Texas Contractor Exam — All Questions

A remodel stalls and no inspection is requested for more than a year. What typically happens to the building permit?

• a.It stays valid indefinitely, because the full permit fee was paid when it was issued
• b.It converts into a certificate of occupancy covering the portion of work already finished
• c.It transfers to the building department, which then completes the remaining work at cost
• d.It expires under most permit ordinances, and permission to continue must be obtained again✓

Permits are generally issued with a life span, and most ordinances treat a permit as expired if work is not started within a set period or if it is abandoned for a stated interval, commonly measured by the time since the last approved inspection. The remedy is to renew or reapply, sometimes under a newer code edition and at additional fee. A permit is authorization to build, never a certificate of occupancy.

A new edition of a model code was published last year. Which edition governs a project in a particular city?

• a.The newest published edition, which takes effect nationwide on the date it is released
• b.Whichever edition the design professional prefers to cite when preparing the drawings
• c.The edition that jurisdiction has adopted, which may not be the newest one✓
• d.The edition in force when the jurisdiction first began issuing permits for private work

A model code has no legal force until a state or local government adopts it, so the code in force is whatever edition that jurisdiction has enacted, together with its local amendments. Publication of a newer edition changes nothing until adoption, and many jurisdictions run one, two, or more editions behind. The contractor's obligation is to build to the edition actually adopted, which is why the code in force should be confirmed at permit time.

When the printed code text does not clearly settle a question, whose interpretation controls the work?

• a.The model code publisher, whose commentary binds every jurisdiction that adopts the code
• b.The building official for that jurisdiction, acting as the authority having jurisdiction✓
• c.The general contractor, who is responsible for the means and methods used on the site
• d.The material manufacturer, whose printed instructions replace the language of the code

Adopted codes give the building official, as the authority having jurisdiction, the power to interpret the code and to render decisions on its application, and those decisions govern the work in that jurisdiction. Published commentary is a useful explanation but is not itself law unless it is adopted. A contractor who disagrees with an interpretation does not simply overrule it in the field; the remedy is the appeals process.

A contractor believes the building official has misapplied a provision of the adopted code. What is the usual formal remedy?

• a.Continue the work as planned and raise the issue only if a violation notice is issued
• b.Ask that an inspector from a neighboring jurisdiction be assigned to review the work
• c.Apply for a zoning variance, which permits construction that departs from the adopted code
• d.File an appeal with the jurisdiction's board of appeals, which reviews the official's ruling✓

Adopted codes generally establish a board of appeals to hear claims that the code was wrongly interpreted, that the provisions do not apply, or that an equally good alternative is being refused. The board reviews the official's determination; it is not empowered to waive requirements it simply dislikes. A zoning variance addresses land-use rules such as setbacks or height, which is a different body of regulation entirely.

A contractor wants to use a product the adopted code does not describe. Under most adopted codes, the path forward is to:

• a.Install it and let the inspector decide at final inspection whether the work is acceptable
• b.Wait for the next edition of the model code, which may describe that product by name
• c.Submit it for approval as an alternative material or method with evidence of compliance✓
• d.Substitute the closest product the code does describe, since alternatives are not allowed

Model codes expressly allow alternative materials, designs, and methods of construction, provided the building official finds the proposal at least equivalent to the code requirement in quality, strength, durability, and safety. The applicant carries the burden of proof, commonly satisfied with a third-party evaluation report or engineering data. Approval is obtained before the work goes in, not gambled on at the final inspection.

Which statement best describes the level of construction quality that an adopted building code represents?

• a.It is the minimum legally acceptable standard, and good practice may exceed it✓
• b.It is the highest quality obtainable, so exceeding any requirement is itself a violation
• c.It is an average of what local builders were producing at the time the code was adopted
• d.It is a set of recommendations with no legal force once the permit has been issued

A building code sets the floor: it defines the least that may lawfully be built to protect health, safety, and welfare, and building better than the code is permitted and often advisable. Passing inspection therefore proves compliance with the minimum, not that the work is of high quality. Once adopted, the code is law in that jurisdiction, and a permit does not suspend it.

