General Contractor License Business Law and Finance 5 — Questions and Answers
Question 1: A contractor discovers that a subcontractor is misclassifying employees as independent contractors. What is the primary risk to the general contractor?
- The GC has no liability for a subcontractor's classification decisions
- The GC could face joint employer liability for unpaid wages and benefits (Correct answer)
- Only the subcontractor faces fines
- The project owner is responsible for all employment classifications
Correct answer: The GC could face joint employer liability for unpaid wages and benefits
In many jurisdictions, general contractors can be held jointly liable for subcontractor wage violations under joint employer or responsible contractor doctrines.
Question 2: What is 'bid shopping' and why is it considered unethical?
- Comparing prices from multiple suppliers before submitting a bid
- Using a subcontractor's bid price to solicit lower competing bids after being awarded a contract (Correct answer)
- Submitting bids to multiple general contractors simultaneously
- Adjusting a bid price based on the owner's budget
Correct answer: Using a subcontractor's bid price to solicit lower competing bids after being awarded a contract
Bid shopping occurs when a GC uses a sub's price to pressure competing subs to underbid, undermining trust and the integrity of the bidding process.
Question 3: A contractor wants to purchase equipment for a project. Which financing approach preserves the most cash while spreading the cost over the equipment's useful life?
- Paying cash outright
- Leasing the equipment
- Equipment financing loan (Correct answer)
- Using a line of credit
Correct answer: Equipment financing loan
An equipment loan allows the contractor to own the asset while spreading payments over its useful life, preserving working capital for operations.
Question 4: Which construction insurance policy covers property in transit and stored materials not yet incorporated into the project?
- General liability insurance
- Builder's risk insurance
- Inland marine insurance (Correct answer)
- Completed operations coverage
Correct answer: Inland marine insurance
Inland marine insurance covers tools, equipment, and materials while they are being transported or stored off-site before installation.
Question 5: Under contract law, what is the 'parol evidence rule'?
- Evidence obtained without a warrant is inadmissible in contract disputes
- Prior oral or written negotiations cannot be used to alter the terms of a final written contract (Correct answer)
- Verbal contracts in construction are always unenforceable
- Contractors must keep written records of all verbal change orders
Correct answer: Prior oral or written negotiations cannot be used to alter the terms of a final written contract
The parol evidence rule bars the use of prior negotiations or oral agreements to contradict or vary the terms of a fully integrated written contract.
Question 6: A contractor's 'overhead' costs include all of the following EXCEPT:
- Office rent and utilities
- Administrative salaries
- Direct materials used on a specific project (Correct answer)
- Insurance premiums
Correct answer: Direct materials used on a specific project
Direct materials are a direct job cost assigned to specific projects, not overhead — overhead consists of indirect costs that support the business as a whole.
Question 7: Which of the following constitutes a valid contract modification under standard contract law?
- A verbal agreement between the owner and a subcontractor without the GC's knowledge
- A written change order signed by authorized representatives of both parties (Correct answer)
- An email from the owner asking for extra work without a price agreement
- A unilateral notice from the contractor demanding more money
Correct answer: A written change order signed by authorized representatives of both parties
A valid contract modification requires mutual agreement and, on construction projects, is typically formalized through a written change order signed by both parties.
General Contractor License Business Law and Finance 5
A contractor discovers that a subcontractor is misclassifying employees as independent contractors.
What is the primary risk to the general contractor?