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TN General Contractor practice questions

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Question 1Business Organization, Financial Management, and Accounting

A general contractor operates as a sole proprietorship. Which statement best describes the owner's personal liability for business debts?

  1. The owner has no personal liability because the business is a separate legal entity.
  2. The owner is liable only for debts that were personally guaranteed in writing.
  3. The owner is personally liable for all business debts. Correct answer.
  4. The owner's liability is limited to the amount invested in the business.

Explanation

A sole proprietorship is not a separate legal entity from its owner, so the owner bears unlimited personal responsibility for the debts and obligations of the business. Limited liability arises only when a business is organized as a corporation or a properly maintained LLC.

Question 2Business Organization, Financial Management, and Accounting

A company reports total assets of $500,000 and total liabilities of $300,000. What is the amount of owners' equity?

  1. $300,000
  2. $800,000
  3. $500,000
  4. $200,000 Correct answer.

Explanation

The accounting equation states that assets equal liabilities plus owners' equity, so equity is calculated as assets minus liabilities. Here, $500,000 minus $300,000 equals $200,000.

Question 3Business Organization, Financial Management, and Accounting

The balance sheet reports which of the following as of a specific date?

  1. Revenues and expenses for the period
  2. Assets, liabilities, and owners' equity Correct answer.
  3. Cash receipts and payments during the period
  4. Only the company's cash balance

Explanation

A balance sheet is a snapshot of financial position at a point in time, listing what the business owns, what it owes, and the owners' residual interest. Revenues, expenses, and cash flows are reported on the income statement and statement of cash flows for a period.

Question 4Business Organization, Financial Management, and Accounting

Gross profit is calculated as:

  1. Total revenue minus all operating expenses
  2. Net income plus depreciation
  3. Revenue minus cost of goods sold Correct answer.
  4. Revenue minus owner's draws

Explanation

Gross profit measures the margin earned on performing work before general and administrative costs are subtracted. It equals revenue less the direct cost of the work performed, often called cost of goods sold or cost of revenue.

Question 5Business Organization, Financial Management, and Accounting

Working capital is best defined as:

  1. Cash plus accounts receivable
  2. Total assets minus total liabilities, which equals owners' equity
  3. Net income plus non-cash expenses
  4. Current assets minus current liabilities Correct answer.

Explanation

Working capital measures the short-term liquidity available to run operations, computed as current assets less current liabilities. It indicates whether a business can meet obligations coming due within the next twelve months.

Question 6Business Organization, Financial Management, and Accounting

For a properly formed and maintained limited liability company, which statement is generally true?

  1. Members are personally liable for the LLC's debts and obligations.
  2. The LLC must have at least two members in every state.
  3. LLC profits are always taxed at the entity level in every state.
  4. Members are generally not personally liable for LLC debts. Correct answer.

Explanation

An LLC is a separate legal entity, so its members are ordinarily shielded from personal liability for business debts beyond their investment. This protection depends on keeping the entity in good standing and not commingling funds or making personal guarantees.

Question 7Business Organization, Financial Management, and Accounting

Which statement about depreciation of construction equipment is accurate?

  1. Depreciation is a cash payment made to replace equipment.
  2. Depreciation is recorded only when equipment is sold.
  3. Depreciation increases the equipment's book value each year until it is fully depreciated.
  4. Depreciation spreads the equipment's cost over its useful life and is non-cash. Correct answer.

Explanation

Depreciation is the systematic allocation of an asset's cost to expense over the periods that benefit from its use. It reduces book value over time and does not involve any cash outflow in the period recorded.

Question 8Business Organization, Financial Management, and Accounting

Which is a characteristic of an S corporation?

  1. Income passes through to shareholders and is taxed on their personal returns. Correct answer.
  2. It may have an unlimited number of shareholders.
  3. It is taxed the same as a C corporation, with tax paid at the entity level.
  4. Shareholders must all be nonresident aliens.

Explanation

An S corporation elects pass-through taxation, so its income is reported on the shareholders' individual returns rather than taxed at the corporate level. To qualify, the corporation must meet eligibility rules on shareholder count and shareholder type.

Question 9Business Organization, Financial Management, and Accounting

A contractor has current assets of $900,000 and current liabilities of $600,000. What is the current ratio?

  1. 0.67
  2. 2.00
  3. 1.50 Correct answer.
  4. 3.00

Explanation

The current ratio equals current assets divided by current liabilities. Here, $900,000 divided by $600,000 equals 1.50, meaning the contractor holds $1.50 of current assets for every $1.00 of current liabilities.