A listed water heater's installation instructions require a larger clearance than the adopted code requires. What should the installer do?

• a.Follow the code clearance, because an adopted code always overrides a manufacturer's document
• b.Split the difference between the two clearances and note that choice on the inspection record
• c.Follow whatever clearance the supplier recommends, since the supplier warrants the equipment
• d.Follow the greater clearance, since listed equipment must be installed as listed✓

Model codes require listed equipment to be installed in accordance with its listing and the manufacturer's installation instructions, so those instructions become an enforceable part of the installation. Where the instructions are more restrictive than the general code requirement, the more restrictive figure is what must be built, and departing from it can also void the listing and the warranty. Averaging two requirements is never a compliant approach.

What does it mean when a building product is described as 'listed and labeled'?

• a.The manufacturer registered the product's trade name with the federal trademark office
• b.A qualified testing agency evaluated it, and its mark shows it meets a published standard✓
• c.The building official inspected the product at the factory before it was shipped to the site
• d.The label states the length of the warranty the manufacturer offers to the purchaser

Listing means an approved agency has evaluated the product against an applicable standard and publishes it in a list; labeling means the product carries that agency's mark showing it was produced under a periodic factory inspection program. Building officials rely on listings and on third-party evaluation reports because they cannot test every product themselves. The mark speaks to code compliance, not to trademarks or warranty terms.

Which of these jobs is LEAST likely to require a building permit in a typical jurisdiction?

• a.Replacing worn carpet and repainting the walls of an existing bedroom✓
• b.Removing a bearing wall between the kitchen and the living room of a house
• c.Adding a new branch circuit and receptacles in a finished basement living area
• d.Building a rear addition with a new foundation and a new roof structure

Adopted codes commonly exempt ordinary maintenance and cosmetic finish work such as painting, papering, floor covering, and similar minor repairs, because that work does not affect structure or life safety. Structural alterations, additions, and new electrical, plumbing, or mechanical work are the things permits exist to review. Exemption lists vary by jurisdiction, so the safe habit is to ask the building department before assuming any job is exempt.

Which sequence of inspections is typical on a new house, from the start of work to the end?

• a.Framing and rough-in, footing, final, insulation, then underground plumbing
• b.Insulation, footing, final, framing and rough-in, then underground plumbing
• c.Final, framing and rough-in, insulation, footing, then underground plumbing
• d.Footing, underground plumbing, framing and rough-in, insulation, then final✓

Inspections follow construction, and each one occurs at the last moment the work is still visible: footings before concrete is placed, underground plumbing before it is buried, framing with electrical, plumbing, and mechanical rough-in before insulation and drywall, insulation before it is covered, and a final inspection when everything is complete. Exact names and stages vary by jurisdiction, and the approved plans must generally be kept on site for the inspector.

A crew hangs drywall over electrical and plumbing rough-in before the inspector has seen it. What should the contractor expect?

• a.The inspector will accept dated photographs of the concealed work instead of an inspection
• b.The work counts as approved, because the next inspection supersedes the one that was missed
• c.The inspector may require the covered work to be opened up again so it can be inspected✓
• d.The permit is voided permanently, and no new permit may be issued for that address

Adopted codes prohibit concealing work that requires inspection until it has been inspected and approved, and they authorize the building official to require that covered work be uncovered. The cost of the tear-out and the repair falls on the contractor, and the delay is rarely recoverable from the owner. Photographs may occasionally be accepted at the official's discretion, but no contractor is entitled to rely on that.

An owner needs to occupy a finished floor of a building while work continues elsewhere in it. The building official may issue:

• a.A final certificate of occupancy for the whole building, with the rest inspected later
• b.A temporary certificate of occupancy for the completed portion, subject to stated conditions✓
• c.A permit amendment transferring responsibility for the unfinished work to the owner
• d.A variance from the adopted building code covering the areas that remain unfinished

Adopted codes allow the building official to issue a temporary certificate of occupancy for a portion of a building that is safe to occupy, usually with conditions and an expiration date, while the balance of the work is completed. The full certificate follows when the remaining work passes final inspection. A temporary certificate does not waive any code requirement and does not shift responsibility for the unfinished work to the owner.

