Contractor's Business Law Manual................................................................ I
1. CONTRACTORS' LICENSE LAW ............................................................................................ 1
1. LICENSE CLASSIFICATION .................................................................................................. l
2. LICENSING GENERAL REQUIREMENTS ........................................................................... 3
3. LICENSE EXEMPTION ........................................................................................................... 4
4. RECIPROCITY ......................................................................................................................... 5
5. CRIMINAL BACKGROUND CHECK.................................................................................... 5
6. EXAMINATION ........................................................................................................................ 5
7. QUALIFYING INDIVIDUAL .................................................................................................. 7
8. CHANGES IN PERSONNEL ................................................................................................... 8
9. CHANGES IN BUSINESS NAME OR ADDRESS ................................................................. 9
10. BONDS ........... ;........................................................................................................................ 9
11. COMPLAINTS ...................................................................................................................... 11
2. BUSINESS MANAGEMENT ...................................................................................................... 16
1. FORMS OF BUSINESS .......................................................................................................... 16
2. FINANCIAL STATEMENTS .................................................................................................. 18
3. RATIO ANALYSIS .................................................................................................................. 23
4. BUSINESS MANAGEMENT ................................................................................................. 24
3. LABOR LAW & TAX................................................................................................................... 33
1. HIRING, WAGES AND FIRING ....................................,.... .'................................................... 33
2. WORKERS' COMPENSATION INSURANCE ..................................................................... 38
3. TAX .......................................................................................................................................... 40
4. CONTRACT LAW........................................................................................................................ 43
1. CONTRACT TYPE ................................................................................................................. 43
2. JOINT CONTROL ................................................................................................................... 47
3. MECHANICS LIEN WARNING ............................................................................................ 48
4. LIENS AND STOP NOTICES RIGHTS ................................................................................ .49
5. SERVING MECHANICS LIEN AND STOP NOTICE .......................................................... 50
6. OWNER'S COUNTER STRATEGIES ................................................................................... 52
7. DISPUTES ............................................................................................................................... 53
:"\. (;()NS'fRUCTION SAFETY ....................................................................................................... 56
I. DOSH REGULATIONS .......................................................................................................... 57
2. REGIONAL NOTIFICATION CENTERS UNDERGROUND SERVICE ALERT............... 63
l PRESERVATION OF NATIVE AMERICAN REMAINS ...................................................... 65
Dftact:or's Business Law Test Questions .................................................. 67
,UIIMtlll:ss Law Test 1............................................................................................................................ 69
,Uuwh1css Law Test 2 ............................................................................................................................ 83
, UMli1css Law Test 3 ............................................................................................................................ 97
JJuul11css I ,aw Test 4 .......................................................................................................................... 111
llm1lih,lHN Law Test Update ................................................................................................................ 124
utnl Huilding Contractor Trade Manual............................................. 127
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not limited to, in print, online, on a CD, DVD, MP3 or in any other format now known or introduced in
the future) with the intention of teaching, tutoring, reselling or distributing such copies without written
permission from the publisher.
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Disclaimer: This book is written with the understanding that the author was not engaged in rendering
legal services. The information included has been carefully prepared and is correct to the best of their
knowledge as of the publication date.
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Foundation..................................................................................................................................... lL':I
Framing ......................................................................................................................................... 143
Siding ............................................................................................................................................ 156
Roofing ......................................................................................................................................... 161
Plumbing ....................................................................................................................................... 165
Electrical Wiring ........................................................................................................................... 173
HVAC ............................................................................................................................................ 187
Interior Finish ................................................................................................................................ 201
Satety ............................................................................................................................................. 210
General Building Contractor Trade Test Questions .................................. 215
Gen-B Test 1..................................................................................................................................... 217
Gen-B Test 2 ..................................................................................................................................... 227
Gen-B Test 3 ..................................................................................................................................... 238
Gen-B Test 4 ..................................................................................................................................... 249
Gen-B Test 5 ..................................................................................................................................... 259
Gen-B Test 6 ..................................................................................................................................... 269
Gen-B Test 1-6 Answers ................................................................................................................... 279
Contractor's Business Law
Manual
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1. CONTRACTORS' LICENSE LAW
:: '(;~ont..actors5State,License,,Board
D&pA{ff"--C,-,v-f
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,, P.O. Box 26000
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'/ Sacramento, CA 95826
(800) 321-CSLB (2752)
t) www.cslb.ca.gov
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11 CSLB has 15 appointed Members, include:
U 5 licensed contractors
I labor representative
1,1 9 public members (8 non-contractors and 1 building official)
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1. LICENSE CLASSIFICATION
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~~lass~A~8e~eral"~-n~neeringw~ont~act(rn1 1 ~~VJ__ i~ .
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W I he pnnc1pal busmess 1s m connect10n with fixed works requmng specialized engmeenng knowledge
I and skill.
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l@lass-•B~eneral,Building;!;.(ifontractor
The principal business is in connection with any structure built, being built, or to be built, tJ.1equimng~m'll/its
,e6Y\sttu&tt0nRll1th@'l!/us€il0:iiillat,1;~leas.t111~@¾J.,11m-eJated11;,buiclding•tFa"d:e'sil':?0Jl'l'orafts~ however, framing or carpentry
1
}t, projects may be performed without limitation. A "B" General Building contractor may take a contract
lbr projects involving one trade only if the contractor holds the appropriate specialty license or
~W subcontracts with an appropriately licensed specialty contractor to perform the work.
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There are 42 separate "C" license classifications for contractors whose construction work requires
specialized skill and whose principal contracting business involves the use of specialized building trades
or crafts. Manufacturers are considered contractors if engaged in on-site construction, alteration, or
repair.
.IO ~lass"~GI~Specialey.wContractoi;.
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H, Classification Code Section
\'/ Asbestos Abatement ................. , .................................................. C-22 7v#sfffUt
IH Boiler, Hot-Water Heating and Steam Fitting ............................ C-4 -,f.b,\<..
11) Building Moving/Demolition .................................................... C-21
,j() Cabinet, Mill work and Finish Carpentry .................................... C-6
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Ceramic and Mosaic Tile ............................................................ C-54
Concrete ..................................................................................... C-8
Construction Zone Traffic Control ............................................. C--3 1
Drywall ....................................................................................... C-_9
Earthwork and Paving ................................................................ C-12
Electrical ..................................................................................... C-10 r.t[_(
Elevator ................................................................ :•. .................... C-11
Fencing ....................................................................................... C-13
Fire Protection ............................................................................ C-161~11}; (B~l-7,:1@,)_~)il:.
Flooring and Floor Covering ..................................................... C-15
Framing and Rough Carpentry .................................................... C-5 ( 51~~ ~!p-#i ).
General Manufactured Housing .................................................. C-4 7 ;f1;1,h fh..f/;
Glazing ........................................................................................ C-17 1rk,Jit}!.,
Insulation and Acoustical.. .............................. ·····························c-2 rM>ciJ{~%
Landscaping ................................................................................ C-27
Lathing and Plastering ................................................................ C-35 /4~4ri
Limited Specialty ........................................................................ C-61
Lock and Security Equipment ..................................................... C-28
Low Voltage Systems .................................................................. C-7 (~f1ft
Masonry ......................................................... ,·............................. C-29 AS.#
Ornamental Metal ....................................................................... C-23 7;£ifp1t~1..:..t
Painting and Decorating ............................................................. C-33
Parking and Highway Improvement ........................................... C-32
Pipeline ....................................................................................... C-34
Plumbing ... :, ................................................................................. C-36
(~Ii!.)
Refrigeration ............................................................................... C-38
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Roofing ....................................................................................... C-39 (,f' y;;-_ 1..12- i ·<lt1i)
Sanitation System ....................................................................... C-42 )f0~~ {{~~r-t?--<Ci)
Sheet Metal ................................................................................. C-43 Vi4;iil{
Sign ............................................................................................. C-45 tJ
Solar. ............................................................................................ C-46
Reinforcing Steel ........................................................................ C-50
Structural Steel ........................................................................... C-51
Swimming Pool .......................................................................... C-53
Warm-Air Heating, Ventilating and Air-Conditioning ............... C-20
Water Conditioning .................................................................... C-55
Welding ....................................................................................... C-60 ~ 1t
Well Drilling ............................................................................... C-57 C 51}t~.JE,)
CSLB lists the C-61 Limited Specialty classification in "D" subcategories for administrative tracking.
iffJ ).
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2. LICENSING GENERAL REQUIREMENTS
2
To qualify for a California contractor license, an individua~u~eiia~leas~1~~ea11s,i!@ld, and have either
4 as.iMali'.4li~oci1rl111~e'c§um~tHillllmr issued by the Social Security Administration or.wan-lrfdiv•idua:LJ:'u]la,)';~,r
5 1tdel'ltii:icati0nlil+Ni11Jmber from the Internal Revenue Service.
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7 Working Experience
8 The person who will act as the qualifying individual must have had, '\Wl!i:llin•ith~Mtl:m,a~4'i>.~•~~,~~
9 immediately before the filing of the application, 'titl!Wleas-fc:nm:li€4')&'¥'Wlh.y~alisW{l0:f¥llir@Kperienc.e,.,10I;lSMk,.l!
IO journeyman, foreman, supervising employee, contractor, or owner-builder. in the classification for which
he or she is applying. The experience claimed on the application must be verifiable, and individuals who
12 have knowledge of the experience must certify the accuracy of the experience information as stated on
13 the "Certification of Work Experience" form.
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4'a@u-,;;,aeytri~n is a person who has completed an"1.pplieD1iieeslriv,•program or is an experienced worker,
not a trainee, and is fully qualified and able to perform the trade
without supervision. l ¥-_
~ a n or supervising employee is a person who has the knowledge and skill of a journeyman and
directly supervises physical construction.
20 IWf!:WffNli/i.Uif!Jli,. is a {qson who manages the daily activities of a construction business, including field
2l supervision. . Jgr_,.
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~wrt'ersbuflrle'ff"'IS a person with a mm1mum of knowledge, skills and ab1ht1es of a Journeyman, who
performs work on his or her own property, and who has the skills necessary to manage the daily
activities of a construction business, including field supervision.
Wl.a'Kemffii4t~~imslttui:S:U~m~g~'c:llli~W"1~ifteK!~:h~d~ifesponsibTet½p.ersoJ:t such as
a homeowner, an
umployer, fellow employee, other journeyman, contractor, union representative, building inspector;
architect, engineer, business associate, or a client if the applicant is/was self-employed. The person
verifying your experience must have firsthand knowledge of your experience during the time period
covered-that is, he or she must have observed the work that you have done and must complete and sign
under penalty of perjury the "Certification of Work Experience" form, which is included with the
npplication. Even if you provide a "Certification of Work Experience" form, be prepared to furnish
documentation of any experience you claim on the form whenever it is requested. Failure to provide this
documentation will result in the return of your application for correction or denial of the license. You
1nust provide written documentation of any training or education claimed in place of experience.
Acceptable documentation includes copies of apprenticeship certificates and college transcripts.
-m,wamlm~reditA maximum of one-and-one-half (1-1/2) years of credit upon submission of certified official
, t
l1 unscripts for the following:
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An Associate degree from an accredited school or college in n lfold dir()Clly rtilntcd to the specific
classification for which the application is being made.
• A maximum of two (2) years of credit upon submission of certified omclol 1t·1uuwripts for either of the
following:
A four-year degree from an accredited college or university in u lfold rol11k1d to business (such as
accounting, business administration, economics, mathematics, etc.)
A professional degree in law.
