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1. A contractor estimates a job will cost $80,000 in direct costs and wants a 25% markup on cost. What should the bid price be?

Markup on cost means adding the markup percentage to the cost: $80,000 × 1.25 = $100,000. Markup on cost and margin on sales produce different results — always clarify which method is being used.

2. What is the difference between "markup" and "margin"?

Markup is the profit added as a percentage of cost. Gross margin (gross profit margin) is profit expressed as a percentage of the selling (contract) price. A 25% markup ≠ 25% margin.

3. A contractor has fixed monthly overhead of $10,000 and a variable cost ratio of 70% of revenue. What monthly revenue is needed to break even?

Break-even = Fixed Costs ÷ (1 − Variable Cost Ratio) = $10,000 ÷ (1 − 0.70) = $10,000 ÷ 0.30 = $33,333. At this revenue, total costs equal total revenue.

4. Which of the following is considered a FIXED cost for a contracting business?

Fixed costs remain constant regardless of business volume. Office rent, insurance premiums, and loan payments are fixed. Materials, subcontractors, and job-specific fuel are variable costs.

5. A contractor's job cost sheet shows: Materials $30,000, Labor $20,000, Subcontractors $15,000, Overhead allocation $10,000. What is the total direct job cost?

Total job cost includes all costs attributable to the project: $30,000 + $20,000 + $15,000 + $10,000 = $75,000. All four items are legitimate project costs.

6. A contractor takes out a $50,000 equipment loan at 8% annual interest. What is the simple interest owed for 6 months?

Simple interest = Principal × Rate × Time = $50,000 × 0.08 × 0.5 = $2,000. For 6 months (half year), use 0.5 as the time factor.

7. Cash flow problems in contracting most commonly occur when:

Cash flow gaps arise when contractors must pay workers, suppliers, and subcontractors before receiving payment from the client. Managing payment schedules and draw requests is critical.

8. A contractor prepares an estimate and adds 15% to cover overhead and 10% profit on top of that. If direct costs are $50,000, what is the bid price?

$50,000 × 1.15 (overhead) = $57,500; $57,500 × 1.10 (profit) = $63,250. Overhead is applied first to the cost, then profit is applied to the overhead-loaded cost.

9. Which financial statement shows a contractor's assets, liabilities, and equity at a specific point in time?

The balance sheet (statement of financial position) shows assets, liabilities, and owner's equity at a specific date. The income statement shows revenue and expenses over a period.

10. A contractor's accounts receivable are growing while cash on hand is shrinking. This most likely indicates:

Growing receivables with shrinking cash means customers owe money but haven't paid. This is a classic cash flow problem — the contractor has earned revenue but cannot collect it timely.

11. Which type of insurance protects a contractor if a third party is injured on the job site?

Commercial General Liability (CGL) insurance covers third-party bodily injury and property damage claims. Workers' comp covers employees; builder's risk covers the structure under construction.

12. A contractor uses the percentage-of-completion method for revenue recognition. If a job is 40% complete and the total contract value is $200,000, recognized revenue to date is:

Under percentage-of-completion, revenue = contract value × percentage complete = $200,000 × 40% = $80,000. This method matches revenue to the work actually performed.

13. What is the purpose of a "retainage" or "retention" clause in a construction contract?

Retainage (typically 5–10% of each progress payment) is withheld by the owner as security until the project is substantially complete and defects are corrected. It motivates timely completion.

14. A contractor's current ratio is 0.8. This means:

Current ratio = Current Assets ÷ Current Liabilities. A ratio below 1.0 means current liabilities exceed current assets — a potential liquidity problem signaling the contractor may struggle to pay short-term debts.

15. Before starting a project, a contractor should prepare a schedule of values in order to:

A schedule of values breaks the contract amount into line items by trade or work phase. It becomes the basis for progress payment requests (AIA G702/703), ensuring payments match completed work.

16. A contractor receives a $5,000 deposit on a contract. Under California law for home improvement contracts, the maximum down payment is:

California law limits down payments on home improvement contracts to the lesser of $1,000 or 10% of the contract price. Demanding more is a violation of the Contractors State License Law.

17. Which of the following best describes "overhead" in construction estimating?

Overhead includes indirect costs like office rent, utilities, insurance, equipment depreciation, and administrative salaries — costs incurred to keep the business running regardless of any specific project.