Under the model residential code as commonly adopted, what are the limits on riser height and tread depth for a stairway in a dwelling?

• a.Risers not more than 7 3/4 inches high and treads not less than 10 inches deep✓
• b.Risers not more than 6 inches high and treads not less than 14 inches deep
• c.Risers not more than 9 inches high and treads not less than 8 inches deep
• d.Risers not more than 12 inches high and treads not less than 6 inches deep

The International Residential Code, Section R311.7.5, limits riser height to a maximum of 7 3/4 inches and requires a tread depth of at least 10 inches, and it also limits the variation within a single flight so the steps are uniform underfoot. Because jurisdictions adopt different editions and add local amendments, the contractor should confirm these figures in the code actually in force before laying out a stair.

Under the model residential code as commonly adopted, where must smoke alarms be installed in a new dwelling?

• a.Only in the hallway outside the bedrooms, where smoke from any room collects first
• b.Only on the top story, since smoke and heat rise toward the highest level of the house
• c.In each sleeping room, outside each sleeping area, and on every story✓
• d.In the kitchen and the mechanical room, where ignition sources are most concentrated

The International Residential Code, Section R314.3, requires smoke alarms inside each sleeping room, outside each separate sleeping area in the immediate vicinity of the bedrooms, and on each additional story of the dwelling including basements and habitable attics. Covering only the hallway or only the top floor leaves a sleeping occupant unprotected behind a closed door. Local amendments and the adopted edition should always be checked.

A contractor reports cash of $60,000, accounts receivable of $180,000, inventory of $90,000, and current liabilities of $120,000. What is the acid-test (quick) ratio?

• a.2.25 to 1
• b.2.75 to 1
• c.2.0 to 1✓
• d.0.5 to 1

The quick, or acid-test, ratio counts only the assets that can be turned into cash quickly, so inventory is excluded: ($60,000 + $180,000) / $120,000 = 2.0. Including the $90,000 of inventory gives 2.75, which is the current ratio, not the quick ratio. Dropping cash instead of inventory gives 2.25, and using cash alone gives 0.5. Sureties like this ratio because it tests whether near-term bills can be paid without having to sell material first.

Which statement correctly distinguishes a balance sheet from an income statement?

• a.The balance sheet lists the revenue and expenses earned during a period, while the income statement lists what the company owns and owes
• b.The balance sheet reports assets, liabilities, and equity at one point in time, while the income statement covers a span of time✓
• c.Both reports cover the same twelve-month period and differ only in how much detail each one shows
• d.The balance sheet is prepared only when the company is sold, while the income statement is prepared every month

A balance sheet is a snapshot: it shows what the company owns, what it owes, and the owners' remaining stake as of one specific date. An income statement (profit and loss statement) is a movie: it reports revenue earned and expenses incurred across a period such as a month, quarter, or year. Reversing the two is a common mix-up, and both statements are prepared regularly, not just at a sale.

A contracting company has total liabilities of $450,000 and owner's equity of $300,000. What is its debt-to-equity ratio?

• a.0.67 to 1
• b.2.5 to 1
• c.0.6 to 1
• d.1.5 to 1✓

Debt-to-equity = total liabilities / owner's equity = $450,000 / $300,000 = 1.5. It says creditors have supplied $1.50 for every $1.00 the owners have in the business. Flipping the fraction gives 0.67, using total assets of $750,000 in the numerator gives 2.5, and dividing liabilities by total assets gives 0.6 (that is the debt-to-assets ratio). Lenders and sureties read a rising debt-to-equity ratio as thinner owner commitment and higher risk.

On a contractor's balance sheet, accumulated depreciation appears as:

• a.A contra-asset deducted from equipment cost to show net book value✓
• b.A current liability owed to the lender that financed the equipment purchase
• c.An equity account that grows as the owners leave profits in the business
• d.A cash reserve set aside in a separate account to replace the equipment

Accumulated depreciation is a contra-asset account: it carries a credit balance and is deducted from the original cost of the fixed assets to show net book value. It is not money owed to anyone, so it is not a liability, and it is not part of the owners' stake. It also is not a fund of cash — no money is set aside, which is why a company can be fully depreciated on paper and still have to borrow to replace a machine.

