General Contractor License Business Law and Finance 3 — Questions and Answers
Question 1: What does 'indemnification' mean in a construction contract?
- A guarantee of project completion
- An agreement by one party to protect another from specified losses or claims (Correct answer)
- A warranty on materials used
- A penalty clause for late completion
Correct answer: An agreement by one party to protect another from specified losses or claims
An indemnification clause requires one party (typically the contractor) to defend and compensate the other party against specified claims or liabilities.
Question 2: Which entity is responsible for issuing a W-2 form to employees?
- The IRS directly
- The employee's bank
- The employer (Correct answer)
- The state labor department
Correct answer: The employer
Employers must issue W-2 forms to employees by January 31 each year, reporting annual wages and taxes withheld.
Question 3: A contractor discovers hidden conditions on a job site that significantly increase costs. Which contract clause typically addresses this situation?
- Force majeure clause
- Differing site conditions clause (Correct answer)
- Liquidated damages clause
- Warranty clause
Correct answer: Differing site conditions clause
A differing site conditions clause allows contractors to seek additional compensation when unexpected subsurface or hidden conditions are encountered.
Question 4: Which type of business entity provides personal liability protection for all owners while allowing pass-through taxation?
- Sole proprietorship
- General partnership
- Limited liability company (LLC) (Correct answer)
- C-corporation
Correct answer: Limited liability company (LLC)
An LLC shields members from personal liability for business debts while profits pass through to members' personal tax returns.
Question 5: A contractor's bid is accepted but they later claim the bid contained a material error. The contractor's best legal recourse is generally:
- Breach of contract against the owner
- Rescission based on unilateral mistake if the owner knew or should have known of the error (Correct answer)
- Filing for bankruptcy protection
- Claiming force majeure
Correct answer: Rescission based on unilateral mistake if the owner knew or should have known of the error
Courts may allow rescission of a contract if the contractor can prove a significant clerical or mathematical error that the owner had reason to know about.
Question 6: What is 'retainage' in a construction contract?
- A fee paid to retain a contractor before work begins
- A percentage of each progress payment withheld until project completion (Correct answer)
- The contractor's profit margin built into the bid
- A tax withheld from subcontractor payments
Correct answer: A percentage of each progress payment withheld until project completion
Retainage (typically 5-10%) is withheld from each payment to ensure the contractor completes all work satisfactorily before receiving full payment.
Question 7: Under the Davis-Bacon Act, contractors on federal construction projects must pay workers:
- The federal minimum wage only
- Prevailing wages and fringe benefits for the locality (Correct answer)
- Union scale wages regardless of location
- Wages set by the federal contractor themselves
Correct answer: Prevailing wages and fringe benefits for the locality
The Davis-Bacon Act requires federal construction contractors to pay the locally prevailing wages and fringe benefits determined by the Department of Labor.
General Contractor License Business Law and Finance 3
What does 'indemnification' mean in a construction contract?