Business and Financial Management
This domain tests whether you can run a contracting business, not just build: entity choice, job costing, financial statements, insurance, bonding capacity, payroll burden, and New Mexico gross receipts tax (GRT). Expect scenario arithmetic rather than definitions.
The three statements
A balance sheet shows assets = liabilities + equity at a point in time. The income statement shows revenue minus direct costs (gross profit) and then overhead (net profit). The cash flow statement explains why a profitable job can still leave you unable to meet payroll. Working capital = current assets − current liabilities; sureties and banks weigh it heavily.
Margin versus markup
Margin is a percentage of price; markup is a percentage of cost. They are never interchangeable. Overhead must be recovered in every price, and job costing through cost codes is how you learn whether it actually was. Underbillings (costs in excess of billings) are an asset but a warning sign; overbillings are a liability.
Payroll, tax, and bonding
Fully burdened labor includes FICA, FUTA, SUTA, workers' compensation, and benefits - often 25–40% above the wage. New Mexico levies GRT on the contractor's receipts; it is a tax on the business, generally passed through in the price, and specific deductions may apply for documented subcontractor payments. A surety evaluates character, capacity (size and type of work program), and capital.
Worked example
Direct job cost is $80,000. Overhead is 10% of cost, and you want a 20% net margin on price. Cost + overhead = $88,000. Price = $88,000 ÷ (1 − 0.20) = $110,000. Check: (110,000 − 88,000) ÷ 110,000 = 20%. If you had instead added 30% markup to $80,000, you would bid $104,000 and earn only 15.4% margin - the overhead is under-recovered.
Traps that cost marks
- Using markup and margin as synonyms.
- Pricing with no overhead recovery, then wondering where the profit went.
- Counting retainage receivable as cash available for the next job.
- Quoting labor at bare wage with no burden.
- Assuming GRT is a sales tax the customer remits directly.