A contractor's revenue for the year is $800,000 and direct job costs are $600,000. What is the gross profit percentage?

• a.33.3%
• b.25.0%✓
• c.75.0%
• d.133.3%

Gross profit is revenue minus direct job costs: $800,000 - $600,000 = $200,000. Gross profit percentage measures that against revenue: $200,000 / $800,000 = 25%. Dividing the $200,000 by cost instead of revenue gives 33.3%, which is the markup, not the margin. The 75% figure is the cost ratio, and 133% comes from dividing revenue by cost. Confusing markup with margin is one of the most expensive arithmetic errors a contractor can make.

A contractor's revenue is $1,200,000, direct job costs are $900,000, and general overhead is $250,000. What is the net profit percentage?

• a.25%
• b.5.6%
• c.4.2%✓
• d.20.8%

Net profit = $1,200,000 - $900,000 - $250,000 = $50,000, and $50,000 / $1,200,000 = 4.2%. Stopping at gross profit gives 25%, which ignores the overhead the company must still cover. Dividing net profit by direct costs gives 5.6%, and dividing overhead by revenue gives 20.8%. The gap between a 25% gross margin and a 4.2% net margin shows how little room there is once overhead is paid.

A contractor's income statement shows a $90,000 profit for the year, yet the company cannot cover this week's payroll. What is the MOST likely explanation?

• a.Profit is earned as work is performed, while the cash sits in unpaid receivables✓
• b.An income statement showing a profit proves the bank balance must be just as large
• c.Profit and cash are always the same number, so the bookkeeper posted an entry wrong
• d.Payroll is not an expense, so it never enters the profit calculation

Profit and cash are different measures. Accrual-based profit is recognized when the work is performed, while the cash arrives only when the owner pays — often 30 to 60 days later, and retainage later still. A contractor can therefore be profitable on paper and insolvent at the bank, which is why more contractors fail from cash starvation than from unprofitable work. Payroll is very much an expense; it is simply paid long before the matching revenue is collected.

A contractor budgets $180,000 of annual overhead and averages a 30% gross margin on the work sold. What annual revenue is needed just to break even?

• a.$257,143
• b.$54,000
• c.$234,000
• d.$600,000✓

Break-even revenue = fixed overhead / gross margin percentage = $180,000 / 0.30 = $600,000. At that volume the 30% margin generates exactly $180,000 of gross profit, which pays overhead and leaves zero profit. Multiplying overhead by the margin gives $54,000, adding 30% to overhead gives $234,000, and dividing by the 70% cost percentage gives $257,143. Building the annual overhead budget first is what makes this calculation possible.

A work-in-progress schedule shows 'costs and estimated earnings in excess of billings' on a job. What does that condition indicate?

• a.The company has billed the owner for more work than it has actually performed so far
• b.The company has performed more work than it has billed and is financing the job itself✓
• c.The company has finished the job and the owner has released all of the retainage held
• d.The company recorded the job's entire contract value as revenue when the deal was signed

Costs and estimated earnings in excess of billings is underbilling: the value earned to date exceeds what has been invoiced, so the contractor's own cash is funding the owner's project. It appears as an asset, but it is a warning sign of slow billing, unbilled change-order work, or a cost overrun that has not yet been recognized. The opposite condition, billings in excess of costs, is overbilling and is carried as a liability.

What is the primary purpose of a work-in-progress (WIP) schedule?

• a.To list every tool and piece of equipment currently checked out to each field crew
• b.To record the hours every employee worked during the current pay period
• c.To compare contract value, cost to date, cost to complete, and billings per job✓
• d.To show the depreciation taken this year on each vehicle and machine the company owns

A WIP schedule lines up every open contract and shows, job by job, the contract value, costs incurred to date, estimated cost to complete, percent complete, revenue earned, and amounts billed. From those columns it computes each job's underbilling or overbilling and its projected profit. Bonding companies and lenders read the WIP before the income statement because it reveals fade in job margins long before the year-end results do.

A contractor carries $150,000 in accounts receivable on annual revenue of $1,825,000. What is the average collection period (days sales outstanding)?