Question 10Business Organization, Financial Management, and Accounting

In double-entry bookkeeping, which statement is correct?

  1. Only cash transactions require two entries in the ledger.
  2. Total debits must equal total credits for every transaction. Correct answer.
  3. A debit always increases a liability account on the balance sheet.
  4. Every transaction increases at least one asset account.

Explanation

Double-entry accounting records each transaction so that the dollar amount of debits equals the dollar amount of credits. This keeps the accounting equation in balance after every entry.

Question 11Business Organization, Financial Management, and Accounting

Purchasing a new excavator with cash is reported in which section of the statement of cash flows?

  1. Financing activities
  2. It is not reported because no revenue is generated
  3. Investing activities Correct answer.
  4. Operating activities

Explanation

Cash spent to acquire long-lived productive assets is classified as an investing activity. Operating activities cover day-to-day operations, while financing activities cover borrowing and transactions with owners.

Question 12Business Organization, Financial Management, and Accounting

How is retainage withheld by an owner from a progress payment typically recorded by the contractor?

  1. As a receivable until it is collected Correct answer.
  2. As a liability until final payment is received
  3. As a reduction of contract revenue
  4. As an operating expense in the period withheld

Explanation

Retainage is an amount the owner withholds but still owes the contractor, so it remains an asset in the form of a receivable. It is not an expense or a reduction in revenue because the work has already been performed.

Question 13Business Organization, Financial Management, and Accounting

A contractor has fixed costs of $120,000 per year and an average contribution margin of $400 per unit. What is the break-even volume in units?

  1. 48 units
  2. 480 units
  3. 300 units Correct answer.
  4. 30 units

Explanation

Break-even volume equals total fixed costs divided by the contribution margin per unit. Dividing $120,000 by $400 gives 300 units, the point at which total contribution covers fixed costs.

Question 14Business Organization, Financial Management, and Accounting

A company reports revenue of $2,000,000 and net income of $120,000. What is the net profit margin?

  1. 6.0% Correct answer.
  2. 0.6%
  3. 12.0%
  4. 16.7%

Explanation

Net profit margin equals net income divided by revenue, expressed as a percentage. Here, $120,000 divided by $2,000,000 equals 0.06, or 6.0%.

Question 15Business Organization, Financial Management, and Accounting

Retained earnings on the balance sheet represents:

  1. The total amount of capital contributed by shareholders plus loans
  2. Cash set aside for future equipment purchases
  3. The company's bank account balance
  4. Cumulative profits kept in the business rather than distributed Correct answer.

Explanation

Retained earnings are the accumulated net income of the business that has not been paid out to owners as distributions. They are part of equity and do not represent a specific pool of cash.

Question 16Business Organization, Financial Management, and Accounting

In job cost accounting for a construction project, which cost would typically be charged directly to that job?

  1. Office rent for the company headquarters
  2. Framing labor and lumber installed on that project Correct answer.
  3. General liability insurance for the entire company
  4. The owner's personal vehicle registration

Explanation

Direct job costs are those that can be traced specifically to a project, such as labor, materials, and equipment used on that job. Company-wide costs are indirect and must be allocated across jobs as overhead.

Question 17Business Organization, Financial Management, and Accounting

A revolving line of credit is most useful to a contractor for:

  1. Covering short-term cash shortfalls between progress payments Correct answer.
  2. Recording depreciation on equipment
  3. Eliminating the need for retainage on public projects
  4. Permanently replacing long-term debt with equity financing from investors

Explanation

A revolving line of credit provides flexible short-term borrowing that can be drawn and repaid as cash needs fluctuate. Contractors commonly use it to bridge the gap between paying job costs and collecting progress payments.

Question 18Business Organization, Financial Management, and Accounting

Employee federal income tax withheld from payroll is:

  1. A liability held and later remitted to the government Correct answer.
  2. Exempt from reporting on the income statement
  3. An expense of the employer in addition to the wages paid
  4. Kept by the employer as revenue

Explanation

Withheld income tax is part of the employee's gross wages that the employer collects and holds in trust for the government. It is recorded as a current liability until remitted, not as an additional employer expense.

Question 19Business Organization, Financial Management, and Accounting

Under accrual accounting, revenue on a construction contract is generally recognized when:

  1. The final invoice is mailed to the customer
  2. The contract is signed by both parties
  3. Cash is received from the customer
  4. The performance obligation is satisfied Correct answer.

