Which cost component represents a supported anticipated reward for development coordination and risk, distinct from contractor overhead/profit?
Correct Answer
B) Entrepreneurial incentive.
The terminology in this question calls the market-supported anticipated development reward entrepreneurial incentive. It is distinct from contractor overhead/profit and direct materials. Realized entrepreneurial profit is an outcome that may inform the estimate, rather than automatically the prospective cost input.
Why This Is the Correct Answer
Option B is correct because entrepreneurial incentive is the market-supported anticipated reward for coordinating development and bearing its risk. It is distinct from contractor overhead and profit, which is a direct cost. Realized entrepreneurial profit may inform the estimate, but the prospective cost input is the anticipated incentive.
Why the Other Options Are Wrong
Option A: Direct material cost.
Option A, direct material cost, is a direct construction cost for physical inputs. It is not a reward for the developer's coordination and risk.
Option C: Accrued physical deterioration.
Option C, accrued physical deterioration, is a form of depreciation subtracted from cost new. It is a loss in value, not a cost component that rewards development.
Option D: A property-tax appeal charge.
Option D, a property-tax appeal charge, is unrelated to development cost. It does not represent a reward for coordinating construction and bearing risk.
Contractor builds, entrepreneur risks
The contractor's profit pays for building; the entrepreneur's incentive pays for organizing the project and bearing the risk.
How to use: Use this to separate contractor overhead and profit from entrepreneurial incentive.
Exam Tip
Incentive is the anticipated reward before the project; profit is what was actually earned afterward. Watch for questions that test that distinction.
Common Mistakes to Avoid
- -Treating contractor overhead and profit as entrepreneurial incentive
- -Leaving entrepreneurial incentive out of total cost when the market supports it
- -Confusing anticipated incentive with realized profit
Concept Deep Dive
Analysis
This question tests cost terminology. It asks for the cost component that rewards the developer for coordination and risk, which is separate from the contractor's overhead and profit. The reasoning is to match the description to entrepreneurial incentive.
Background Knowledge
Total development cost includes direct costs, indirect costs and an allowance for the developer's reward. Entrepreneurial incentive is the anticipated amount a developer expects to receive for organizing the project and taking on risk, and it is distinguished from the contractor's overhead and profit.
Real-World Application
When estimating replacement cost for a new subdivision home, an appraiser adds an allowance for entrepreneurial incentive supported by what local builders typically expect to earn. That allowance is separate from the general contractor's overhead and profit already in the cost estimate.
More Cost Approach Questions
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