•~a~imullkoitthr.ee"G3~*~eat'SiiO~Iie<llit upon submission of either of the following:
A Certific'1te of Completion of Apprenticeship from an accredited apprenticeship program or a
certified statement of completion of apprenticeship training from a union in the classification for
which the application is being made.
Certified official transcripts for a four-year degree from an accredited college or university in a
field that is directly related to the specific classification for which the application is being made
(such as construction technology/manage~ent, horticulture/landscaping, a related field of
engineering, etc.).
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17 Returned Application
18 Your application may be returned to you if it is insufficient or incomplete. This is known as a "return for
19 correction." VEG&mustllprn;v;ide.i/any,•missing~insfo~i@JJl', make corrections, and return your application to
CSLB ~itfilri~Q•aay,~,fi;om¥ith~aJ:~t.~aS!il!Eetuunem If it is not returned to CSLB within 90 days, your·
21 application becomes void. You cannot reinstate it, and you must submit a new application and
22 appropriate processing fee if you wish to pursue a license. /_ 1-tf:i '1
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24 License Renewal
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25 A contractor license is initially issued ~~:fe,~t;J;?;~m,~d. It will expire two (2) years from the last day
of the month in which it was issued. Active licenses' expire every two (2) years . .;n~l~se~el){¼p,ire
27 • ~. .l!lfl(~1,'eR1i6. Inactive license doesn't need a bond. You may '1leneWrr~aa1:1ex;pired1,liGense'b:cwithinl!liiN:e
28 ~)-M~oos-after,eitsa0xpiration. After five years, it becomes void, and if you wish to contract, you must
29 apply for a new license and fulfill the examination or waiver requirements again.
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3. LICENSE EXEMPTION
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34 • Work on a project for which the combined value of labor, materials, and all other costs on one or more
35 contracts is"ff~;sill>lthan%11$50@ falls within the minor work exemption. Work which is part of a larger or
36 major project, whether undertaken by the same or different contractors, may not be divided into amounts
37 less than $500 in an attempt to meet the exemption;
38 • An employee who is paid wages, who does not usually work in an independently established business,
39 and who does not have direction or control over the performance of work or who does not determine the
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final results of the work or project;
• Public utilities working under specified conditions;
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• Security alarm company operators (licensed by the Bureau of Security and Investigative Services)
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who install, maintain, monitor, sell, alter, or service alarm systems (fire alarm company operators must
1 be licensed by CSLB);
,I • Persons whose activities consist only of installing satellite antenna systems on residential structures or
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property. These persons must be registered with the state Bureau of Electronic and Appliance Repair,
<i I lome Furnishings and Thermal Insulation.
• Owner-builders who build or improve structures on their own property if they either do the work
H themselves or use their own employees (paid in wages) to do the work. This exemption is only valid if
•> I he structure is not intended to be offered for sale within one year of completion;
Io • Owner-builders who build or improve structures on their own property if they contract for the
11 construction with a licensed contractor. This exemption is applicable to the construction of single-family
I,' residential structures only if no more than four such structures are offered for sale in any one calendar
I I year;
I •I • Owner-builders who improve their main place of residence, who have actually resided there for one
I 'I year prior to completion of the work, and who complete the work prior to sale. This exemption is limited
I (1 to two structures within a three-year period;
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4. RECIPROCITY
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PJ California does have reciprocity agreements withl'\rizona, Wev:ada, and Utah.
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5. CRIMINAL BACKGROUND CHECK
All applicants for licensure are required to submit a full set of fingerprints for the purpose of conducting
11 criminal background check. Fingerprints will be compared with the records of the California
I )cpartment of Justice and the Federal Bureau of Investigation to determine if a criminal history exists.
Aft:er submission of an application to CSLB, each individual listed on the application will be sent
instructions on the process for obtaining and submitting fingerprints_
Will a conviction for a criminal offense prevent a person from being licensed as a contractor or
serving as a qualifying individual? CSLB 's applications and other forms include questions regarding
criminal convictions. CSLB may deny a license if the crime is substantially related to the duties,
functions, and qualifications of a contractor. Failure to disclose the requested information may, in and of
itself, be grounds for denial of a license. Even if a crime is found to be substantially related to the duties,
functions, and qualifications of a contractor, an individual may be licensed if he or she has demonstrated
sufficientrehabilitation.
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6. EXAMINATION
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You will be given 3-1/2 hours to complete each examination. If you fiil ltte law and business exam
11nd/or your trade exam, you must also pay a $60 fee each time you are scheduled to retake the exam.
You are given 18 months in which to pass the exams. If you do not pass within 18 months after your
application is accepted by the board, your application is considered void, and you will have to submit a
new application with new fees. The void date on an application may be extended up to 90 days if you
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provide documented evidence that the failure to complete the application process was due to a medical
emergency or other circumstance beyond your control. Examination results are good for five (5) years. If
you pass either the trade exam or the law and business exam but fail the other~ you need only take the
test you failed as long as you retake and pass it within five years.
Penalties for conduct that violates the security of the examination include prosecution on
misdemeanor charges resulting in a fine of $500, payment of damages ofup to $10,000 plus the costs of
litigation, and a county jail sentence. You also would be subject to automatic exam failure; any fee(s)
paid to the state would not be refunded; and you would not be allowed to apply for any license
classification for a period of one (1) year from your examination date. Conduct that violates the security
of the examination includes providing information about test questions to any school, person, or
business other than CSLB examination staff; removing exam materials from the testing site (includes
taking notes or recording anything electronically); communicating with other test takers during an exam;
copying or permitting your answers to be copied; possessing any written material other than test
materials provided by CSLB; or taking an exam on behalf of another applicant.
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After Examination
• A contractor bond or equivalent in the business name of the applicant, and a bond of qualifying
individual or exemption statement for each responsible managing officer or responsible managing
employee, as appropriate. The bond of qualifying individual must be in the names of the qualifying
individuals and the business.
• Proof of workers' compensation insurance or exemption. If you have no employees, an exemption
certificate must be submitted. If the license is qualified by a responsible managing employee (RME), the
qualifier is an employee. This means that workers' compensation insurance is required to cover this
employee and an exemption certificate should not be submitted. (All C-39 Roofing contractors must
carry workers 'compensation insurance regardless of whether or not they have employees.) If you have
employees, no compensation penalty is $2,000 per employee in non-compensable cases, $10,000 for
each employee in compensable cases.
Examination Waiver
The Registrar MAY waive the examination requirement if the qualifying person meets one of the
following conditions:
• The person is currently the qualifying individual for a license in good standing in the same
classification for which he or she is applying; or
• The person has been a qualifying individual within the past five (5) years for a license in good
standing in the same classification for which he or she is applying; or
• Within the last five (5) years, the person has passed both the law and business examination and the
trade examination in the same classification for which he or she is applying.
37
Additional circumstances for Examination Waiver
39 Yes. At the Registrar's discretion, an exam waiver may be granted if the qualifying individual meets the
40 following criteria: The qualifying individual is a member of the immediate family of a licensee whose
41 individual license was active and in good standing for five of the seven years immediately preceding the
38
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application. The qualifying individual must have been actively engaged in the licensee's business for
2 five (5) of the previous seven (7) years and be applying in the same classification. The license is
3 required in order to continue operating an existing family business in the event of the absence or death
4 of the licensee.
5
Even if you think that you are eligible for an examination waiver, you must complete the
6 experience section of the application to document a minimum of five (5) years out of the previous seven
7 (7) years as journey-level experience. All experience claims must be verified by a qualified and
8 responsible person, such as an employer, fellow employee, other journeyman, contractor, union
9 representative, building inspector, architect, or engineer. The person verifying your claim must have
IO firsthand knowledge of your experience during the time period being verified; that is, he or she must
I I have observed the work that you have done.
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7. QUALIFYING INDIVIDUAL
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A qualifying individual, or simply "qualifier," is the person listed in the CSLB records who meets the
experience and examination requirements for the license. A qualifying individual is required for every
classification on each license issued by CSLB. The qualifying individual for a license is responsible for
exercising the direct supervision and control of the employer's (or principal's) construction operations.
If you have a sole ownership license, your qualifier may be either a ~µ~anagm:iJ
&piii.J-~J the owner. If you have a partnership license, your qualifier may either be one
of the general partners (who shall be designated as the qualifying partner) or an RME. If you have a
corporate license, your qualifier may be either one of the officers listed in CSLB records for your license
(who shall be designated as the ~&~~) or an RME. If you have a
limited liability company license, your qualifier may be a responsible managing member, responsible
managing manager, RMO, or RME. If your qualifying individual is an RME, he or she must be a bona
fide employee of the firm and may not be the qualifier on any other active license. This means that the
~~: must be regularly employed by the firm and actively involved in the operation of the business tit;
~~lii0nns~~ij~t8@~~~1m'.Eilii&f!lllU~lillI:a~Uf:JJi'©misfpeFit,,weik, whichever is less.
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A person may act as a qualifying individual for more than one active license only if one of the following
conditions exists:
• There is a common ownership of at least 20 percent of the equity of each firm for which the person
acts as a qualifier;
:15 • The additional firm is a subsidiary of or a joint venture with the first; or
:l<, • The majority of the partners or officers are the same.
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38 A person may serve as the qualifying individual for no more than three (3) firms in any one-year period.
'.19 . If a qualifier disassociates from the third firm, he or she must wait one year before associating with a
40 new third firm.In most cases, a responsible managing employee (RME) can only act as a qualifying
4 I individual for one active license at a time.
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Licenses are not transferable from one business entity to another, even if the qualifying person is
2 the same for both. A new license is required whenever the business entity type is changed. For example,
3 if a contractor with a sole ownership business decides to incorporate, or a partnership splits into multiple
4 sole ownership businesses, a new license is required in each case.
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8. CHANGES IN PERSONNEL
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9 Sole Owner
A sole ownership license is not transferable. If a contracting business is purchased from the holder of a
11 sole ownership license, the contractor license is not part of the purchase. The new owner must apply for
12 and obtain his or her own license before he or she can contract legally.
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14 Partner
15 If a
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general or qualifying partner leaves the business or the partner died, the existing license is canceled.
The remaining partners may request a one-year continuance of the license to complete projects in
progress. The request for a continuance must be submitted to CSLB within 90 days of the date the
partner left. The remaining partners cannot contract for any new projects under that license. The
remaining partners must apply for a new license if they choose to remain in business beyond the one (1)
year limit of the contimiance.
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22 Corporate Officers
23 If any of the officers listed in CSLB records for a corporate license leaves your business, you must
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report the change to CSLB within 90 days by submitting a "Disassociation Request." To add personnel,
you must complete and submit an "Application to Report New Officers of a Corporation." The status of
your license is not affected by adding officers or having any of them leave unless the person who leaves
has been serving as a qualifying individual. If the RMO's share of the voting stock of the corporation, or
,the RMO, responsible managing member's, or responsible managing manager's membership interest of
a limited liability company, falls below 10 percent, he or she will no longer be eligible for exemption
from the bond requirements. You must report the change in exemption status and file a "Bond of
Qualifying Individual" form within 90 days of the change.
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33 Qualifying Individual (Responsible Managing Officer, Employee, Member, or Manager) If an RMO,
34 RME,
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responsible managing member, or responsible managing manager leaves a business
(disassociates), CSLB must be notified in writing within 90 days of the date of disassociation. Use a
"Disassociation Notice" form. You must specify:
• Name of the qualifying individual who left
• Date of disassociation
• Name of the business
• Contractor license number
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One of the remaining official personnel listed in CSLB records for that license, or the qualifying
individual who is disassociating, must sign the notification of disassociation or your letter. If you intend
to continue to conduct business in the classification for which the qualifying individual was responsible,
you must replace him or her within 90 days of the date of disassociation. Failure to do so will result in
suspension of your license or removal of the classification from your license.