Explanation

Accrual accounting recognizes revenue when the promised work is performed, not when cash changes hands. For construction, this usually means recognizing revenue over time as progress satisfies the performance obligation.

Question 20Business Organization, Financial Management, and Accounting

A contractor has a $1,000,000 fixed-price contract with estimated total costs of $800,000. By year-end, costs incurred are $200,000 and the cost-to-cost method is used. What revenue should be recognized in year one?

  1. $800,000
  2. $200,000
  3. $1,000,000
  4. $250,000 Correct answer.

Explanation

Under the cost-to-cost method, the percentage complete equals costs incurred divided by total estimated costs, or $200,000 divided by $800,000, which is 25%. Applying 25% to the $1,000,000 contract price yields $250,000 of revenue.

Question 21Business Organization, Financial Management, and Accounting

A company has $500,000 of annual overhead and expects 100,000 direct labor hours. A job requires 4,000 direct labor hours. Using a labor-hour allocation rate, how much overhead applies to the job?

  1. $5,000
  2. $125,000
  3. $20,000 Correct answer.
  4. $50,000

Explanation

The overhead rate is total overhead divided by total labor hours, or $500,000 divided by 100,000 hours, giving $5.00 per hour. Multiplying $5.00 by the 4,000 hours on the job produces $20,000 of applied overhead.

Question 22Business Organization, Financial Management, and Accounting

When a surety evaluates a contractor's capacity, which measure most directly indicates the contractor's ability to finance additional work?

  1. The interest rate charged on the contractor's revolving credit card balance
  2. Number of employees on payroll
  3. Total revenue reported on last year's completed contracts
  4. Adjusted working capital relative to the size of the backlog Correct answer.

Explanation

Sureties focus on the contractor's financial capacity to fund operations until payments are collected, measured largely through adjusted working capital in relation to the remaining backlog. Growing backlog without adequate working capital strains cash flow and increases the risk of a claim.

Question 23Business Organization, Financial Management, and Accounting

A contractor's debt-to-equity ratio rises sharply from 0.8 to 2.5 in one year. Which interpretation is most reasonable?

  1. The company's profitability must have doubled over the same period
  2. The company now has more equity than debt
  3. The company is more leveraged and creditors bear more risk Correct answer.
  4. The company has eliminated most of its financial risk

Explanation

Debt-to-equity compares total liabilities with owners' equity, so a rising ratio signals heavier reliance on borrowed funds. Greater leverage increases fixed obligations and the risk borne by creditors, even if the added debt is funding growth.

Question 24Business Organization, Financial Management, and Accounting

A contractor receives a $50,000 mobilization advance before any work is performed. Under accrual accounting, how should this be recorded initially?

  1. As owners' equity
  2. As a liability (unearned or deferred revenue) Correct answer.
  3. As revenue in full as soon as the cash is deposited
  4. As an asset

Explanation

Cash received before the related work is performed creates an obligation to perform, so it is recorded as unearned revenue, a liability. The amount is recognized as revenue as the work is completed and the obligation is satisfied.

Question 25Contract Law and Contract Administration

Under the common law mailbox rule, an acceptance of an offer is generally effective when:

  1. the offeree begins preparing to perform
  2. the offeror acknowledges receipt in a signed writing
  3. the offeror actually receives it
  4. the offeree dispatches it to the offeror Correct answer.

Explanation

The mailbox rule provides that a properly dispatched acceptance is effective on dispatch, even if it never reaches the offeror. It applies to acceptance of an offer, not to the effectiveness of the offer itself, and does not require any acknowledgement or preparatory step by the offeree.

Question 26Contract Law and Contract Administration

Which statement best describes consideration in a construction contract?

  1. A bargained-for exchange of value between the parties Correct answer.
  2. A written recital stating that the parties intend to be bound
  3. The parties' signatures as witnessed by a notary public
  4. A promise by one party to make a gift in the future

Explanation

Consideration is the benefit or detriment each party bargains for and exchanges, such as a promise to build in return for a promise to pay. Recitals, notarization, and unfulfilled gift promises do not supply it.

Question 27Contract Law and Contract Administration

Which of the following agreements must generally be in writing to be enforceable under the statute of frauds?

  1. A month-to-month rental of construction equipment
  2. An oral change order for $800 of extra framing work
  3. A contract to complete interior painting within three weeks
  4. A contract that cannot be performed within one year Correct answer.