• a.30 days✓
• b.2.5 days
• c.12 days
• d.90 days

Daily sales = $1,825,000 / 365 = $5,000, so days sales outstanding = $150,000 / $5,000 = 30 days. Dividing revenue by receivables gives 12, which is the receivables turnover in times per year, not days. Treating the annual figure as one month of sales gives about 2.5 days. Rising days sales outstanding means cash is arriving more slowly, which squeezes payroll even when the jobs themselves are profitable.

A contractor buys a truck for $48,000, expects a salvage value of $8,000, and will use it for five years. What is the annual straight-line depreciation expense?

• a.$9,600
• b.$40,000
• c.$1,600
• d.$8,000✓

Straight-line depreciation = (cost - salvage value) / useful life = ($48,000 - $8,000) / 5 = $8,000 per year. Forgetting to subtract salvage gives $9,600, the $40,000 figure is the whole depreciable base rather than one year of it, and $1,600 comes from depreciating only the salvage amount. The same $8,000 is charged in each of the five years, which is what makes the method 'straight line.'

Why is depreciation described as a non-cash expense?

• a.The cash left when the asset was bought, so the annual charge moves no new money✓
• b.The tax authorities refund the depreciation amount to the company in cash each year
• c.The charge is only an estimate, so it is left out of the income statement entirely
• d.The equipment lender pays the depreciation charge directly on the company's behalf

Cash leaves the business once, when the equipment is purchased. Depreciation then spreads that already-spent cost across the years the asset is used, so the expense reduces reported profit without any further cash going out the door. That is why a cash-flow statement adds depreciation back to net income. Nobody refunds or pays the charge, and it does appear on the income statement.

A contractor buys a $40,000 excavator and also pays $900 to repair an existing skid steer. How are these two costs normally treated?

• a.Both are operating expenses deducted in the month they are paid
• b.The excavator is a capital expenditure and the repair is an operating expense✓
• c.Both are capital expenditures recorded as assets and depreciated over several years
• d.The excavator is an operating expense and the repair is capitalized as a new asset

A capital expenditure buys or substantially improves an asset that will serve the business for years, so it goes on the balance sheet and is depreciated over its useful life. An ordinary repair simply keeps an existing asset running, so it is an operating expense charged in full in the current period. Treating the excavator as an expense would understate assets and distort a single month's profit; treating a routine repair as an asset would overstate both.

A contractor borrows $60,000 on a note at 8% simple annual interest and repays it after six months. How much interest is owed?

• a.$4,800
• b.$400
• c.$62,400
• d.$2,400✓

Simple interest = principal x rate x time = $60,000 x 0.08 x 0.5 = $2,400. Using a full year gives $4,800, using one month gives $400, and $62,400 is the total payoff of principal plus interest rather than the interest alone. The time factor must be expressed in years, so six months is 0.5 and ninety days would be 0.25.

A contractor needs money to cover payroll and materials during the gap before owners pay, and the amount needed rises and falls all year. Which financing tool fits best?

• a.A term loan repaid in fixed monthly installments over the next five years
• b.A revolving line of credit drawn down and repaid as the cash need rises and falls✓
• c.An equipment loan secured by one machine and amortized over that machine's life
• d.A lease on a specific piece of equipment with a purchase option at the end

A line of credit is revolving: the contractor draws only what is needed, pays interest only on the outstanding balance, and repays as receivables come in, which matches a working-capital need that changes week to week. A term loan delivers a lump sum on a fixed repayment schedule and suits a one-time purchase. Equipment loans and leases are tied to specific machines and finance assets, not payroll.

How is retainage withheld by owners reflected in a contractor's financial statements, and what is its practical effect?

• a.As a receivable the contractor has earned but cannot yet collect✓
• b.As an expense of the job that permanently reduces that contract's gross profit
• c.As a liability owed to the owner until the punch list has been fully completed
• d.As overhead spread evenly over every job the company has open

Retainage the owner holds is money the contractor has already earned, so it is carried as a retainage receivable — an asset — until it is released. It is not an expense and it does not reduce the contract's profit; it only delays the cash. Because retainage is withheld from every progress payment across every job, it can amount to a large sum financed by the contractor, which is why it belongs in any cash-flow forecast.