18. A contractor pays an independent subcontractor $4,500 during the calendar year for installation work. Which tax form must the contractor issue to that subcontractor?

Payments of $600 or more to a non-employee (independent contractor) for services require a Form 1099-NEC. A W-2 is issued only to employees, and the $4,500 exceeds the $600 reporting threshold.

19. What tax form does an employer issue to each EMPLOYEE at the end of the year to report wages and withholding?

Employers issue a Form W-2 to each employee, reporting annual wages and amounts withheld for income, Social Security, and Medicare taxes. The 1099-NEC is for non-employees, and the W-9 collects a payee's taxpayer identification number.

20. A contractor is hiring its first employee. Which federal identification number must the business obtain from the IRS to report payroll taxes?

An Employer Identification Number (EIN) is the federal tax ID a business uses to report and deposit payroll taxes. A CSLB license number identifies the contractor for licensing, not for federal tax reporting.

21. An employee's gross wages for a pay period are $2,000. Using the combined employee FICA rate of 7.65% (Social Security 6.2% plus Medicare 1.45%), how much is withheld from the paycheck for FICA?

FICA withheld = $2,000 × 7.65% = $153.00. This combines Social Security ($2,000 × 6.2% = $124) and Medicare ($2,000 × 1.45% = $29).

22. Which payroll tax is paid entirely by the EMPLOYER and never withheld from an employee's wages?

FUTA is funded solely by the employer; nothing is withheld from employees for it. Income tax, the employee Social Security share, and California SDI are all withheld from the worker's pay.

23. A contractor classifies an independent subcontractor as an employee by mistake (or the reverse). The MOST significant financial risk of misclassifying a worker is:

Worker misclassification can make the contractor liable for unpaid payroll taxes (Social Security, Medicare, unemployment) plus penalties and interest, and can also trigger workers' compensation and labor-law exposure.

24. A self-employed contractor operating as a sole proprietor with no withholding generally must make federal income tax payments to the IRS:

Because no employer withholds tax from a sole proprietor's income, the IRS requires estimated tax payments made quarterly to cover income tax and self-employment tax as the income is earned.

25. How frequently a contractor must deposit withheld federal payroll taxes with the IRS is determined primarily by:

The IRS sets a deposit schedule (typically monthly or semiweekly) based on the employer's total payroll tax liability during a lookback period. Larger liabilities require more frequent deposits.

26. Under the cash basis of accounting, a contractor records revenue when:

Cash-basis accounting recognizes revenue when payment is received and expenses when they are paid. Accrual accounting, by contrast, records revenue when earned and expenses when incurred, regardless of cash movement.

27. Which accounting method records revenue when it is EARNED and expenses when they are INCURRED, even if no cash has changed hands?

Accrual-basis accounting matches revenue to the period in which it is earned and expenses to the period in which they are incurred, giving a more accurate picture of profitability than cash basis.

28. Which financial statement reports a contractor's revenue and expenses over a period of time and shows the net profit or loss?

The income statement, also called the profit and loss statement, summarizes revenue and expenses over a period and ends with net profit or loss. The balance sheet, by contrast, is a snapshot at one point in time.

29. The fundamental accounting equation expressed on a balance sheet is:

The balance sheet always balances because Assets = Liabilities + Owner's Equity. Equity equals what remains for the owner after liabilities are subtracted from assets.

30. A contractor's balance sheet shows total assets of $400,000 and total liabilities of $250,000. What is the owner's equity?

Owner's Equity = Assets − Liabilities = $400,000 − $250,000 = $150,000. Equity is the residual interest in the assets after liabilities are paid.

31. A contractor has current assets of $90,000 and current liabilities of $60,000. What is the working capital?

Working capital = Current Assets − Current Liabilities = $90,000 − $60,000 = $30,000. Working capital measures the short-term funds available to operate the business.

32. A contractor completes a job with a contract price of $120,000 and total job costs of $90,000. What is the gross profit?

Gross profit = Contract Price − Job Costs = $120,000 − $90,000 = $30,000. Gross profit is the amount remaining to cover overhead and produce net profit.