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9. CHANGES IN BUSINESS NAME OR ADDRESS
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IO Report changes in business name or address as soon as possible, but no later than 90 days after the
11 change.
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13 Business Name
14 Report a change of the name of your business by completing an "Application to Change Business Name
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and/or Address" form. Note the following conditions:
• The form must be signed by an owner, partner, officer, member, or manager of the firm.
• If you hold a corporate license or limited liability company license, you must first register the name
change with the California Secretary of State. Include a certified copy of the Amendment of Articles of
Incorporation (for a corporation) or Statement of Information (for an LLC) form, as appropriate, with
your notice.
• The new business name must not conflict with the type of business entity or the classification held.
Business Address
Report a change of the official address of your business by completing the "Application to Change
Business Name and/or Address" form. The form must be signed by the owner, a partner, officer, member,
26 or manager of the firm.
10. BONDS
(lO
:} I License Bond
As of January 1, 2016, applicants for a new contractor license, other than those applying for a joint
venture license, no longer need to have more than $2,500 worth of operating capital. However, the
umount of the contractor license bond or cash deposit that must filed with the Registrar increased from
$12,500 to $15,000. Bonds are not transferable-they cannot be transferred from one license to another
or from one qualifying individual to another.
QI Bonds
~V, It is your responsibility to file a contractor license bond valued at $15,000 or an equivalent cash deposit
~O with the Registrar. In addition, you must submit a separate bond of qualifying individual or cash deposit
~ I in the amount of $12,500 for the RME or the RMO. However, a bond of qualifying individual is not
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1 required if the RMO certifies that he or she owns 10 percent or more of the voting stock or equity of the
2 corporation for which he or she serves as the qualifying Individual. If the license is inactive, neither the
3 contractor bond nor the Bond of Qualifying Individual is needed.
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5 Special Requirements for LLC
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If you have a limited liability company (LLC) license, a separate $100,000 surety bond is required (in
addition to the $15,000 contractor bond) for the benefit of any employee or worker damaged by the
LLC's failure to pay wages, interest on wages, or fringe benefits, as well as other contributions.
Commercial General Liability Insurance is required for limited liability companies (LLC) with the
aggregate limit of $1 million required for licensees with five or fewer persons listed as members of the
personnel of record; an additional $100,000 is required for each additional member of the personnel of
record, not to exceed $5 million total.
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14 Disciplinary Bonds
15 After a firm's license
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hatbeen revoked for a violation of contractors' state license law, the firm must file
a disciplinary bond with the Registrar if the license is to be reinstated or reissued, or if the firm seeks to
have a new license issued.
Disciplinary bonds are subject to the following requirements:
• The disciplinary bond must be filed in addition to, and cannot take the place of or be combined with,
any other bonds required to maintain an active contractor license;
• The Registrar determines the bond amount, which is based on the seriousness of the violations. The
amount may not be less than $15,000 nor greater than 10 times the amount of the contractor bond;
• The disciplinary bond must remain current and on file with the Registrar for at least two (2) years. In
some cases, the Registrar may require a longer filing period; and
• The firm's license must remain active and current while the disciplinary bond is on file.
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27 Suspensions due to bond-related issue
28 Your license will be suspended if any of the following bond-related conditions occur:
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Your surety company cancels one or more of your required bonds;
• The voting stock of the responsible managing officer for a corporate license or the membership
interest in a limited liability license is no longer at least 10 percent of the total voting stock of the
corporation. Suspension is effective from the date ownership or membership interest terminated unless a
bond of qualifying individual, backdated to the date his or her percentage of the stock or membership
interest fell below 10 percent, is filed;
• A judgment or payment of claim reduces the amount of any required bond;
• You fail to maintain a disciplinary bond or cash deposit in full force and effect for the required amount
of time. A suspended license can be reinstated if the surety company sends a "Rescission of Cancellation
Notice" to CSLB or if you obtain a new bond and submit it to CSLB within 90 days of the date that the
new bond becomes effective, or within 90 days of the date the old bond is canceled.
•
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Approved Alternatives to Contractor Bonds
2 Instead of filing a surety bond with CSLB, a contractor may prefer to use one of the following approved
alternatives for filing a security deposit. (NOTE: All alternatives to bonds are retained by CSLB for
4 three (3) years cifter the end of the license period that they cover. if the board is notified of a complaint
5 relative to a claim against the deposit, the deposit shall not be released until the complaint has been
6 Adjudicated.)
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Certificate o{Deposit
It must be issued by a bank or savings and loan association doing business in California; It must show
IO the business name of the applicant or the licensee; It must be payable to the Contractors State License
I I Board; It must be issued for a period of at least one (1) year and be automatically renewable at each
12 maturity date; It must state that the interest earned will be paid to the depositor; and It must not
13 designate the payee as a "trustee."
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15 2. Bank Savings Account. Savings and Loan Investment Certificate or Share Account. Credit Union
16 Certificate for Funds or Share Account
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The account/certificate information must be properly filled out on forms approved by the Registrar and
available from CSLB; The passbook or certificate must be delivered to the Registrar with the assignment
form; The passbook or the certificate must show the business name of the applicant or licensee; and The
passbook or the certificate must be assigned to CSLB.
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22 3. Cash
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A licensee may choose to make a cash deposit with CSLB instead of filing a bond. The cash deposit
must be in the form of a cashier's check or a bank-certified check made payable to the Contractors State
License Board. A cashier's check must show the name of the purchaser and must be deposited with
CSLB.
4. Bearer Bonds
X, ~LJ0 ~li}
Bearer bonds must be issued by the U.S. Government or the State of California; Be delivered to a bank
in Sacramento, California, and have a market value equal to or greater than the prescribed amounts. The
bank, as agent for the applicant or licensee, will, on order of the Registrar, deliver the bonds to the
Treasurer of the State of California. Under no circumstances are bearer bonds to be delivered to CSLB
or the Registrar.
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11. COMPLAINTS
;17
38 Complaints against contractors may be filed with CSLB by homeowners, other contractors,
:19 subcontractors, material suppliers, or employees. Public agencies also may file complaints. Most
40 complaints made against contractors involve poor workmanship; abandonment of a project; failure to
41 pay subcontractors, suppliers, or employees; building code violations; lack of reasonable diligence in
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1 executing a construction project; use of false, misleading, or deceptive advertising; and violations of the
2
law governing home improvement Contracts.
3
4 Complaints Against Licensed Contractors
5 1. Mediation
6 When a complaint is made against a licensed contractor, the CSLB Intake and Mediation Center nearest
the location of the alleged violation receives and processes the complaint. Each written complaint is
8 reviewed to determine if it falls within CSLB 's jurisdiction. CSLB sends a confirmation to the
9 complainant that the complaint has been received. CSLB also sends a notice to the licensed contractor to
10 determine if the complaint can be resolved without further board involvement.
7
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12 2. Arbitration, Litigation
13 If the complaint has not been resolved after the contractor has been notified, a consumer services
14 representative (CSR) may contact the complainant and respondent (the licensee) to request additional
15 information and, if necessary, documentation. If appropriate, the CSR will attempt mediation. If
16 mediation is unsuccessful, the CSR may recommend settlement through CSLB 's arbitration program, or
17 recommend that the complainant contact the surety company that issued the contractor's bond, file a
18 claim in small claims court, or file a civil suit in superior court.
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20 3. Investigation
21 If CSLB believes that a complaint fits the criteria for assignment to an enforcement representative (ER),
22 an investigation may be conducted to determine if there are violations of contractors' state license law.
23 An investigation may involve interviewing the complainant, the contractor, and any other parties who
24 can furnish relevant information.
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1) A Minor Violation is established, CSLB may send the licensee an advisory notice. The advisory
notice informs the licensee that CSLB is aware of the violation and that a future occurrence of the
same violation may result in more stringent board actions.
2) A More Serious Violation is established, the Registrar of Contractors may issue a citation, which
can include an order to correct a project, make restitution to an injured party, and pay a civil penalty
ofup to $5,000 for violations by licensees and $15,000 for unlicensed contractors.
A. If the licensee complies with the citation orders, CSLB takes no further action.
B. If the licensee contests all or any part of the citation, a mandatory settlement conference may be
held to resolve the citation. If the matter is not settled, a hearing can be set before an administrative
law judge of the State of California. At the hearing, the licensee can argue against the citation
orders.
B 1. If the licensee prevails at this hearing, CSLB takes no further action.
B2. If, however, the licensee does not prevail and does not comply with a final citation order,
the license may be suspended and then revoked.
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The decision of the Registrar
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3 • Dismissal with No Penalties
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Matters that have been dismissed are not disclosed to the public.
• Recovery ofJnvestigation and Enforcement Costs
The licensee, to maintain good and clear standing or as a condition for renewal and reinstatement of his
or her license, must pay the costs as ordered or as stipulated.
• Suspension of the License
The licensee is not entitled to operate during the period of suspension. A disciplinary bond must be filed
before the license will be reinstated or reissued.
• Revocation of the License
The licensee's right to contract is taken away. The license shall not be reinstated or reissued for one (1)
to five (5) years from the effective date of the decision. None of the official personnel listed in the CSLB
records for a revoked license and who have been found to have known about, or participated in, the acts
or omissions constituting grounds for the revocation may apply for a license until the penalty period is
over. The licensee also must show that he or she has complied with all provisions of the decision and
settled any loss caused by the act or omission that resulted in the revocation of the license, and must file
a disciplinary bond in the amount set by the Registrar.
• Stay of Suspension or Revocation (probation)
The licensee must abide by certain terms and conditions to keep the suspension or revocation from going
into effect. He or she also must file a disciplinary bond to remain in business during this period.
Suspension or revocation of the license will result if any of the terms of the agreement are violated.
• lniunction against Unlawful Activity
Upon establishing that a blatant violation of the law has occurred, CSLB may go to court to request an
injunction to immediately stop the unlawful activity.
• Criminal Charges
If a blatant violation of the law has occurred, CSLB may refer the complaint to the local office of the
district attorney for a possible criminal filing.
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Complaint Disclosure
Once CSLB has determined that a probable violation of law has occurred, which, if proven, would
present a risk of harm to the public-and for which suspension or revocation of the contractor's license
would be appropriate-the date, nature, and status of the complaint will be disclosed to the public. A
disclaimer stating that the complaint is, at this time, only an allegation will accompany this disclosure.
Citations will be disclosed to the public from date of issuance and for five (5) years from the date of
compliance.
Accusations that result in suspension or stayed revocation of the contractor license shall be
disclosed from the date the accusation is filed and for seven (7) years after the accusation has been
,19 settled, including the terms and conditions of probation. All revocations that are not stayed shall be
,IO disclosed indefinitely from the effective date of the revocation.
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Civil Court Judgments Impact Licenses
A contractor is required to report a construction-related civil court judgment to CSLB within 90 days of
the judgment date. When CSLB receives a copy of the judgment, the information is entered on the
contractor license record and a notice is sent to the contractor. The notice gives the contractor 90 days
from the date of the notice to resolve the judgment. After 90 days, if the judgment is not resolved, the
contractor license is automatically suspended and remains suspended until the judgment is resolved.
If the contractor fails to report the judgment within 90 days, then when the judgment is reported,
his or her contractor license is suspended immediately. The license remains suspended until the
judgment is resolved.