A company with average owner's equity of $600,000 and total assets of $1,200,000 earned net income of $90,000. What is its return on equity?

• a.7.5%
• b.6.7%
• c.15%✓
• d.150%

Return on equity = net income / owner's equity = $90,000 / $600,000 = 15%. Dividing by total assets instead gives 7.5%, which is return on assets, and inverting the fraction or slipping a decimal produces the other figures. Return on equity tells the owners what their invested stake earned during the year, and a surety compares it with what the same money could earn elsewhere at less risk.

A contractor reports revenue of $1,200,000, cost of goods sold of $900,000, and average inventory of $75,000. What is the inventory turnover?

• a.16 times a year
• b.0.08 times a year
• c.1.6 times a year
• d.12 times a year✓

Inventory turnover = cost of goods sold / average inventory = $900,000 / $75,000 = 12 times a year. Using revenue instead of cost of goods sold gives 16, inverting the fraction gives 0.08, and a decimal slip gives 1.6. A higher turnover means material is moving to jobs instead of sitting in the yard tying up cash; a falling turnover often signals overbuying or obsolete stock.

A crew is paid every Friday, material invoices come due in 30 days, and the owner pays about 60 days after each billing. What does this cycle require?

• a.Enough working capital to carry payroll and materials for weeks before cash returns✓
• b.A guarantee that the job will show a large profit when it is finally completed
• c.Nothing unusual, since the payroll checks clear only after the owner's money arrives
• d.A bigger markup on the bid, which by itself brings the receivable in sooner

The contractor pays cash out on Friday but does not get it back for roughly two months, so every active job consumes working capital until the receivable is collected. The company must fund that gap out of cash reserves or a line of credit, and the faster it grows the more cash it swallows. A healthy markup improves profit but does not make the owner pay any sooner, and payroll cannot be deferred until the money arrives.

Under the completed-contract method of accounting, revenue and expenses on a job are recognized:

• a.Evenly each month from the notice to proceed through the final punch list
• b.In proportion to the costs incurred on the job in each accounting period
• c.When the job is finished and accepted, rather than as the work progresses✓
• d.At the moment the contract is signed, because the full price is known then

The completed-contract method defers all revenue, cost, and profit on a job until the contract is substantially complete, then recognizes them at once. It is simple and matches cash-basis instincts, but it makes results lurch from period to period and tells a lender little about work in progress. Recognizing results in proportion to costs incurred describes the percentage-of-completion method, which most sureties prefer for long-duration contracts.

A job cost report shows the job about 50% complete but labor costs already at 80% of the labor estimate. What should the contractor do FIRST?

• a.Bill the owner for the extra labor as a change order without any further review
• b.Wait until the job closes out to see whether the numbers correct themselves
• c.Shift the overrun to another job's cost code so that the report looks balanced
• d.Find the cause now and re-forecast the remaining cost to complete the job✓

A cost variance is a signal, and its value is entirely in acting on it early. The contractor should find out whether the overrun came from a productivity problem, an inaccurate estimate, unrecorded extra work, or miscoded time, then update the estimated cost to complete so the WIP schedule and the profit forecast tell the truth. Moving costs between jobs corrupts the whole cost system, and extra work is billable only if it is genuinely a change in scope that the owner approves.

In construction cost control, a 'committed cost' is best described as:

• a.An amount obligated by a signed subcontract or purchase order but not yet invoiced✓
• b.The share of the contract price the owner agrees to release at project closeout
• c.Any cost the contractor has actually paid out in cash during the current month
• d.The profit the company has promised to distribute to its owners at year end

Committed costs are dollars the company is already legally on the hook for through executed subcontracts and purchase orders, even though no invoice has arrived and no cash has moved. Comparing committed plus actual costs against the budget shows the real remaining exposure on a job, while looking only at invoices paid to date makes a job appear far healthier than it is. The gap between committed and actual is simply work ordered but not yet billed.

How should a signed change order that increases the contract price be handled on the work-in-progress schedule?

