returns $60,000 at the end of years 1 and 2. At 10%, NPV = -100,000 + 60,000/1.10 + 60,000/1.21 = -100,000 + 54,545 + 49,587 = $4,132. Because NPV is positive, accept the project on financial grounds. IRR is about 13.1%, above the 10% hurdle. Payback is between year 1 and year 2; NPV is preferred because it measures value added in today's dollars.

Traps that cost marks

Discounting profit instead of cash flow; ignoring timing of receipts; ranking mutually exclusive projects by IRR rather than NPV; treating sunk costs as relevant; forgetting retainage and billing lag; confusing markup with margin.