General Contractor License Business Law and Finance 4 — Questions and Answers
Question 1: A contractor working as a sole proprietor is personally sued for a project dispute. What is their exposure?
- Limited to the value of the business assets only
- Limited to the project contract amount
- Unlimited — all personal assets can be at risk (Correct answer)
- Protected by contractor licensing laws
Correct answer: Unlimited — all personal assets can be at risk
Sole proprietors have no legal separation between personal and business assets, so all personal property can be reached by business creditors.
Question 2: What is a 'lien waiver' and when is it typically used?
- A document waiving the right to file a mechanics lien, exchanged upon payment (Correct answer)
- A court order removing an existing lien from a property
- A contractor's agreement to perform work without a lien bond
- A permit waiving inspection requirements
Correct answer: A document waiving the right to file a mechanics lien, exchanged upon payment
A lien waiver is a document where a contractor or supplier relinquishes their right to file a mechanics lien upon receiving payment.
Question 3: Which of the following best describes 'accounts receivable' on a contractor's balance sheet?
- Money the contractor owes to suppliers
- Money owed to the contractor for completed work not yet paid (Correct answer)
- The contractor's equipment and tools
- Future project revenue not yet earned
Correct answer: Money owed to the contractor for completed work not yet paid
Accounts receivable represents amounts billed to clients for work performed but not yet collected.
Question 4: An owner terminates a contract 'for convenience' without cause. What is the contractor typically entitled to?
- Nothing, since the owner has the right to terminate
- Only payment for work completed to date
- Payment for work done, costs incurred, and lost profit on unperformed work (Correct answer)
- The full contract price as if the project were completed
Correct answer: Payment for work done, costs incurred, and lost profit on unperformed work
A for-convenience termination clause entitles the contractor to payment for completed work, committed costs, and anticipated profit on the remaining scope.
Question 5: A contractor fails to pay payroll taxes withheld from employees. The IRS can assess the 'Trust Fund Recovery Penalty' against:
- Only the corporation
- Responsible individuals personally, even if the business is incorporated (Correct answer)
- Only the company's accountant
- Only the project owner as the paying party
Correct answer: Responsible individuals personally, even if the business is incorporated
The Trust Fund Recovery Penalty allows the IRS to hold responsible individuals personally liable for unremitted payroll taxes, piercing corporate protection.
Question 6: What is the legal effect of an 'acceleration clause' in a construction loan?
- It allows the contractor to speed up the work schedule
- It permits the lender to demand full repayment immediately upon default (Correct answer)
- It increases the interest rate over time
- It reduces the loan balance when milestones are reached
Correct answer: It permits the lender to demand full repayment immediately upon default
An acceleration clause gives the lender the right to declare the entire loan balance due immediately if the borrower defaults on any loan term.
Question 7: Under OSHA regulations, which of the following is a contractor's general duty regarding workplace safety?
- Safety is the sole responsibility of the property owner
- Contractors must provide a workplace free from recognized hazards likely to cause serious harm (Correct answer)
- Only employers with 25+ employees must follow OSHA standards
- Safety compliance is voluntary for licensed contractors
Correct answer: Contractors must provide a workplace free from recognized hazards likely to cause serious harm
OSHA's General Duty Clause requires all employers to provide a workplace free from recognized serious hazards, regardless of company size.
General Contractor License Business Law and Finance 4
A contractor working as a sole proprietor is personally sued for a project dispute.
What is their exposure?