(NOTE: Anyone can report a construction-related judgment against a contractor by sending a copy
of the judgment to the CSLB Judgment Unit at the Sacramento headquarters office. In fact, most of the
judgments received by CSLB are sent by the person to whom the contractor owes money.)
Once a judgment is entered on a contractor's license record, the unsatisfied judgment can affect any
other license that a person is on or any license for which he or she may apply. For example, suppose a
contractor has a sole ownership license and a corporation license. If the judgment is against the
corporation, then the suspension for failure to resolve the judgment will also suspend the sole ownership
license.
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Outstanding Liabilities Impact Licenses
The state Board of Equalization, Employment Development Department, Department of Industrial
Relations, or Franchise Tax Board can notify CSLB of outstanding final liabilities owed by a contractor
to those departments. When CSLB receives such a notification, a letter is sent to the contractor notifying
him or her that they have 60 days in which to resolve the outstanding liability or the license will be
suspended. If CSLB has not received any information about a resolution at the end of the 60-day period,
the license will be suspended until the outstanding liability is resolved. The same procedure will be
followed if a check submitted to CSLB by a licensee is dishonored.
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28 Statewide Investigative Fraud Team
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In addition to the complaint process, CSLB established the Statewide Investigative Fraud Team
(SWIFT), an arm of the Enforcement division that focuses on the underground economy and unlicensed
contractors who prosper at the expense of consumers and legitimate businesses. CSLB 's SWIFT unit has
the authority to visit any job site without cause or complaint, ask contractors to produce proof of
licensure in good standing, and cite those not properly licensed.
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Complaints Against Unlicensed Contractors
No unlicensed person shall advertise for construction work or work of improvement unless the
advertisement specifically states that the person is not licensed. Contracting without a license is usually
a misdemeanor.
• First offense: up to six months in jail and/or a $5,000 fine, and potential administrative fines of $200
to $15,000.
• Second offense: no less than 90 days in county jail and whichever of the following is the highest:
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20% of the contract price
2
$5,000 fine
3 • Third offense: no less than 90 days in county jail but not more than one year and a fine not less than
4 $5,000 nor greater than $10,000 or 20% of the contract price whichever is highest.
5
without a license for any project that is covered by a state of emergency or disaster proclaimed by the
7 Governor or the President of the United States. Felony convictions may result in a state prison term as
8 specified by the court.
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<)
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Citation
The Registrar may issue a citation to an unlicensed contractor when there is probable cause to believe
that the person is acting in the capacity of a contractor or engaging in the business of contracting without
a license in good standing with CSLB. The citation includes an order of abatement to cease and desist
and a civil penalty of up to $15,000. Unless the board receives a written appeal within fifteen (15)
working days after the citation is served, the citation becomes a final order of the Registrar. The civil
penalty is paid to CSLB.
If the citation is appealed, a mandatory settlement conference may be held to resolve the citation. If
the matter is not settled, the appeal will be heard before an administrative law judge. The administrative
law judge submits a decision to uphold, modify, or dismiss the citation. The decision is sent to the
Registrar for adoption.
If the cited unlicensed contractor continues to contract without a license, the Registrar may refer the
case to the local district attorney for criminal action.
24 lniunction
The Registrar may apply for an injunction with the superior court of either the county in which an
2<, alleged practice or transaction took place, or the county in which the unlicensed person maintains a
business or residence. An injunction restrains an unlicensed person from acting in the capacity or
~8 engaging in the business of contracting without a license in good standing with CSLB.
:rn
Unregistered Salespersons
JI The same citation process used for complaints against unlicensed contractors is used for complaints
against unregistered home improvement salespersons. Disciplinary action also can be taken against the
~;) licensed contractor who employs the unregistered salesperson.
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2. BUSINESS MANAGEMENT
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To Be a Manager
The average contractor has knowledge and skills in many of the phases of construction learned from
firsthand experience. However, upon starting a business, the contractor must become a business manager,
often without experience or training. Statistics show that 90 percent of bankruptcies and business
closures result from poor management. The specific reasons include an inability to plan, manage, and
control business affairs (managerial competence); insufficient on-the-job supervisory experience or the
10 inability to manage employees (people competence); and the lack of knowledge of business practices
11 (technical competence). Hard work is not enough. You learned your building trade skills through
12 on-the-job training, and these skills must now be balanced by learning management skills as well.
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Management theory has been divided into two different areas:
1. Functional Areas of Management Include:
• Planning
• Decision-Making/Delegation
• Standardization
• Controls
2. Behavioral Aspects of Management Include:
• Human Relations
• Cooperation
• Responsibility
• Communication
• Executive Ability
1. FORMS OF BUSINESS
The legal form of the business will determine the available sources of financing, the extent of personhl
liability, the extent of control, and the tax liabilities. The legal form may change as the business grows
and should be reviewed as financing requirements change. The sole owner often lacks the personal
capital sources necessary to sustain growth. The partnership is usually created to expand the source of
funds. Continued growth and the resulting larger financing needs may lead to incorporation, which, in
tum, provides access to external funds.
Sole Ownership
Sole ownership (sole proprietorship) is the simplest form of business organization and relies primarily
on the financial resources available to an individual. The owner has sole responsibility and complete
control. He or she must obtain all the financing and is personally liable for any claims against the
business. The sole ownership is easy to set up and is subject to minimum regulations. For tax purposes,
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business income is reported as personal income. Sole ownership appeals to individuals who value
smallness, simplicity, and personal control.
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General Partnership
General partnerships use the financial and personal resources of two or more individuals who share in
the ownership and operation of the business. A lawyer should be consulted to formalize the rights and
responsibilities of the partners regarding management and profit-sharing. Under most circumstances, a
partnership agreement terminates with the death or withdrawal of a partner or the addition of a new
partner.
The partnership is not an entity separate from the partners. Each partner may be personally liable to
the extent of his or her personal assets and may be legally responsible for the negligent acts of the other
partner(s). For tax purposes, an individual's share of the partnership income is taxed as personal income.
13
14 Limited Partnership
15 The limited partnership allows investors to join in a partnership without taking full responsibility for the
16 business. The limited partner risks only his or her original investment. In this case, there must be at least
17 one general partner who runs the business and who remains fully responsible for the liabilities of the
18 business.
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C Corporation
C corporation is a separate legal entity created by the government. It can make contracts, be held legally
liable, and is taxed. The corporation may raise capital by selling stock to private investors or to the
public. Stockholders are usually not liable for claims against the corporation beyond their original
investment. Creditors may claim only the corporate assets, although corporate officers may be
personally liable. Incorporation begins by filing articles of incorporation with the Secretary of State. The
corporation has no fixed life. The death of a stockholder or sale of one's personal investment will nQt
disrupt the business. C corporations can have an unlimited number of shareholders. C corporations can
have non-US citizens/residents as shareholders.
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30 S Corporation
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5 IA)
!tvL 12.
The business can operate in corporate form to reduce the owner's liability. A corporate income tax return
is filed, but no tax is paid at the corporate level. Instead, business profits or losses "pass-through" to
shareholders and are then reported on their individual tax returns. Any tax due is paid by shareholders at
their individual tax rates. S corporations shareholders must be US citizens or residents, and no more than
100 shareholders in S Crop.
{t--J'f
Limited Liability Company x-2~
LLC shields personal assets from busine,ss liability. Requires separation of business and personal
finances, allowable in all 50 states and the District of Columbia. Highly flexible management structure
and flexible tax reporting options.
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2. FINANCIAL STATEMENTS
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MSPlleft columns) R (
Assets are categorized as either current or fixed. Assets are listed in order of declining liquidity.
(Liquidity refers to the speed with which an item can be con.~erted into cas!;i or, put another way, the
......---......
.......
•~~<k~~(iNilillttM:•·) Current assets are the first items listed on the left side
~alance sheet. These are the assets that are either cash or capable of being converted into cash in
the normal course of business, generally within one (1) year from the date of the balance sheet. In
addition to cash (money on hand and deposits in the bank), the other items that will be turned into cash
include retentions, accounts receivable, inventories, and prepaid expenses. After current assets, the
balance sheet lists fixed assets.
-------
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·
*-BalamieaShee,
The balance sheet is a s!atement of financial condition of an individual business~~•~. ~
The balance sheet is often referred to as a ~p-sja§1,:' The accountant will usually provide two a1ailce
sheets, one for the current year just ending and another for the prior year. The example of a balance sheet
compares where the company stood at the end of each of the past two years. The balance sheet is a
statement of the company's resources, financial obligations, and ownership investment. The balance
sheet is divided into two sides: on the left are shown the assets; on the right are shown the company's
liabilities and stockholders' equity (the owners' investment). Both sides are always equal or in balance.
The company's assets include its cash, physical goods, and its financial claims on others. Liabilities
represent the claims others have on the company. The stockholder's equity section includes the original
investment of the owners. Since this example is a corporation, the equity section includes undistributed
profits earned by the corporation to date (additional investment of earnings held by the corporation).
)1iv;,,r/J ~
i
/U7--. .
~~h: ~mediatel~ available or liquid funds.
~½fi!itt~n: A specified amount, 11ffl!Mlsl,-l~s~m, withheld from progress payments to the contractor
pending satisfactory completion and final acceptance of the project. This amount you have already
earned even though you have not yet been paid.
• nfQ'~<ffi:l?Jt~~r~lt:ffl~: The ,\-amounts due from customers (other than retentions) in payment for
construction projects. r✓J 1fZ~ ~7-_
• l!;u;i~~~~: Includes all materials, labor, and direct and indirect overhead on jobs currently in progress.
• i&~I?;itt~l!B~;frebs'.e's,9, Goods or services the company buys and pays for before use. Examples are
insurance premiums and office supplies. ~<''1 $._~
•
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{Q £~ J
This group of assets includes physical resources a contractor owns or acquires for use in operations and
39 has no intention to resell. Regardless of their current market value, fixed assets are valued at their
40 original cost less accumulated depreciation. Sometimes property, plant, and equipment may be leased
38
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rather than owned. The value of the leased property is often included with the fixed assets and the lease
2 payments are included with the liabilities.
3
3. Other Assets
5 Resources not included under current assets, or fixed assets. Such as:
(i • scrap materials
7 • long-term receivables
K • equipment held for resale
11
()
10
f;.i.-«
11 ~M1A11Jfff!illp:f~right columns) 12_
12
LI ~u~~iabi~it~ ~fr<..,-;.~ {{ 't {
~
14 this item includes debts of the company that become~~~ai'lll©iflltlr~laa~h@,~.
15 Current assets are the source from which these payments are usually made. Management must be aware
I<, of this relationship and maintain sufficient current assets or control the amount of current liabilities to
17 avoid becoming delinquent in its bills. In our example, Typical Construction Company, Inc. has
IH $180,000 of current liabilities composed of the following items:
19 • Accounts Payable: Money owed to suppliers and subcontractors.
20 • Notes Payable: Balance of the principal owed on a written promissory note.
21 • Accrued Expenses Payable: Money owed for interest, services, insurance premiums, and other fees
that are not included under accounts payable. Thus, expenses that have
been incurred but are not due for payment on the date of the balance sheet are grouped under accrued
lil expenses payable.
• Accrued Payroll: Salaries and wages that the contractor currently owes to employees.
2(l • Miscellaneous Taxes Payable: Amounts estimated by the accountant to have been incurred during the
accounting period and are owed to local and state governmental agencies.
2H • Federal Income Taxes Payable: Amount of liability for taxes owed to the federal government.
