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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.

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.

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.

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.

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.

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.

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.

$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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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

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

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

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.

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

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.

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.

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.

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.

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

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.

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.