MHIC Contracts and Estimating 5 — Questions and Answers
Question 1: When calculating overhead costs in a job estimate, which of the following is an example of a fixed overhead expense?
- Office rent (Correct answer)
- Cost of lumber for the project
- Subcontractor labor for framing
- Permit fees for the specific job
Correct answer: Office rent
Fixed overhead expenses like office rent remain constant regardless of the number of projects, unlike direct job costs.
Question 2: Under Maryland regulations, which of the following must a home improvement contract include regarding payment schedule?
- A clear payment schedule tied to project milestones or dates (Correct answer)
- Payment in full required before work begins
- Payment solely at the contractor's discretion
- Monthly installments regardless of project length
Correct answer: A clear payment schedule tied to project milestones or dates
Maryland home improvement contracts must specify a payment schedule, and law limits deposits to protect homeowners from contractors who collect money and disappear.
Question 3: A contractor uses the cost-plus pricing method. This means the customer pays:
- The actual cost of materials and labor plus a fixed fee or percentage markup (Correct answer)
- A flat rate agreed upon before the job starts
- Only for materials while the contractor absorbs all labor costs
- A rate based on the square footage of the home
Correct answer: The actual cost of materials and labor plus a fixed fee or percentage markup
Cost-plus contracts pass through actual project costs to the owner and add an agreed markup for overhead and profit.
Question 4: A liquidated damages clause in a construction contract typically specifies:
- A pre-agreed dollar amount the contractor owes the homeowner for each day the project is delayed past the completion date (Correct answer)
- The maximum profit the contractor can earn
- The penalty the homeowner pays for late payment
- The contractor's right to stop work if unpaid
Correct answer: A pre-agreed dollar amount the contractor owes the homeowner for each day the project is delayed past the completion date
Liquidated damages clauses set a predetermined daily penalty for project delays, replacing the need to prove actual damages.
Question 5: Which Maryland statute primarily governs home improvement contracts and licensing requirements for contractors?
- Maryland Home Improvement Law (Business Regulation Article, Title 8) (Correct answer)
- Maryland Contract Act (Commercial Law Article, Title 2)
- Maryland Mechanic's Lien Law (Real Property Article, Title 9)
- Maryland Consumer Loan Act (Financial Institutions Article, Title 11)
Correct answer: Maryland Home Improvement Law (Business Regulation Article, Title 8)
The Maryland Home Improvement Law, codified in the Business Regulation Article, Title 8, governs contractor licensing and contract requirements.
Question 6: A contractor discovers mid-project that asbestos-containing materials must be removed before work can continue. This situation is best addressed by:
- Stopping work, notifying the homeowner in writing, and executing a change order for remediation costs (Correct answer)
- Removing the asbestos yourself since you are already on site
- Absorbing the cost because it was your responsibility to identify it during bidding
- Completing the project and billing the asbestos removal separately without advance notice
Correct answer: Stopping work, notifying the homeowner in writing, and executing a change order for remediation costs
Encountering hazardous materials like asbestos requires stopping work, notifying the owner, and obtaining written authorization before proceeding with remediation.
Question 7: When estimating labor costs for a project, a contractor should calculate the fully burdened labor rate, which includes:
- Wages plus payroll taxes, workers' compensation insurance, and benefits (Correct answer)
- Only the employee's base hourly wage
- Wages and materials combined as a single cost
- Only the cost of subcontracted labor
Correct answer: Wages plus payroll taxes, workers' compensation insurance, and benefits
The fully burdened labor rate adds payroll taxes, insurance, and benefits to base wages to reflect the true cost of employing a worker.
MHIC Contracts and Estimating 5
When calculating overhead costs in a job estimate, which of the following is an example of a fixed overhead expense?