M~A {~ )
2. ti/a(l)ngsil/e"/lm'IJifm'6l@iki,tifdE fdfPr(~_{; .
;\ I Long-term liabilities are notes or mortgages due one (1) year beyond the balance sheet date. In our
12 sample balance sheet, Typical Construction Company, Inc. owed $100,000 on a bank loan due more than
:D a year in the future. This loan was secured by using certain equipment as collateral.
:w
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I~ ~KRQ,&DHRs-tfr(!;)l!JiI•Y.(right column)
fJ-.~
;\(, The stockholders' equity also called net worth or equity, re~ents the claim of the owners on the assets
17 of the business.
N~/f
iH
JI) /. Contributed Capital: The total amount invested in the business by investors. Par value is arbitrarily
established and need not be the same as the current market price of that share of stock.
,I I Treasury Stock = Outstanding Stock
,I()
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Issued Stock -
1
2 Par Value: It used to be that the par value of common stock was equal to the amount invested (as with
3 fixed-income securities). However, today most stocks are issued with either a.very low par value (such
4 as $0.01 per share) or no par value at all. Corporations do this because it helps them avoid a liability to
5 stockholders should the stock price take a turn for the worse. For example, if a stock was trading at $5
6 per share and the par value on the stock was $10, theoretically, the company would have a $5-per-share
7 liability. Par value has no relation to the market value of a stock. A no par value stock can still trade for
8 tens or hundreds of dollars. It all depends on what the market feels the company is worth.
9 2.Retained Earnings: Total corporation earnings from its beginning, minus the total dividends declared
1O (distributions to owners) since the corporation was founded. This account represents additional
11 investment by the owners who were willing to forego a larger distribution of the company's earnings.
12
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~J ~;~t_j l~J f.
14
l!!:~()m,Statemen1'>
15 The income statement summanzes the operations of the company over a period of time. For the Typical
16 Construction Company, Inc. the period of time is one (1) year. The balance sheets presented for Typical
were year-end balance sheets with the income statement summarizing the operations during the
18 intervening time period. Income statements are often prepared to cover shorter operational periods (e.g.,
19 quarter or month). Basically, the income statement shows business revenue, expenses, and the resulting
20 profit or loss for a given accounting period. Since the revenues are matched against the related costs and
21 expenses, the difference between the two is how much the corporation makes or loses.
17
22
23 l.£asbJlasis.of,4~9,01untmg ~ t{g_(d ~ :JJi! ~ \
24 Under the cash basis of accounting, reve:b.ue1s iecognized when cash is actually or constructively
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received, and expenses are deductible in the year paid (unless they should be taken in a different period
to clearly reflect income). A cash basis of accounting may be appropriate where no prepaid expenses
( e.g., insurance, rent), depreciable assets, or inventories exist, and where revenue is received during the
accounting period. Information regarding cash flow, as provided by the cash basis of accounting method,
can be valuable in judging the ability of the business to pay its debts, to finance replacements ·of
productive assets, and to expand the scope of business operations. However, a strict cash method neither
records receivables nor payables since these items have not been received or disbursed. This failure to
match income and expenses for a given accounting period restricts the information available to the
manager using a cash basis of accounting. Cash basis accounting simply waits until cash flows become
historical.
Additionally, where depreciation and inventories are utilized, the accrual method is necessary to
accurately reflect expenses and income. For federal income tax purposes, the accrual method is required
when inventories are utilized.
The net increase or decrease in cash during a given period is not very useful in evaluating a company's
operating performance because, although progress payments come in during the course of a job, final
©2017-2019 Grand Space Construction Corp ~$1t$tlftlffl~il3llt&i:£Jift~
20
profit cannot be determined until after the job is completed. For these reas@ns, the cash basis o~
2 accounting is not recommended for contractors.
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1./i. 't-,~d . r?/ri
The accrual basis of accounting anticipates futtire c
ows, t 1s is a method that recognizes revenues
() when earned and expenses when incurred, regardless of when payment is received or made. Thus, this·
7 method allows the matching of revenues and as:,ociated expenses for individual periods of time. In a
8 contracting business that has qualifying long-term projects, the accrual basis of accounting is often
1> further modified using two methods:
II()I
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1,1
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I<,
'1,(ic .'f!fi ·
~tll}!
~ G)profiits
w1 report
· of actua1
and 1osses regu1ar1y on th e b as1s
work accomplished on each job. For example, if the work performed in a given year is estimated to
represent 50 percent of total performance under contract, then 50 percent of the total estimated revenue
and profit is considered earned. kl' '.1 £ .
~~mrJl:ete~fl•tnafi!/ltiim.eth'iJ.alt,~atf.ows for the gross income and related costs for each contract to be
reported in the year in which such a contract is completed.
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17
IH Income
I<) The revenue amount reflects all the billings made to customers for completed projects, as well as work
20 in progress. This is an example of the accrual basis previously discussed. In our example for Typical
21 Construction Company, Inc., the sales of residences for the current year were $1,250,000, which
represents amounts billed for completed projects and work in progress.
2<,
2H
29
:IO
:11
Cost Of Operations
Cost of operations in the contracting business is comprised of all costs and expenses associated with
running the business, with the exception that federal income taxes are shown on another line. By totaling
all the costs of operations and subtracting these from the revenue, the operating profit of the company
can be found. In our example, Typical Construction Company, Inc., the total cost of operations for the
current year is $1,145,000, which, when subtracted from the net sales, leaves an operating profit of
$105,000. This represents the amount of profit earned by the contractor without taking into
consideration federal income taxes.
~~~-/--1. ri:. 4\.
,i;, ~ W i j [
\11 The actual cost for labor payroll for all jobs worked on during the period covered by the income
J~ statement. The amount of direct labor and the percentage of direct labor to the total cost of any particular
;1<1 project should be closely monitored by management. Direct labor expense is an important variable in
,l'/ determining the ultimate profit of the company. The labor percentage is also a direct measurement of the
IH efficiency of the workers and the performance of supervision.
\Q
,IO
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This includes all payroll taxes, insurance, and employee benefits associated with the labor payroll. If the
3 workers belong to a union, the direct labor burden will include union benefit assessments and, in some
4 cases, association fees.
2
5
6
7
-,.M~~
~i4 l
This includes the cost of all materials used on the job,11~Qrd:Sl!!illlSl:la1ky,e:,1lh©illalvgiS, in. . ©Ni,©ES~<ti~on
8 ~l.il©m@ll8'1lat@me.!l).t. Since materials comprise such a large part of the total cost of contracting, this
9 account should be carefully controlled and every effort made to ensure that purchasing is done
10 efficiently.
11
12 4,Qthe}jlY/jitzefr;/;,()/JgJri
{e,~ ,S
13 These costs include all items, other than those listed above, that are directly chargeable to individual
14 jobs. For example, permits, bonds, insurance, and equipment rentals would be included here.
15
16 ~(ilji_(ilJ.and,4.dmi:wt&tM~fJf:l'St!B
17 This figure on the income statement is comprised of all items of expense of a general nature that cannot
18 be specifically attributed to individual construction projects. In the example of Typical Construction
19 Company, Inc., these expenses are summarized for the year on a separate schedule, which supplements
20 the income statement.
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24
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27
Pretax Income
To get this figure, the total operating expenses were subtracted from the sales of residences. This figure
is called Income Before Provision for Federal Income Tax for those corporations that are subject to
federal taxation. Certain corporations, as well as sole ownerships and partnerships, do not pay taxes on
income; the income is reported on the owner's personal tax returns. This is another example of how the
organizational form the contractor initially chooses will influence the content of the financial statements.
28
29 Net Profit for Year
30 This figure is often called net income and represents the sum of all revenues minus all expenses
31 including taxes, if applicable. Net profit or income is commonly referred to as the "bottom line."
32 Because it is an important indicator of performance, and it is also the last line of the income statement.
33
34 ~asrud[J.o~tatement ~
35 The Cash Flow Statement allows investors to understand how a company's operations are running,
:z:,rJj_:e...
36 where its money is coming from, and how it is being spent. It is distinct from the income statement and
37 balance sheet because it does not include the amount of future incoming and outgoing cash that has been
38 recorded on credit. Therefore, cash is not the same as net income, which on the income statement and
39 balance sheet, includes cash sales and sales made on credit. Cash flow is determined by looking at three
40 components by which cash enters and leaves a company: core operations, investing and financing.
41
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5
Retained Earnings Statement
The statement begins with the beginning-of-the-year retained earnings. The current year's net
income reported on the income statement is added and the current year's dividends are subtracted from
this amount. The ending retained earnings amount is the same as that reported in the balance sheet. Thus,
the retained earnings statement indicates the relationship of the income statement to the balance sheet.
6
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3. RATIO ANALYSIS
9
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~;ti 6-('J foj 1iJ11(
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The relationship between any two figures within the current financial data is called a ratio. For example,
if current assets are $100,000 and current liabilities are $50,000, the relationship of current assets to
current liabilities ($100,000/$50,000) may be shown as 2 to 1, or 2: 1 (ratio). The bank loan officer who
is to recommend the establishment of a line of credit (short-term loan) would be interested in the current
ratio and quick ratio, as the bank would expect the contractor to repay the loan in the near tel)Il.
16
17 Current Ratio
~}3-/2 1/4 f3j
'
18 One very important kind of information that can be readily determined from the balance sheet is the
19 ability of the company to pay debts when due (sometimes referred to as liquidity). The difference
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between the total current assets and the total current liabilities is called Working Capital. One way of
looking at working capital is that it represents the amount that ,is free and clear if all current debts are
paid off. A comfortable amount of working capital gives a company the ability to meet its obligations
and take advantage of opportunities.
What is a comfortable amount of working capital? To help answer this question, the current ratio
provides additional helpful information. To calculate the current ratio, divide total current assets by total
current liabilities. In the example of Typical Construction Company, Inc., the figures are:
Current Assets
$250,000 = 1.39
Current Liabilities $180,000
30 Therefore, for each $1 of current liabilities there is $1.39 in current assets to back it up. A current ratio
:1 I
:12
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]5
of 1.5 to 1 is generally regarded as ideal for industrial companies. However, the merit of a current ratio
varies by industry. A current ratio below 1 is concerning because it signals a company may struggle to
keep up with its short-term liabilities and emergency expenses. However, a current ratio of 3 or 4 to 1
suggests a company may be holding on to too much cash. A relatively high ratio is a conservative
position. A relatively low ratio is risky or aggressive.
'.16
J7 Quick Ratio J1.__J;p 1-h(i"?
:18 The quick ratio is more conservative way of testing the adequacy of the current liquidity of the company.
,'19 Instead of using current assets, quick assets are substituted because these are quickly converted into cash.
,10" One simple method of determining the quick assets is total current assets minus inventories. In our
~I example:
©2017-2019 Grand Space Construction Corp
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u11 <i-1 J
(fJ ,l,'£_~j )
1 Current Assets
2
3
-Inventories
Quick Assets
$250,000
-$110,000
$140,000
~,.,
s: lo<i
~
~--(q ~ ±J 110" l t!__
4
5 Quick Ratio =
6
Quick Assets
Current Liabilities
$140,000
$180,000
. pO ~ (j) rp.,
=0.78
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For the above analysis, we can see that we have $0.78 of assets that may readily be converted into cash
for each $1 of current liabilities that will require cash payments shortly.
The long-term creditors (banks or insurance companies) would be interested in the ratio of total
liabilities to net worth. This measure indicates the relative proportions of the contractor's assets supplied
by creditors and owners. In the event that the company defaulted on its debts, this ratio indicates the
degree of safety for the creditors.
