General Contractor License Business and Finance Management 5 — Questions and Answers
Question 1: Which financial metric best measures a contractor's ability to generate cash from operations, independent of financing and investing activities?
- Net income
- Operating cash flow (Correct answer)
- Gross profit margin
- Return on equity
Correct answer: Operating cash flow
Operating cash flow measures cash generated from core business operations, excluding financing and investment activities, revealing true liquidity.
Question 2: A contractor submits a change order request for unforeseen site conditions. Under AIA contract terms, this must typically be submitted:
- Within 21 days of discovering the condition (Correct answer)
- At project closeout
- Only if costs exceed 10% of the contract
- Before any work begins on the project
Correct answer: Within 21 days of discovering the condition
AIA A201 requires contractors to submit claims for additional costs within 21 days of discovering the condition that gave rise to the claim.
Question 3: What is the purpose of a 'lien waiver' in construction payment processes?
- To authorize subcontractors to begin work
- To release the right to file a mechanics lien upon receipt of payment (Correct answer)
- To extend the project completion date
- To transfer ownership of materials to the owner
Correct answer: To release the right to file a mechanics lien upon receipt of payment
A lien waiver is a document signed by a contractor, sub, or supplier releasing their right to file a mechanics lien in exchange for payment.
Question 4: A contractor uses the 'cost-plus' pricing method. This means the client pays:
- A fixed price regardless of actual costs
- Actual project costs plus an agreed fee or percentage (Correct answer)
- Only material costs with labor donated
- The lowest competing bid price
Correct answer: Actual project costs plus an agreed fee or percentage
Cost-plus contracts reimburse the contractor for all allowable project costs plus an agreed-upon fee or markup for overhead and profit.
Question 5: Which IRS form is a general contractor required to issue to an unincorporated subcontractor who was paid $600 or more in a tax year?
- W-2
- 1099-NEC (Correct answer)
- W-9
- 941
Correct answer: 1099-NEC
A 1099-NEC must be issued to non-employee individuals or unincorporated businesses paid $600 or more for services during the tax year.
Question 6: A contractor's bid includes a 15% markup on direct costs. If direct costs total $80,000, what is the total bid price?
- $88,000
- $92,000 (Correct answer)
- $95,000
- $96,000
Correct answer: $92,000
Total bid = Direct costs × (1 + markup): $80,000 × 1.15 = $92,000.
Question 7: A contractor who is dissolving their business must ensure which of the following before closing?
- Transfer all licenses to a new owner automatically
- Settle outstanding debts, file final tax returns, and cancel licenses and permits (Correct answer)
- Retain all employees for 90 days after dissolution
- Notify only federal agencies, not state licensing boards
Correct answer: Settle outstanding debts, file final tax returns, and cancel licenses and permits
Proper business dissolution requires paying remaining debts, filing final tax returns, and canceling all active licenses, permits, and registrations.
General Contractor License Business and Finance Management 5
Which financial metric best measures a contractor's ability to generate cash from operations, independent of financing and investing activities?