Explanation

The statute of frauds requires a signed writing for agreements that by their terms cannot be performed within one year, along with certain other categories such as land sales and suretyship promises. Short job contracts, small oral changes, and short-term rentals normally fall outside it.

Question 28Contract Law and Contract Administration

An owner terminates a contractor for breach and pays another firm more to finish the job. The owner's basic expectation damages are measured by:

  1. twice the increase in the contract price
  2. the entire original contract price
  3. nothing, unless the breach was willful and intentional
  4. the cost to complete the work Correct answer.

Explanation

Expectation damages put the owner where performance would have left it, so the owner recovers the reasonable cost of completion less any unpaid contract balance still held. Punitive multiples are unavailable in ordinary contract cases, and intent to breach is not an element of the claim.

Question 29Contract Law and Contract Administration

When the other party commits a material breach, the nonbreaching party may generally:

  1. only sue for specific performance of the contract
  2. unilaterally rewrite the contract's terms
  3. treat the contract as ended and sue for damages Correct answer.
  4. continue performance and waive every remedy

Explanation

A material breach excuses the injured party from further performance and permits it to treat the contract as discharged while pursuing damages. Specific performance is an extraordinary remedy limited to cases where money cannot cure the harm.

Question 30Contract Law and Contract Administration

A subcontractor who is unpaid on a private Tennessee project generally preserves mechanic's lien rights by:

  1. filing suit within 90 days of last work without giving notice
  2. serving the required notice and recording the lien Correct answer.
  3. notifying the owner within 10 days of signing the subcontract
  4. recording a lien within 30 days after starting work

Explanation

Tennessee law conditions a subcontractor's lien on giving the statutorily required notice to the owner and recording a statement of lien within the prescribed period after the debt becomes due. Both steps are necessary, and the clock does not run from the start of work or from subcontract signing.

Question 31Contract Law and Contract Administration

A contractor performs extra work at the superintendent's oral direction. In most standard construction contracts, recovering payment for that work depends on:

  1. change orders removing the need for any documentation
  2. extra work always being the owner's responsibility regardless of authorization
  3. the contract typically requiring written authorization for extra work Correct answer.
  4. the contractor being unable to recover for extra work in any circumstance

Explanation

Standard contracts make written change orders the mechanism for authorizing extra work and price adjustments. A contractor may still recover if the owner waived the writing requirement or is estopped by its conduct, which is why documentation of the direction matters.

Question 32Contract Law and Contract Administration

Substantial completion of a construction project generally occurs when:

  1. the owner has made final payment and released retainage
  2. the work is usable for its intended purpose Correct answer.
  3. all punch list items have been completed and accepted
  4. the architect has issued a certificate of occupancy

Explanation

Substantial completion marks the point at which the work is sufficiently complete for its intended use, with only minor or punch list items outstanding. It starts warranty periods and shifts risk of loss in many contracts, but it precedes final completion and final payment.

Question 33Contract Law and Contract Administration

A payment bond on a construction project primarily protects:

  1. subcontractors and suppliers who are not paid Correct answer.
  2. the surety against every claim on the project
  3. the contractor's state license from suspension
  4. the owner against defective or incomplete workmanship

Explanation

A payment bond stands behind the contractor's obligation to pay labor and material suppliers, giving them a solvent source of recovery if the contractor defaults. Performance bonds, by contrast, protect the owner against a contractor's failure to complete the work.

Question 34Contract Law and Contract Administration

A subcontractor's bid may be enforced by the general contractor even before contract award when:

  1. the subcontractor's bid was the lowest one received
  2. the general contractor relied on the bid and the sub knew it would Correct answer.
  3. the owner approved the subcontractor in advance
  4. the general contractor paid a deposit of ten percent

Explanation

Under promissory estoppel, a subcontractor's bid is binding if the general contractor reasonably and foreseeably relied on it in preparing its own bid and the subcontractor knew of that reliance. No deposit or owner approval is needed to create the obligation.

Question 35Contract Law and Contract Administration

An indemnity clause in a construction contract generally obligates one party to:

  1. mediate every dispute before filing suit
  2. reimburse the other for specified losses Correct answer.
  3. waive all claims for delay damages
  4. buy insurance covering all project participants

Explanation

Indemnity is a risk-shifting promise by which one party agrees to answer for the losses or liabilities of another, often those arising from its own negligent acts. Insurance, delay waivers, and dispute procedures are handled in separate clauses.