• a.Left out until the owner actually pays for the added work
• b.Added to both the contract value and the estimated cost of the job✓
• c.Recorded as extra profit only, with no change to the job's estimated total cost
• d.Treated exactly like a pending change order that the owner has not yet approved

An approved change order changes the deal, so both the revised contract value and the revised estimated cost belong in the WIP schedule; percent complete, revenue earned, and the over/underbilling position all shift as a result. Leaving approved changes out understates revenue earned and makes a job look overbilled when it is not. Pending change orders are treated more conservatively precisely because the owner has not yet agreed to pay for them.

A contractor lists current assets of $420,000, fixed assets of $310,000, current liabilities of $265,000, and long-term debt of $180,000. What is working capital?

• a.$285,000
• b.$155,000✓
• c.$240,000
• d.$45,000

Working capital = current assets - current liabilities = $420,000 - $265,000 = $155,000. Only the current items belong in the calculation. Subtracting the long-term debt instead gives $240,000, using fixed assets gives $45,000, and $285,000 is total assets minus total liabilities, which is owner's equity rather than working capital. Sureties often size a contractor's bonding capacity as a multiple of working capital.

Retained earnings on a contracting company's balance sheet represent:

• a.The cash currently sitting in the company's main operating bank account
• b.The total revenue the company has billed since it opened for business
• c.Profits kept in the business rather than paid out to the owners✓
• d.The amount the owners originally paid in to capitalize the company

Retained earnings is the running total of every year's net income less any distributions or dividends taken by the owners. It sits in the equity section and measures how much profit has been reinvested in the business over its life. It is not a pile of cash — those retained profits were typically spent on equipment, materials, and receivables — and it is separate from the owners' original paid-in capital.

The statement of cash flows reports:

• a.The value of every asset and debt the company holds on the closing date
• b.Revenue earned and expenses incurred in the period whether or not cash moved
• c.The estimated cost to complete each open job in the company's current backlog
• d.Cash received and paid out, grouped as operating, investing, and financing✓

The cash-flow statement traces the actual movement of money during a period and sorts it into three buckets: operating activities such as collections and payroll, investing activities such as buying equipment, and financing activities such as loan draws and owner distributions. It reconciles the profit on the income statement to the change in the bank balance. The point-in-time listing of assets and debts is the balance sheet, and accrual revenue and expense belong to the income statement.

A job has a contract price of $1,250,000 and an estimated total cost of $1,000,000. Costs to date are $400,000 and the contractor has billed $560,000. What is the overbilling?

• a.$160,000
• b.$60,000✓
• c.$250,000
• d.$100,000

Percent complete by cost is $400,000 / $1,000,000 = 40%, so revenue earned to date is 40% of $1,250,000 = $500,000. Billings of $560,000 exceed the $500,000 earned by $60,000, which is billings in excess of costs and estimated earnings. Subtracting costs from billings gives $160,000, which ignores the profit earned so far; $100,000 is the gross profit earned to date and $250,000 is the total estimated profit on the job.

A nonexempt carpenter is paid $24.00 per hour and works 46 hours in one workweek. Under the federal FLSA minimum, what is the gross pay for that week?

• a.$1,104
• b.$1,176✓
• c.$1,656
• d.$1,248

The first 40 hours are paid at the regular rate: 40 x $24.00 = $960. The 6 overtime hours are paid at one and one-half times that rate: 6 x $36.00 = $216. Total gross pay is $1,176. Paying all 46 hours straight time gives $1,104 and shortchanges the worker; paying every hour at time and a half gives $1,656; and paying the overtime hours at double time gives $1,248, which exceeds the federal requirement.

Gross payroll for a pay period is $10,000. Social Security is 6.2% and Medicare is 1.45% of wages. What is the employer's own FICA share for that payroll?

• a.$765, matching the employees' withholding✓
• b.$1,530, twice what was withheld from the employees
• c.$0, because FICA is withheld from employees only
• d.$620, covering only the Social Security portion

FICA has two halves at identical rates: the employee's 7.65% is withheld from wages and the employer owes a matching 7.65% out of its own pocket. On $10,000 of wages that is $765 withheld and $765 in employer tax, so $1,530 total is remitted, but only $765 of it is the employer's share. Forgetting the employer match is a classic reason a contractor's labor budget comes up short, and Medicare alone would leave out the larger Social Security piece.