33. A contractor sells a job for $200,000 with total job costs of $150,000. What is the gross profit MARGIN as a percentage of the selling price?

Gross profit = $200,000 − $150,000 = $50,000. Gross margin = Gross Profit ÷ Selling Price = $50,000 ÷ $200,000 = 25%.

34. A contractor wants a 20% gross margin on the SELLING price. If the job costs $48,000, what must the selling price be?

When margin is based on selling price, Selling Price = Cost ÷ (1 − Margin) = $48,000 ÷ (1 − 0.20) = $48,000 ÷ 0.80 = $60,000. Note this differs from simply adding 20% to cost.

35. A contractor applies a 25% markup on cost. Expressed as a margin on the selling price, this 25% markup equals approximately:

A 25% markup on a cost of $100 produces a selling price of $125. The margin = profit ÷ selling price = $25 ÷ $125 = 20%. A 25% markup always equals a 20% margin.

36. A contractor's annual overhead is $120,000 and the company expects $600,000 in direct job costs for the year. What overhead rate, as a percentage of direct costs, should be applied to each job?

Overhead rate = Total Overhead ÷ Total Direct Costs = $120,000 ÷ $600,000 = 20%. Each job is then loaded with 20% of its direct costs to recover overhead.

37. A contractor's direct job costs are $70,000. The overhead rate is 15% of direct costs, and the contractor wants a 10% profit on the total of direct costs plus overhead. What is the bid price?

Direct costs $70,000 × 1.15 = $80,500 (costs plus overhead). $80,500 × 1.10 = $88,550 (adding profit). Overhead is applied first, then profit on the loaded cost.

38. A contractor buys a work truck for $45,000, expects to use it for 5 years, and estimates a salvage value of $5,000. Using straight-line depreciation, what is the annual depreciation expense?

Straight-line depreciation = (Cost − Salvage Value) ÷ Useful Life = ($45,000 − $5,000) ÷ 5 = $40,000 ÷ 5 = $8,000 per year.

39. Depreciation of construction equipment is best described as:

Depreciation is a non-cash accounting expense that spreads the cost of a long-lived asset across the years it is used. No cash leaves the business when depreciation is recorded.

40. A contractor's quick (acid-test) view of liquidity differs from the current ratio mainly because the quick ratio:

The quick ratio measures the ability to pay short-term debts using the most liquid assets, so it excludes inventory because inventory may not convert to cash quickly. The current ratio includes all current assets.

41. A contractor borrows $30,000 at 6% simple annual interest and repays it in full after 3 years. What is the total amount repaid?

Simple interest = $30,000 × 0.06 × 3 = $5,400. Total repaid = principal + interest = $30,000 + $5,400 = $35,400.

42. A contractor's fixed monthly costs total $18,000 and variable costs run 60% of revenue. What monthly revenue is needed to break even?

Break-even revenue = Fixed Costs ÷ (1 − Variable Cost Ratio) = $18,000 ÷ (1 − 0.60) = $18,000 ÷ 0.40 = $45,000.

43. On a $150,000 contract, the owner withholds 10% retention from each progress payment. After all work is billed, how much money is being held as retention?

Retention = 10% × $150,000 = $15,000. This amount is held by the owner until the project is accepted, which the contractor must plan for in its cash flow.

44. Why does retention (retainage) create a cash-flow challenge for a contractor?

Retention is part of money the contractor has earned but cannot collect until project completion and acceptance. The contractor still must pay labor, materials, and subcontractors in the meantime, creating a cash gap.

45. Including a contingency line item in a project budget is intended to:

A contingency is a budgeted reserve set aside to cover unexpected conditions, scope surprises, or estimating errors. It is not profit and is not intended to be spent unless an unforeseen cost arises.

46. Which of the following is a VARIABLE cost that rises and falls with the volume of construction work performed?

Materials such as concrete and lumber are variable costs because the amount spent rises and falls directly with job volume. Insurance, office lease, and license fees stay the same regardless of how many jobs run.

47. Job costing is BEST described as a system that:

Job costing accumulates labor, materials, subcontractor, and other costs by individual project, letting the contractor compare actual costs to the estimate and judge each job's profitability.