Question 36Contract Law and Contract Administration

When an owner terminates a construction contract for convenience, the contractor is generally entitled to recover:

  1. the full contract price plus lost profits on the whole project
  2. nothing at all unless the owner also breached the contract
  3. punitive damages equal to the unpaid contract balance
  4. the value of work performed plus reasonable termination costs Correct answer.

Explanation

Termination for convenience ends the work without fault, so the contractor recovers the reasonable value of work and materials furnished, plus costs caused by the termination and typically a reasonable profit on work performed. Anticipated profit on unperformed work is generally excluded.

Question 37Contract Law and Contract Administration

A contractor encounters rock that appears in neither the drawings nor the geotechnical report. Under a standard differing site conditions clause, the contractor should:

  1. notify the owner promptly and keep records of the claim Correct answer.
  2. absorb the cost, since site conditions are always the contractor's risk
  3. remove the rock quietly and add the cost to the next invoice
  4. stop work permanently and file suit against the owner

Explanation

Differing site conditions clauses require prompt written notice before the condition is disturbed, allow the owner to investigate and direct the work, and preserve the contractor's right to an equitable adjustment. Silent self-help or abandoning the job forfeits or complicates the claim.

Question 38Contract Law and Contract Administration

A no-damages-for-delay clause in a construction contract generally:

  1. applies only to subcontractors, not to the general contractor
  2. bars any extension of time as well as delay damages
  3. is unenforceable in every jurisdiction
  4. may bar delay damages but still allows an extension of time Correct answer.

Explanation

These clauses typically waive money damages for owner-caused delay while leaving the contractor's right to a time extension intact, preserving the schedule and avoiding liquidated damages. Courts enforce them in most states but may refuse enforcement for delays not contemplated by the parties.

Question 39Contract Law and Contract Administration

Retainage in a construction contract is best described as:

  1. a percentage of each payment withheld until the work is accepted Correct answer.
  2. an amount added to the contract to cover overhead
  3. a penalty charged for finishing after the deadline
  4. a fee paid to the owner when the contract is signed

Explanation

Retainage is a portion of progress payments held back to protect the owner until completion, acceptance, or the expiration of lien periods. It is not a fee, penalty, or markup, and statutes in many states limit the percentage and duration.

Question 40Contract Law and Contract Administration

A contractor's obligation to perform in a good and workmanlike manner:

  1. applies only to public works projects
  2. applies only when the contract says nothing about quality
  3. can be disclaimed by any written contract, whatever the bargaining power
  4. is implied by law into construction contracts Correct answer.

Explanation

Construction contracts carry an implied duty to perform in a good and workmanlike manner consistent with industry standards, whether or not the contract spells out details. It is not confined to public work, and disclaimers face enforceability limits.

Question 41Contract Law and Contract Administration

A general contractor incorporates the prime contract documents by reference into a subcontract. The usual purpose is to:

  1. make the subcontractor a party to the prime contract
  2. bind the sub to prime contract terms that relate to the sub's work Correct answer.
  3. give the subcontractor a direct right to sue the owner
  4. relieve the subcontractor of all duties owed to the general contractor

Explanation

Incorporation by reference flows down obligations such as scheduling, submittals, insurance, and claims procedures that concern the subcontractor's scope. It does not create privity between the sub and the owner or eliminate the sub's duties to the general contractor.

Question 42Contract Law and Contract Administration

A subcontractor has belatedly been sued in court on a claim that the subcontract requires to be arbitrated. The subcontractor's best response is to:

  1. ignore the lawsuit, because arbitration clauses are unenforceable
  2. recover attorney fees automatically as the prevailing party
  3. demand a jury trial in place of arbitration
  4. ask the court to compel arbitration and stay the litigation Correct answer.

Explanation

A party facing suit on an arbitrable claim must move to compel arbitration and request a stay; failing to act can waive the right. Arbitration clauses are generally enforceable under the Federal Arbitration Act and state law.

Question 43Contract Law and Contract Administration

In Tennessee, a contractor that performs work requiring a license without holding one:

  1. faces no consequence as long as the owner is satisfied
  2. may be barred from recovering payment for the work in court Correct answer.
  3. may still enforce the contract and collect the full price
  4. can cure the problem by paying a fee after final payment

Explanation

Tennessee's contractor licensing statutes restrict an unlicensed contractor's ability to bring suit to recover compensation for work requiring a license. The owner's satisfaction does not cure the statutory bar, and later licensing does not retroactively validate the contract.