Net sales to net working capital, net sales to total assets, and net income to net worth are all
measures of the efficiency of the company's use of its resources. These measures are important
indicators to management. Net sales to net working capital (low ratio) might be attributed either to an
excess of working capital or to inadequate sales. Management should examine each ratio, keeping in
mind that if the ratios reflect a weakness, the manager then must analyze the problem area and develop
possible solutions, e.g., more vigorous collection effort to reduce the size of receivables. Keep in mind
that the ratios also are interdependent. When the receivables are reduced, the cash generated by the
collection effort may be used to reduce long-term liabilities and improve the debt ratio. Management
must not focus its attention narrowly. The broad perspective created by knowledge of business principles
is essential for success.
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4. BUSINESS MANAGEMENT
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1. Marketing Management
30 2. Financial Management
-xr ./'''/Ji,.
.~...11 ,m
I <ll.
.w1 r'. r~ £0
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3. Operations Management ~
32 4. Risk Management ~~
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*
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1. Marketing Management
35 ~.~Qlilfl•l•@@:ntia~.~epF0S€:at..the:1111111111m3·@}R11111!S©ffli""~~st111€S~©~e.t11@c~@:til!~~- <Bma,14-a,nd
36 ~~ffle€l~0nti;a~iu~usmes~.s.i;,e.~n-efi.itoc.a4& The extent of the marketing effort is limited by
37 the sources available to the contractor. Development of a formal marketing program is helpful to the
38 contractor to ensure that continued effort and attention is placed in this vital area. Inattention to the
39 marketing program could weaken the entire effort of the company, regardless of how strong the othe1
40 areas may be.
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2. Financial Management
2
3 I. Capitalization
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Capitalization refers to the total of financial resources made available to the owner. These financial
resources are used to acquire the physical assets necessary to cm\duct the business. As you assess your
financial requirements, the more obvious needs to finance the tools, vehicles, and other equipment
(physical resources) used daily in the business are recognized first. The need for additional financing of
office expenses, licenses, payroll expenses, bonding, rentals, etc., because of the differences between
when you must pay and when you get paid, is critical for the business. A lack of enough working capital
and insufficient cash liquidity generally result in business failure.
The amount of working capital required depends on the type of contracting business. The progress
payments required under contracts for custom building and remodeling may be used to meet payroll
expenses and material costs. The typical contract provides for three (3) or more payments, 90 percent
during the construction phase and the final 10 percent upon completion and expiration of the lien period.
This final 10 percent is the "retention". The contractor cannot collect more than the percentage already
completed. The contractor must be aware that differences in the timing of expenditures and receipts may
limit his or her capacity to finance the business, particularly if the company commits itself to new jobs
before final payments on completed jobs have been received.
The significance of "retention" must not be underestimated. Retention usually exceeds profits and
therefore represents a claim on working capital. Retention payments to the individual contractor may be
held up through no fault of the contractor. The total project must be accepted before retentions are
released. The problem is even greater for the subcontractor who completes his or her phase early in the
project and must contend with a long waiting period. Since these funds are not available for use
elsewhere in the business, the contractor must often finance the costs through borrowing. Speculative
builders require larger amounts of capital than custom builders. Consequently, speculative builders often
must provide substantial financial resources to qualify for loan commitments. Growth that is too rapid
can jeopardize the company's solvency. Financial planning will help avoid cash shortages.
28
2() 2. Sources o(Financing
JO The new business owner typically lacks the required financial resources. Two types of external financing
l\ I are available-equity funds and debt. Equity funds are supplied by investors who acquire some control
of the business and a share of future profits. These funds remain in the business. Debt represents
~l:1 borrowed dollars that require both the repayment of the original amount and periodic interest payments.
~•I The owner does not normally give up control of the business.
M ~~
~
e typ1cal~l
sources
.
. fund s are
o f th ese fun d s are acquamtances
o f th e new owner-contractor. Eqmty
;}K sometimes available from private venture capital companies, small business investment corporations that
~V, nre funded by the federal Small Business Administration, and minority enterprise small business
40 investment companies. These sources are usually restricted to businesses with a proven track record in a
~ I growing industry.
©2017-2019 Grand Space Construction Corp
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l
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1*~ ~'
2) Debt
~~ 1(
/!
a) Long-Term
j. f e~
Banks may offer long-term financing to contractors with good credit ratings, technical knowledge, arn
capacity for repayment as evidenced by financial planning in the form of projected balance sheets
income statements, and cash budgets. ~a½~Bfflffl~miiit,m1imtli':!~SBA) can make direct loam
but prefers to provide funds by guaranteeing up to 90 percent of a bank loan. SBA will not review ;
direct loan application unless the firm has been refused by at least one bank, and if the city's populatioi
exceeds 200,000. SBA prefers an equal dollar share to be put up by the owner for loans under either th
guarantee program or direct loan program.
5~/2 3
't,g
10
ll b) Short-Term
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The operating business may want to establish a line of credit with a bank to meet some of its short-terr
needs for working capital. Through the line of credit, commercial banks can provide the working capit2
necessary to complete the awarded contract, with the loan requiring repayment when the contractor i
paid. The bank loan officer will normally require balance sheets and income statements on the busines
for the current period, as well as over several prior years. The contractor is advised to have these repor1
prepared by a Certified Public Accountant so that they meet professional accounting standards. Th
lender will expect to be provided with information on the contract up for bid, as well as all uncomplete
contracts. The loan officer will evaluate:
Character: Includes experience with similar jobs and locations; business reputation with lender:
suppliers, and subcontractors; and reasonableness of bid.
Capacity: Requires an evaluation of current workload, availability of equipment, and financial resource
available to withstand any reasonable loss. The financial strengths of the awarding agency, an
subcontractors and suppliers also are important considerations.
Certainty: What are the chances that repayment will be affected by unexpected losses on existin
business? Are completion dates realistic? Is there a chance that penalties will be assessed for delays?
Bank loans to speculative builders may include funds necessary to provide offsite improvements, c
well as the construction of buildings. Funding also may be arranged to acquire land for futru
development.
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3. Operations Management
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1. Job Selection
Job selection is the key to making a profit. The planning involved in job selection requires a knowled~
of the general level of business activity in the local area, the need for new construction, costs 1
materials and labor, the contractor's current financial resources, and any new architectural or structur
advances. (The goal is to select individual projects for which the contractor has technical expertise.)
39
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2. Bidding and Estimation (Planning)
Accurate bidding requires that the contractor map out the entire construction process. The time spent on
3 this detailed work ensures the accuracy of cost estimates necessary for the contractor to make a profit.
4 Careful review of the job requires on-site inspection (walk the job), review of plans and specifications,
5 identification of equipment required and the financing method (purchase, lease, rental), and the need for
6 subcontractors.
2
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Materials required are determined from takeoffs (quantity and measurements taken from plans) that are
converted to costs on the estimation form. Prices should be obtained from published price lists and
quotes from suppliers and subcontractors. It is important to include sales tax and freight costs. Cash
discounts should not be included unless the contractor is certain that sufficient financial resources will
be available so that accounts payable may be repaid during the discount period. California requires a
Seller's Permit for businesses that sell tangible personal property. The contractor must collect the
required sales tax from the customer unless the tax on materials was already paid at the time of purchase.
Before starting a job, determine if city or county permits are required.
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Labor costs are calculated according to work classification. These costs include not only the hourly
wage rate, but also payroll taxes, health and welfare benefits, vacation pay, and required insurance.
The contractor also should be aware that wage settlements could affect these rates and that job actions
could affect the availability of these workers.
Other direct costs include all items, other than those listed above, that are directly chargeable to
individual jobs. For example, permits, bonds, insurance, and equipment rentals, interest, loan
commitment fees, points, and other charges on borrowed funds.
tiflit1.
2s
%-~·~t~,
26 ~includes General Administrative Costs (G&A Cost) and other Indirect Cost. G&A Cost
27 expends including general business expends such as office~l~n,Ji)1i8Slll~azg~'\'le~mad
28 ~ ~ s , and any other general administrative costs. The appropriate portion should be
29 allocated to the job. Indirect Cost that can not be traced to a single project, but are applied to a number
j() of different jobs, such as fuel and lubricant expenses, general maintenance, and small tools represent and
;11 a construction supervisor's salary.
:12
;1:1 When all the costs have been totaled, the contractor must add profit. Profit is essential to the
:\4 continuation of the business and represents the return for bearing risk. The contractor will seriously
:\5 jeopardize the business by omitting the allowance for profit, especially if the bid is low margin and there
;\(, is any chance of underestimation. Insufficient profits threaten both capitalization (losses reduce retained
;ip/ earnings) and cash flow (payments to vendors may exceed receipts) to the extent that bankruptcy and/or
:rn dissolution may be the result.
'.\I),
11()
111
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I Revenue(Sales) - Direct Cost - Overhead = Profit
1
2
Common pitfalls that can be avoided include: bidding on projects for which the plans and specifications
4 are not completely understood; insufficient planning so that hurried analysis becomes necessary; over
5 extension of the managerial and/or financial resources of the company; and bidding against the
6 competition and not on the job. It is easier to avoid financial difficulty by not bidding on a job for which
7 you lack the capability than to try to salvage the job after a poor bid has been accepted.
3
8
9 3. The Construction Process (Coordination and Control)
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The estimate that is the basis for the bid becomes a budget for the project. Without extensive planning
and scheduling, lack of coordination can result in added costs that quickly reduce the profits. If the
estimation has been done properly, the job was broken down into a job schedule to arrive at the number
of labor hours required. Actual construction, however, requires that materials and labor be brought
together at the proper time. Two methods of production scheduling may be used to accomplish this
coordination.
~~~-
16
.
17; , . , , . , ~ i s a fundamental scheduling technique that shows graphically the starting and finishing
times for the individual tasks that make up the job. This scheduling approach is simple but overlooks
19 some interrelated tasks.
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C} M l ~o~ti?)ffr ;!,
~JJ/!!l!l!lj1fi£iqatreaJ!tf!IJYEffl!l1! is
a more complex tool that better inter-relates the tasks. This technique
derives its name from the key path through the network that takes into account all the tasks to be
completed.
Any delay in one of these tasks will result in overall delay of the project. This procedure, therefore,
identifies the tasks on which the manager must focus attention to ensure completion of the project on
time. Since the contractor's time is a scarce resource, this approach can save on this important factor.
ti
:t
28 4. Controlling Costs
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40
Contractors typically have a small permanent payroll that consists of a foreperson and skilled journey
persons. This force can be expanded by union hiring halls, which means that the contractor must be
knowledgeable about the union's master labor contract. The work of the various subcontractors must be
scheduled and coordinated with the overall job. The small contractor must expect to spend most of the
day at the site, coordinating these activities and resolving conflicts. Subcontractors should be chosen on
the basis of their ability to perform, as well as cost, since untimely delays quickly eliminate the potential
savings of the lowest bid.
Purchasing is an essential part of the job because of the high cost of carrying materials inventory.
As with subcontractors, reliability is equally important as price. The contractor will typically develop
trade relations with a limited number of suppliers. Costs are best controlled by checking with other
suppliers if prices increase significantly, by verifying order quantities, by taking cash discounts when
offered, and by not overstocking.