48. Which of the following would be classified as a DIRECT cost on a specific project's job cost report?

Direct costs are traceable to a specific project, such as the wages of workers on that job, its materials, and its subcontractors. Office salaries, headquarters utilities, and advertising are overhead (indirect).

49. A contractor's income statement for the year shows revenue of $800,000, job costs of $560,000, and overhead of $160,000. What is the net profit?

Net profit = Revenue − Job Costs − Overhead = $800,000 − $560,000 − $160,000 = $80,000.

50. A contractor's net profit for the year is $60,000 on total revenue of $750,000. What is the net profit margin?

Net profit margin = Net Profit ÷ Revenue = $60,000 ÷ $750,000 = 0.08 = 8%.

51. The PRIMARY purpose of preparing a business budget for the upcoming year is to:

A budget is a financial plan that projects revenue and expenses, allowing the contractor to anticipate cash needs, set goals, and compare actual results against the plan. It does not replace tax filings or guarantee profit.

52. A contractor projects $1,000,000 in revenue and budgets overhead at 18% of revenue. How much should be budgeted for overhead?

Budgeted overhead = $1,000,000 × 18% = $180,000. Comparing actual overhead to this budget helps the contractor control indirect costs.

53. A contractor compares the budget to actual results and finds materials cost $52,000 against a budgeted $45,000. This $7,000 difference is called a:

The difference between budgeted and actual amounts is a budget variance. Spending $7,000 more than budgeted on materials is an unfavorable variance because it reduces profit relative to the plan.

54. Which financial statement specifically shows how cash moved into and out of the business during a period?

The cash flow statement reports cash inflows and outflows from operating, investing, and financing activities. A profitable contractor can still run short of cash, which this statement reveals.

55. It is possible for a contractor to show a net profit on the income statement yet still be unable to pay its bills. This situation is best explained by:

Profit is an accounting result; cash is what pays bills. Money tied up in receivables, retention, or inventory means a profitable contractor can still lack the cash needed to meet obligations.

56. A contractor's job is 30% complete. Total estimated job costs are $250,000 and the contract price is $320,000. Under the percentage-of-completion method, how much job cost should be recognized to date?

Cost recognized = Total Estimated Costs × Percentage Complete = $250,000 × 30% = $75,000. The matching revenue would be $320,000 × 30% = $96,000.

57. On a balance sheet, which of the following is classified as a CURRENT asset?

Current assets are expected to convert to cash within one year — for example, cash, accounts receivable, and inventory. A crane and a building are long-term assets; a 5-year loan is a long-term liability.

58. A contractor has current assets of $120,000 and current liabilities of $80,000. What is the current ratio?

Current ratio = Current Assets ÷ Current Liabilities = $120,000 ÷ $80,000 = 1.5. A ratio of 1.5 means the contractor has $1.50 of current assets for every $1.00 of current liabilities.

59. California's PACE (Property Assessed Clean Energy) program allows a property owner to finance energy-efficiency or water-conservation improvements and repay the cost through:

Under a PACE program, the financing for qualifying efficiency improvements is repaid as a special assessment on the property owner's annual property tax bill. It is governed by the California Financial Code, not by a grant.

60. A contractor's job estimate includes $40,000 materials, $35,000 labor, and $25,000 subcontractors. The contractor adds 16% overhead and then 12% profit on the overhead-loaded cost. What is the bid price (rounded to the nearest dollar)?

Direct costs = $40,000 + $35,000 + $25,000 = $100,000. With overhead: $100,000 × 1.16 = $116,000. With profit: $116,000 × 1.12 = $129,920.

61. A contractor pays a worker $25 per hour for 45 hours in one week, with overtime at 1.5 times the regular rate for hours over 40. What are the gross wages for the week?

Regular pay = 40 × $25 = $1,000. Overtime = 5 × ($25 × 1.5) = 5 × $37.50 = $187.50. Gross wages = $1,000 + $187.50 = $1,187.50.

62. Beyond an employee's gross wages, a contractor must also budget for the employer's share of payroll taxes. This additional cost is commonly referred to as:

Labor burden is the added cost of employing a worker beyond base wages — including the employer's payroll taxes, workers' compensation insurance, and benefits. Estimators must add labor burden to bid jobs accurately.

63. A worker is paid a base wage of $30 per hour. With a labor burden of 35%, what is the fully burdened hourly cost the contractor should use for estimating?

