A contractor receives bids from three electrical subcontractors: Company A at $85,000 with 2% prompt payment discount, Company B at $82,500 with no discount, and Company C at $87,200 with 1.5% discount. Which provides the lowest net cost?
Correct Answer
A) Company A
Company A: $85,000 × 0.98 = $83,300. Company B: $82,500. Company C: $87,200 × 0.985 = $85,892. Company A provides the lowest net cost at $83,300 with the prompt payment discount.
Why This Is the Correct Answer
Company A provides the lowest net cost when the prompt payment discount is applied. By calculating $85,000 × 0.98 (which represents paying 98% after a 2% discount), the net cost becomes $83,300. This is lower than Company B's $82,500 and Company C's discounted price of $85,892. The key is recognizing that prompt payment discounts can make a higher initial bid more cost-effective than lower bids without discounts.
Why the Other Options Are Wrong
Option B: Company B
Company B appears attractive at $82,500 with no discount required, but this is actually $800 more expensive than Company A's discounted price of $83,300. The lack of a prompt payment discount means the contractor pays the full amount, making it the second-best option.
Option C: Company C
Company C has the highest base bid at $87,200, and even with the 1.5% prompt payment discount applied ($87,200 × 0.985 = $85,892), it remains the most expensive option. The discount is insufficient to overcome the significantly higher initial bid amount.
Option D: All are equal
The costs are clearly different when calculated properly. Company A costs $83,300, Company B costs $82,500, and Company C costs $85,892 after discounts are applied. There is a $2,592 difference between the lowest and highest options.
Memory Technique
Remember 'DAN' - Discount Adjusted Net cost. Always calculate the net cost after applying any prompt payment discounts before making bid comparisons.
Reference Hint
Construction project management and cost estimation chapters, specifically sections on subcontractor bidding and payment terms analysis
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