41
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*4. Risk Management /tj,i ~i ij
2 Businesses operate under conditions of uncertainty. Profits are the price charged to bear risk.
8:
3 Unexpected property and casualty losses can severely damage the business' prospects. Insurance is a
4 means of reducing the company's exposure to risk. The contractor should consult an insurance agent or
5 broker to design a comprehensive insurance package to meet the company's specific n~~ds. This
6 package could include:
7 Workers' com ensation insurance
8 Liability insurance
~ ½,, (4: Q~
9 Automobile insurance
10 Fidelity bonds f( ~{-i,;t£<'J,
11 Fire insurance
12 Business interruption insurance
13 Employee health and life insurance
14 "Kev person " insurance
15
16
17
18
19
20
21
22
23
24
25
26
27
Insurance costs can be minimized by obtaining a number of quotes for new or renewal policies, or by
enrolling in special plans offered by trade associations. If the contractor lacks sufficient funds for total
coverage, a planned approach to risk management becomes necessary. Principles that should be
followed include:
• Covering the largest loss exposure first; property and liability insurance should be reviewed yearly to
reflect changes in valuation and take current court judgments into account
• Using deductibles to significantly reduce costs
• Reviewing coverage yearly to reflect changes in the business
•Taking time to understand the implications of any changes in the insurer's contracts
28
29
JO
:11
©2017-20~9 Grand Space Construction Corp
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Typical Construction Company, Inc.
Balance Sheet
for the year ending December 31, 2019
1
2
3
4
5
6
Fri.or
$10,QJ.)O
.$15,000
~
Current Assets
Liabilities and 12., \~
.. Stqekholders' Equity.
Current
Year
Prior
Year
A\iou:n:t11 payable
$80,000
$60,000
l\Totes llaya~l~
$25,000
$20;000
'
. '. z
$30,000
$20,000
$30;000
.$18,000
$11),()00
$12;000
$180,()!)0,
$1,50,000
· Banic:1oan, ti:uck
.and i;iquipmertt; 14%
•. due
$100,000
$90,000
%till, Liabilities
$280,000
$240,000
Liabilities
7
Cash
8
Retention
Accounts Re~eivable;
9
Current
flM. . .
$40;000 .. '$~~.ooo '
J;q9Jt '$'10;90~ ., •. $50,000
,.,,.
·currentJ..iapilities yk,1i,i)
Accru~d expenses
payabJe ·
10
:Accrued.,,
payroll
,,·.
Misc t)lxes payable
11
,'.
/
12
Consnuctirin·lli
13
progre5$
. taxes payable.
14
Less: partial hil,lings
or contracts
'.l'ota,l; cur~nt ·
liabiH.tles
F~dcmu
in:come;
15
16
17
Posts 01: e()11trilcts in.
exce.ss .of billings
Raw Maf~ri~ls ·
..$80,000
.$60,001),
$30;000
~ao;otib
18
19
$110,000.
, $5,000,
. ,,i,ong-~l'.lll Habilities.
$20,000
-f:1~
20
$21),QOO
21
I>repaid,Exp~lf$'es
22
etc:
·
·
'I'otal, Curre:ntAssets
23
24
(pennfts an:dlicen11es,
27
$2.lo,000
.Cmnmonstock, $5
pafvalu~; .•. ·
Pro!'erty, plant and
equ.1pi:nent
!..easehold @.
i.mprovem'()nt,s
Officefofoiture and
fixtures
30
Small tools
a1:1thorfaec1, isaued
and outst11nding
©i?l f
·t,t,{i
28
29
19,009 shares
$2;000
$2,000
$10,000
$10;000
33
Construction
equipment
$1,54,000
34
Less: aooumu.lated
:$20,000
·$15i0OO
35
depreciation
$150,000
$131,000
36
37
38
·
Retained earnings·
$4,000
31
32
Sto~kholders'
Equity
25
26
$250,000
$130,000
$70,()00 ·
$60,000
Total; StoekMiders'
$120,000
$110,000
Total, Liabilities
$400,000
$350,000
Equify
.
and Sto(.lkholders'
EquitY:
f(;i;:tf.f r/i\
Net property, plant
and equipment
Other Assets
$4,000
39
40
Total A,ssets
$400,000
$350,000
41
©2017-2019 Grand Space Construction Corp
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Typical Construction Company, Inc.
Income Statement
for the year ending December 31, 2019
Current Year
$1,250,000
Prior Year
$1,000,000
1,030,000
850,000
115,000
97,000
1,145,000
947,000
'"
Income Before Provision for Federal
Income Tax
Provision for Federal Income Tax
105,000
53,000
30,000
12.000
1,1
I~
Net Profit for year
$75,000
$41,000
Sales of Residences
Cost of Operations
H
()
10
11
11
Cost of Sales
J:/: ~ineral and administrative
~-:pv
.
e nenses
Total operating expenses
lh
17
IH
©2017-2019 Grand Space Construction Corp
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Critical Path Analysis
1
2
3
4
5
6
7
a.Poor
8
e0@©
0
9
10
1. El«:avlite
,i Pour
Folll'ldl!tltin
Fooling,;
•
4,Fre(<llng
wmisl'J floors
11
12
13
14
Bar Chart
15
16
t
Oit
Work Description
.,
17
PourFootlng
18
Pour Foundation
19
Framing
20
Construct.Chimnev·
21
Install Drains, RoUi:lhPlumbina
22
Pour BasementFloor
23
Install Rouah Wirinil
24
lnsfaUWater Unes
25
Install Heating Ducts
26
27
28
29
Uith and PlasterWalls
.);,
Finish Flooring
-
.•
""
I-
--
.I
Install Bath P'lumblng
30
Lav Roofing
31
Install Downspouts, Gutters
32
Paint.Wans;.Trim
33
Sand, Varnish Floors
- ...
Install Electrical Fixtures
34
finish Grade Lot
35
Uimlscaoe
36
37
38
~
!'""
Install Kitchen Eaulnment
Cabinet Work
·Jan.
Dec
No.v
I
Excavate Foundation
--
----
""'
-- ...
-
-
-
,.
t=t=
;
39
©2017-2019 Grand Space Construction Corp
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3. LABOR LAW & TAX
2
3
4 Schedule for California Minimum Wage rate 2017-2023
Date
Minimum Wage for Employers with 2: Minimum Wage for Employers with 2E
Employees or More
!Employees or Less
Uanuary 1, 2017
$10.00/hour
$10.50/hour
January 1, 2018
$10.50/hour
$11.00/hour
January 1, 2019
$11.00/hour
$12.00/hour
January 1, 2020
$12.00/hour
$13.00/hour
January 1, 2021
$13.00/hour
$14.00/hour
Uanuary 1, 2022
$14.00/hour
$15.00/hour
Uanuary 1, 2023
$15.00/hour
1. HIRING, WAGES AND FIRING
H
0 Advertisement and Interviews
IO An employer's job advertisement must be accurate. It is illegal for an employer to misrepresent the type
11 of work, the length of time the job will last, or the wages and benefits offered. The ad must mention any
12 labor disturbance in progress, such as a strike or lockout, as well as the name of the employer.
Iii
The types of questions that an employer may include in a job application or ask during an interview
ltl ore limited. In general, an employer may NOT ask an applicant questions about:
18 (I) Age, birthday, or any other information that would allow the employer to calculate the
16 npplicant's age (e.g., the year the applicant graduated from middle school). The employer may ask: "Are
IPf you over 18 years of age?" "If hired, can you show proof of age?"
1H (2) National origin, nationality, ancestry, or race. These include questions about birthplace, native
19 lnnguage, height, weight, skin, eye, or hair color. Moreover, the employer may not ask to see a "green
card" or evidence that the applicant is a U.S. citizen. But the employer may ask: "Can you, after being
II ,hired, submit verification of your legal right to work in the United States?"
(3) Sex, sexual orientation, or marital status. Applicants may not be asked whether they have or plan to
hnve children.
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1 (4) Religion or lack of religion. The employer may not ask questions relating directly or indirectly to
2 religion (e.g., which holidays or days of worship the applicant observes). However, the employer may
3 state the regular hours or workdays and ask applicants if they are available t~ work during those times.
4 (5) Arrest record. An employer may ask if the applicant has been convicted of a crime and may ask
5 about an arrest for which the applicant is out on bail or was released on his or her own recognizance
6 pending trial. But the employer may not ask about an applicant's arrest record generally. Labor Code
7 prohibits questions about arrests that did not lead to convictions.
8 (6) Medical history or disabilities. An employer may require that applicants pass a job-related medical
9 exam prior to being hired, but the employer may not ask general questions about their medical history.
10 The employer may ask: "Do you have a physical condition or disability that may limit your ability to
11 perform the job applied for? lfyes, what can be done to accommodate your limitation?"
12
13 Hiring
14 (1) You may favor a veteran
15 (2) If an employee or an applicant has signed an application or an agreement, they are entitled to a copy.
16 (3) Employers shall not impede an employee enter into a labor union.
17 ( 4) Employers shall not use a minor (under 18) to perform work as adjusting machinery belts, oiling,
18 wiping, cleaning machinery or assisting someone who is. In addition, a minor shall not operate or assist
19 in working with band or circular saws, wood-shapers, jointers, polishers, sanders or pneumatic nail guns.
20 (5) Employers shall not put a hard labor (under 16) on "heavy building trade work" such as: Tunnels,
21 excavations, mining, or on scaffolding.
22 (6) Employer must make a photo copy of employee's ID and SSN, employee must fill out an 1-9 form. A
23 photo may be requested after hiring for identification purposes.
24 Recordkeeping Requirements
25 An employer-contractor is required to keep all employment and tax records for a period of at least four
26
27
28
29
30
31
32
33
34
35
36
37
years. These records include the following:
(1) The employer's federal employer identification number, state identification number, and sales and
use tax account number.
(2) The names, addresses, Social Security numbers, and job titles of all employees. ,
(3) The amounts and dates of all wage, annuity, and pension payments to all employees.
(4) Copies of all employees' income tax withholding certificates (W-4 Form).
(5) The amounts and dates .of all payments made to employees while absent due to sickness or injury,
whether such payments were made by the employer or by a third party.
( 6) The dates and amounts of all tax deposits made.
(7) The dates of employment for all employees, including hiring and termination dates.
(8) Returns reporting federal unemployment (FUTA) tax, Social Security (FICA) tax, federal and state
income tax withholding, and the amounts of all wages which are subject to each of these taxes.
38
39 Paydays, Pay Periods, And The Final Wages
40 In California, wages, with some exceptions, must be paid at least twice during each calendar month on
41 the days designated in advance as regular paydays. The employer must establish a regular payday and is
©2017-2019 Grand Space Construction Corp
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required to post a notice that shows the day, time and location of payment. Wages earned between the
2 l st and 15th days, inclusive, of any calendar month must be paid no later than the 26th day of the month
J during which the labor was performed, and wages earned between the 16th and last day of the month
-, must be paid by the 10th day of the following month.
An employee who is discharged must be paid all of his or her wages, including accrued vacation,
6 immediately at the time of termination. An employee without a written employment contract for a
7 definite period of time who gives at least 72 hours prior notice of his or her intention to quit, and quits
H on the day given in the notice, must be paid all of his or her wages, including accrued vacation, at the
I)
ti me of quitting.
An employee without a written employment contract for a definite period of time who quits without
giving 72 hours prior notice must be paid all of his or her wages, including accrued vacation, within 72
hours of quitting. An employee who quits without giving 72 hours prior notice may request that his or
her final wage payment be mailed to a designated address. The date of mailing will be considered the
date of payment for purposes of the requirement to provide payment within 72 hours of the notice of
quitting.
The place of the final wage payment for employees who are terminated (or laid off) is the place of
termination. The place of final wage payment for employees who quit without giving 72 hours prior
notice and who do not request that their final wages be mailed to them at a designated address, is at the
office of the employer within the county in which the work was performed.