Burdened cost = Base Wage × (1 + Burden Rate) = $30 × 1.35 = $40.50. Estimating with only the base wage would understate the true cost of labor.

64. A contractor wins a job for $300,000 and incurs total costs of $264,000. What is the profit margin on the selling price?

Profit = $300,000 − $264,000 = $36,000. Margin = Profit ÷ Selling Price = $36,000 ÷ $300,000 = 0.12 = 12%.

65. A contractor wants to keep a cash reserve equal to 2 months of fixed overhead. If monthly fixed overhead is $14,000, how large should the reserve be?

Cash reserve = 2 × Monthly Fixed Overhead = 2 × $14,000 = $28,000. Maintaining a reserve helps the contractor cover overhead during slow periods or payment delays.

66. Accounts payable on a contractor's balance sheet represents:

Accounts payable is a current liability — amounts the contractor owes to vendors, suppliers, and subcontractors. Money owed TO the contractor by customers is accounts receivable, an asset.

67. A contractor finances a $24,000 piece of equipment with a 4-year loan at 7% simple annual interest. What is the total interest paid over the life of the loan?

Simple interest = Principal × Rate × Time = $24,000 × 0.07 × 4 = $6,720. The total amount repaid would be $24,000 + $6,720 = $30,720.

68. A contractor's progress payment application bills $80,000 of completed work. The owner withholds 10% retention. How much cash will the contractor actually receive on this payment?

Retention withheld = 10% × $80,000 = $8,000. Cash received = $80,000 − $8,000 = $72,000. The $8,000 is collected later when retention is released.

69. Which document collects an independent contractor's name, address, and taxpayer identification number so the payer can later issue a 1099-NEC?

Form W-9 is completed by an independent contractor (payee) to provide their taxpayer identification number to the payer. The payer uses that information to prepare a 1099-NEC at year-end.

70. A contractor's overhead is the same each month whether it completes 2 jobs or 8 jobs. Therefore, the per-job share of overhead is LOWEST when the contractor:

Fixed overhead is spread across all jobs done in a period. The more jobs completed, the smaller the overhead allocation each job must absorb, which is why steady work volume improves competitiveness.

71. A schedule of values that allocates more value to early line items than the work actually justifies is sometimes called "front-loading." From the owner's perspective, the risk of front-loading is that:

Front-loading shifts contract value to early activities so the contractor collects more cash up front than the completed work warrants. This leaves the owner under-secured if the contractor later fails to finish.

72. A contractor reviews three completed jobs and finds Job A earned $12,000 profit on $100,000 revenue, Job B earned $9,000 on $90,000, and Job C earned $4,000 on $80,000. Which job had the HIGHEST profit margin?

Margin = Profit ÷ Revenue. Job A = $12,000 ÷ $100,000 = 12%; Job B = $9,000 ÷ $90,000 = 10%; Job C = $4,000 ÷ $80,000 = 5%. Job A has the highest margin.

73. A contractor that fails to make required quarterly estimated tax payments to the IRS during the year is most likely to face:

When a taxpayer does not pay enough tax through estimated payments or withholding during the year, the IRS may assess an underpayment penalty. Estimated payments are meant to keep tax current as income is earned.

74. A contractor's fixed overhead is $9,000 per month and variable costs are 75% of revenue. If the contractor produces $30,000 of revenue in a month, what is the net result for that month?

Variable costs = 75% × $30,000 = $22,500. Total costs = $22,500 + $9,000 fixed = $31,500. Result = $30,000 − $31,500 = a $1,500 loss, because revenue is below the break-even point of $36,000.

75. A contractor purchases materials on 30-day terms with a 2% discount if paid within 10 days. On a $20,000 invoice, how much is saved by paying within 10 days?

Early-payment discount = 2% × $20,000 = $400. Taking supplier discounts when cash allows is a simple way to reduce material costs and improve job margins.

76. A contractor's job came in with actual costs of $88,000 against an estimate of $80,000, while the contract price stayed at $95,000. The MOST useful lesson from this job cost comparison is that:

Comparing actual costs to the estimate revealed an $8,000 cost overrun. Reviewing why the estimate fell short helps the contractor bid more accurately on future jobs and protect profit.