Question 44Contract Law and Contract Administration

A subcontractor installs defective work and refuses to return. The general contractor pays a third party to correct it. The general contractor typically recovers that cost through:

  1. the architect's certification of correction
  2. a mechanic's lien on the subcontractor's equipment
  3. a change order issued by the owner for the repairs
  4. a backcharge against amounts owed to the subcontractor Correct answer.

Explanation

A backcharge deducts the cost of correcting a subcontractor's deficient work from sums otherwise due that subcontractor, and the subcontract usually authorizes this remedy. It is a direct claim between contractor and subcontractor, not an owner change or a lien on equipment.

Question 45Contract Law and Contract Administration

An owner issues changes so extensive that the work becomes fundamentally different from what was contracted for. Under the cardinal change doctrine, the contractor may:

  1. be required to finish the work at the original contract price
  2. lose all rights unless the owner agrees in writing
  3. treat the contract as breached and recover for work performed Correct answer.
  4. recover only in quantum meruit after completing all the work

Explanation

A cardinal change exceeds the scope of the changes clause and amounts to a breach, freeing the contractor from the changed bargain and allowing recovery for the reasonable value of work performed. The contractor need not finish the transformed project first.

Question 46Contract Law and Contract Administration

A contractor's bid contains a material clerical error, and the owner moves to accept it. A court is most likely to permit withdrawal when:

  1. the contractor simply changed its mind before the bid was accepted
  2. the mistake was material and the owner knew or should have known of it Correct answer.
  3. another bidder withdrew from the competition
  4. the owner had not yet obtained project financing

Explanation

Relief for unilateral mistake requires a material error plus circumstances making enforcement unconscionable, such as the other party's knowledge of the mistake. A mere change of heart or unrelated project circumstances does not support rescission.

Question 47Contract Law and Contract Administration

A contractor may recover constructive acceleration costs when:

  1. the contractor voluntarily speeds up work to finish ahead of schedule
  2. the contractor's own workforce caused the delay
  3. a valid time extension is refused and the contractor must speed up Correct answer.
  4. the contract contains no completion date at all

Explanation

Constructive acceleration arises when the contractor is entitled to a time extension for an excusable delay, the owner refuses it, and the contractor must then spend money to meet the original date. Voluntary speed-up and contractor-caused delay do not qualify.

Question 48Contract Law and Contract Administration

A performance bond surety's obligation is generally triggered when:

  1. the contractor requests a change order
  2. the project falls ten days behind schedule
  3. the contractor files for bankruptcy and stops paying suppliers
  4. the owner declares default and terminates the contract Correct answer.

Explanation

Performance bond obligations ripen when the owner formally declares the contractor in default and terminates as the bond requires, after which the surety may complete, tender a replacement contractor, or pay. Bankruptcy alone or minor schedule slippage does not trigger the bond.

Question 49Contract Law and Contract Administration

A pay-when-paid clause in a subcontract generally provides that payment to the subcontractor:

  1. is triggered after the owner pays the contractor Correct answer.
  2. is prohibited by law in every state
  3. requires the subcontractor to sue the owner directly
  4. never arises if the owner does not pay the contractor

Explanation

A pay-when-paid clause makes the owner's payment a timing mechanism for the contractor's obligation, and many courts require payment within a reasonable time even if the owner never pays. A pay-if-paid clause, by contrast, makes owner payment a condition precedent and is treated more strictly.

Question 50Contract Law and Contract Administration

A general contractor and an owner sign a complete written agreement containing a clause stating that the writing is the entire agreement of the parties. During negotiations the owner had orally promised to provide temporary power to the site at no cost to the contractor. In a dispute over that promise, a court will most likely:

  1. Enforce the oral promise because it was made before the contract was signed
  2. Exclude all parol evidence, including evidence offered to explain an ambiguous contract term
  3. Enforce the oral promise because promises about site services are always treated as collateral
  4. Exclude evidence of the oral promise because the writing is a complete integration Correct answer.

Explanation

When the parties adopt an integrated writing, the parol evidence rule bars prior or contemporaneous oral agreements offered to vary or supplement it, and a merger clause is strong evidence of that intent. The rule does not, however, bar evidence offered to resolve a genuine ambiguity, to show fraud, or to establish a separate collateral agreement supported by its own consideration and not naturally expected to appear in the writing.