Business and Financial Management
A contractor's license exam tests whether you can run a business, not just build. Know the difference between markup and margin: markup is profit as a percentage of cost; margin is profit as a percentage of the selling price. A job costing $100,000 with a 20% markup sells for $120,000, but that is only a 16.7% margin. Questions love to give one and ask for the other.
Understand the three main financial statements. The income statement shows revenue minus expenses over a period. The balance sheet shows assets, liabilities, and equity at a point in time (Assets = Liabilities + Equity). The cash flow statement tracks actual cash movement - a profitable company can still fail from poor cash flow, a favorite trap. Watch for retainage (commonly 5–10% held until completion) and how it affects working capital.
Know the basics of overhead (indirect costs like rent, insurance, office staff) versus direct job costs, and how overhead must be recovered in every bid. Understand lien rights, payment bonds, and the prompt-payment rules that protect cash.
Worked rule of thumb: To convert a desired margin to a markup, use markup = margin ÷ (1 − margin). A 25% target margin needs a 33.3% markup (0.25 ÷ 0.75). Apply this to the selling price, not the cost.
Traps: confusing profit with cash; forgetting to include overhead; treating retainage as collected revenue; mixing markup and margin.