An employee's gross pay for the week is $1,200. The employer withholds $96 of federal income tax plus employee FICA at the combined 7.65% rate. What is the net pay?

• a.$1,104.00
• b.$1,108.20
• c.$1,012.20✓
• d.$920.40

Employee FICA is $1,200 x 0.0765 = $91.80. Net pay = $1,200 - $96.00 - $91.80 = $1,012.20. Deducting only the income tax gives $1,104.00 and deducting only FICA gives $1,108.20. Withholding FICA twice, as if the employer's matching share also came out of the worker's check, gives $920.40 — the match is an employer expense and is never deducted from the employee.

A contractor short on cash uses the federal income tax and FICA amounts withheld from employees' checks to buy materials. What is the exposure?

• a.Nothing, because the withheld amounts belong to the company until the return is filed
• b.Only the employees are penalized, since the tax came out of their own wages
• c.The company simply pays the shortfall with the next payroll and owes nothing more
• d.The withheld money is a trust fund, and a responsible person can be personally liable✓

Amounts withheld from a worker's pay are held in trust for the federal government, not working capital the business may borrow. An employer must deposit them on the schedule the IRS assigns and report them on its payroll returns. When trust-fund taxes go unpaid, the government can assess a penalty personally against the owners, officers, or bookkeepers responsible for the decision, and that liability follows the individual even if the company later fails.

Federal unemployment tax (FUTA) is paid by:

• a.The employee only, through a deduction shown on each paycheck stub
• b.The employee and employer in equal matching shares, like Social Security
• c.The employer only, with nothing deducted from the employees' wages✓
• d.The general contractor on behalf of every subcontractor working on site

FUTA is an employer-paid tax on wages; it is never withheld from an employee's check, which distinguishes it from Social Security and Medicare, where employer and employee each pay a matching share. Employers also pay state unemployment tax, and the rate each company pays is set by state law and its own claims history. Each employer is responsible for its own workforce, not for a subcontractor's employees.

A nonexempt worker paid $20.00 per hour works 45 hours in a week and earns a $90 nondiscretionary production bonus for that week. What is the regular rate for overtime purposes?

• a.$22.00✓
• b.$20.00
• c.$22.25
• d.$30.00

Under the FLSA the regular rate includes nondiscretionary bonuses, so the bonus is added to the week's straight-time earnings and divided by all hours worked: ($900 + $90) / 45 = $22.00. Overtime is then one and one-half times $22.00 for the 5 hours over 40. Leaving the bonus out gives $20.00 and underpays the overtime; dividing the bonus by 40 hours instead of 45 gives $22.25; and $30.00 is the time-and-a-half rate on the base wage rather than the regular rate itself.

A laborer's base wage is $25.00 per hour, and payroll taxes, workers' compensation, and benefits add 32% on top of that wage. What is the fully burdened hourly labor cost?

• a.$8.00
• b.$25.32
• c.$36.76
• d.$33.00✓

Burdened cost = base wage x (1 + burden rate) = $25.00 x 1.32 = $33.00 per hour. The $8.00 figure is the burden by itself with the wage left out, $25.32 treats 32% as 32 cents, and $36.76 comes from dividing by 0.68 as though the burden were a margin on the selling price. Estimating labor at the bare wage understates the real cost of every field hour and is a common way a bid loses money before work even starts.

Which statement correctly describes E-Verify?

• a.A federal payroll system that computes each employee's tax withholding
• b.A federal electronic system that checks I-9 data against government records✓
• c.A federal database listing every contractor licensed to work in the United States
• d.A federal program that pays an apprentice's wages during the first year of work

E-Verify is an internet-based system that compares the information an employee gives on the Form I-9 with records held by the Department of Homeland Security and the Social Security Administration to confirm work authorization. It supplements the I-9; it does not replace the employer's duty to complete and retain the form. Participation is voluntary for many private employers but is required for certain federal contractors and by some states, so a contractor must check the rules that apply to the job.