Direct deposits of wages to an employee's bank, saving and loan, or credit union account that were
previously authorized by the employee are immediately terminated when an employee quits or is
discharged, and the payment of wages upon termination of employment in the manner described above
shall apply UNLESS the employee has voluntarily authorized that deposit and provided that the
employer complies with the provisions of relating to the payment of wages upon termination or quitting
of employment.
26 An employer who willfully fails to pay any wages due a terminated employee (discharge or quit) in the
28
29
;lO
:1 I
~2
'.I:\
:14
,15
prescribed time frame may be assessed a waiting time penalty. The waiting time penalty is an amount
equal to the employee's daily rate of pay for each day the wages remain unpaid, up to a maximum of
thirty (30) calendar days. An employee will not be awarded waiting time penalties if he or she avoids or
refuses to receive payment of the wages due. If a good faith dispute exists concerning the amount of the
wages due, no waiting time penalties would be imposed. A "good faith dispute" that any wages are due
occurs when an employer presents a defense, based in law or fact which, if successful, would preclude
any recovery on the part of the employee. The fact that a defense is ultimately unsuccessful will not
preclude a finding that a good faith dispute did exist. However, a defense that is unsupported by any
evidence, is unreasonable, or is presented in bad faith, will preclude a finding of a "good faith dispute".
:\() Even if there is a dispute, the employer must pay, without requiring a release, whatever wages are due
.\7 and not in dispute. If the employer fails to pay what is undisputed, the "good faith" defense will be
;18 defeated whatever the outcome of the disputed wages.
©2017-2019 Grand Space Construction Corp
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1 Note to Employers:
2
3
4
5
6
7
If you have non-negotiated checks on your books which are made payable to
employees whose employment has been terminated (i.e., because you are unable to locate the employee)
and you have made all reasonable efforts to pay the wages, you may send the non-negotiated checks
with an explanation of your efforts to contact the employee to the nearest office of the Labor
Commissioner. The Labor Commissioner will make further efforts to locate the employee to make
payment of the wages and, if unsuccessful, the checks will be deposited into the State of California
Unclaimed Wages Fund.
8
9 Overtime
10 In California, the general overtime provisions are that a nonexempt employee 18 years of age or older
11 shall not be employed more than eight hours in any workday or more than 40 hours in
12 any workweek unless he or she receives one and one-half times his or her regular rate of pay for all
I
!
I
Ii
11
13 hours worked over eight hours in any workday and over 40 hours in the workweek. Eight hours of labor
14 constitutes a day's work, and employment beyond eight hours in any workday or more than six days in
15 any workweek is permissible provided the employee is compensated for the overtime at not less than:
16 1.
17
18
19 2.
20
21
One and one-half times the employee's regular rate of pay for all hours worked in excess of eight
hours up to and including 12 hours in any workday, and for the first eight hours worked on the
seventh consecutive day of work in a workweek; a
Double the employee's regular rate of pay for all hours worked in excess of 12 hours in any
workday and for all hours worked in excess of eight on the seventh consecutive day of work in a
workweek.
22
23 Deductions
24 An employer can lawfully withhold amounts from an employee's wages only: (1) when required or
25 empowered to do so by state or federal law, or (2) when a deduction is expressly authorized in writing
26
by the employee to cover insurance premiums, benefit plan contributions or other deductions not
27 amounting to a rebate on the employee's wages, or (3) when a deduction to cover health, welfare, or
28 pension contributions is expressly authorized by a wage or collective bargaining agreement. Altho1;gh a
29 wage garnishment is a lawful deduction from wages under Labor Code section 224, an employer cannot
30 discharge an employee because a garnishment of wages has been threatened or if the employee's wages
31
32
33
34
35
36
37
38
39
40
have been subjected to a garnishment for the payment of one judgment.
Some common payroll deductions often made by employers that are unlawful include:
a. Gratuities. An employer cannot collect, take, or receive any gratuity or part thereof given or left fo1
an employee, or deduct any amount from wages due an employee on account of a gratuity given or left
for an employee. However, a restaurant may have a policy allowing for tip pooling/sharing among
employees who provide direct table service to customers.
b. Photographs. If an employer requires a photograph of an applicant or employee, the employer mus·
pay the cost of the photograph. A photo may be requested after hiring for identification purpose.
c. Bond If an employer requires a bond of an applicant or employee, the employer must pay the cost o
the bond.
©2017-2019 Grand Space Construction Corp
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d. Uniforms. If an employer requires that an employee wear a uniform, the employer must pay the cost
J. of the uniform. The term "uniform" includes wearing apparel and accessories of distinctive design and
,I
'I
<1
/
H
t)
Ill
color.
~- Medical or Physical Examinations. An employer may not withhold or deduct from the wages of any
employee or require any prospective employee or applicant for employment to pay for any
pre-employment medical or physical examination taken as a condition of employment, nor may an
employer withhold or deduct from the wages of any employee, or require any employee to pay for any
medical or physical examination required by any federal or state law or regulation, or local ordinance.
l Business Expenses. An employee is entitled to be reimbursed by his or her employer for all expenses
or losses incurred in the direct consequence of the discharge of the employee's work duties.
II
I J Meal periods
11 In California, an employer may not employ an employee for a work period of more than five hours per
I•I day without providing the employee with a meal period of not less than thirty minutes, except that if the
I~ total work period per day of the employee is no more than six hours, the meal period may be waived by
Io mutual consent of both the employer and employee. A second meal period of not less than thirty minutes
I? is required if an employee works more than ten hours per day, except that if the total hours worked is no
lH more than 12 hours, the second meal period may be waived by mutual consent of the employer and
IIJ employee only if the first meal period was not waived. There is an exception for employees in the
motion picture industry, however, as they may work no longer than six hours without a meal period of
not less than 30 minutes, nor more than one hour. And a subsequ,eht meal period must be called not later
than six hours after the termination of the preceding meal period.
Unless the employee is relieved of all duty during his or her thirty minute meal period, the meal
period shall be considered an "on duty" meal period that is counted as hours worked which must be
compensated at the employee's regular rate of pay. An "on duty" meal period shall be
permitted only when the nature of the work prevents an employee from being relieved of all duty and
when by written agreement between the employer and employee an on-the-job paid meal period is
ugreed to. The written agreement must state that the employee may, in writing, revoke the agreement at
nny time. The test of whether the nature of the work prevents an employee from being relieved of all
~(I duty is an objective one. An employer and employee may not agree to an on-duty meal period unless,
~ I hnscd on objective criteria, any employee would be prevented from being relieved of all duty based on
lhc necessary job duties. Some examples of jobs that fit this category are a sole worker in a coffee kiosk,
n II sole worker in an all-night convenience store, and a security guard stationed alone at a remote site.
1~
If the employer requires the employee to remain at the work site or facility during the meal period,
i~ the meal period must be paid. This is true even where the employee is relieved of all work duties during
.lf1 lhc meal period.
If an employer fails to provide an employee a meal period in accordance with an applicable IWC
lN Order, the employer must pay one additional hour of pay at the employee's regular rate of pay for each
Hl ~orkday that the meal period is not provided. This additional hour is not counted as hours worked for
~II purposes of overtime calculations.
©2017-2019 Grand Space Construction Corp
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~-¥~1f-tJAfl~~~Jt&;&Jifrff
1
2
3
4
5
the employer must provide an adequate supply of potable water, soap, or other suitable cleansing
agent and single use towels for hand washing.
if a meal period occurs on a shift beginning or ending at or between the hours of 10 ,p.m. and 6 a.m.,
facilities must be available for securing hot food and drink or for heating food or drink, and a suitable
sheltered place must be provided in which to consume such food or drink.
6
7
8
9
1o
11
12
13
14
15
16
17
18
19
20
21
22
23
Strike Policy
Strike is defined by the Labor Code as a concerted act of 50% of the employees (bargaining unit) to
lawfully refuse (under the appropriate state and federal law) to perform work or services for an employer.
This does not include work interruptions based on conflicting union jurisdictions, or unauthorized by the
appropriate main union governing section.
Lockout is defined as a refusal by an employer to permit any group of 5 or more employees to work as a
result of a dispute over hours, wages, or other conditions of employment. It is a crime for an employer to
hire a professional strikebreaker.
Professional strikebreaker is defined as an individual who has been employed to replace striking or
locked-out employees at 2 or more separate employers 3 times in the last 5 years. An employer who
knowingly hires a strikebreaker is subject to a fine and/or jail time. A strikebreaker who offers to replace
locked-out or striking personnel is also subject to a fine and/or jail time.
Jurisdictional strike is defined as when 2 or more labor organizations each claim exclusivity for
collective bargaining agreements and to have their members work for the employer. The consequence of
this action is that there is a concerted refusal to work for the employer or otherwise impact the
employers business. This type of strike is also illegal, and an employer is entitled to compensation for
damages and a court ordered end to the strike.
24
25
2. WORKERS' COMPENSATION INSURANCE
26
27
28 Workers' Compensation Insurance
29 The California .workers' compensation insurance laws are administered by the state Department of
30 Industrial Relations through the Division of Workers' Compensation. California workers' compensation
31
32
33
34
35
36
37
law establishes a no-fault insurance plan purchased by the employer-contractor and administered by the
state to:
• Limit the employer-contractor's liability and avoid costly lawsuits; and
• Guarantee that an injured worker receives prompt and complete medical treatment and specific
benefits for job-related injury or illness. The harmed parties may sue if an employee is injured when the
employer is illegally uninsured, or if the employer conceals the existence of an employee's injury and its
connection with employment.
38
39 Workers' Compensation Insurance Alternatives
40 • By a standard approved policy of workers' compensation insurance available through any licensed
41 earner;
©2017-2019 Grand Space Construction Corp
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• By securing a permit from the Director of DIR to become a self-insurer, post a bond no less than
2 220,000;
3 • By participating in a collectively bargained alternative dispute resolution program recognized by the
4 Division of Workers' Compensation.
5
6 Reporting Name ofInsurer
7 Every licensed contractor must report, in writing, the name and address of the insurer carrying workers'
8 compensation on his or her employees to CSLB within 90 days after any policy of insurance is issued.
9 He or she must send a copy of this report to the insurer. Failure to make such a report is a misdemeanor.
10
11 Posting Requirements
12 • Give every new employee, either at the time of hiring or by the end of his or her first pay period,
I:1 written notice of the employee's right to receive workers' compensation benefits should he or she be
14 injured on the job while working for the employer..
15 • Post conspicuously, in a location frequented by employees, a Notice to Employees poster. Failure to
I6 do this is misdemeanor.
17 • Post information regarding protections and obligations of employees under occupational safety and
18 health laws, and related citations.
19 • Give any employee who is a victim of workplace crime written notification that the employee is
20 eligible for workers' compensation.
21 • The contractor or his or her insurance company should notify his or her employee, in case of an injury,
of a physician who will provide professional care.
2:1
24
25
26
27
28
29
30
:l 1
:l2
:13
;14
:1s
Commercial General Liability Insurance
Just as an accident can happen to anyone, everyone makes mistakes. CGL insurance protects "the
insured contractor from liability to members of the public (other than employees) for bodily injury,
property damage, or personal injury caused by virtually any activity." Thus, CGL insurance can shift the
risk ofliability for accidents and mistakes from the contractor to the insurance company.
The insurance company:
• Provides a claim-handling process;
• Defends the contractor against insurance claims;
• Pays claims for covered damages;
• Pays for immediately necessary medical treatment, even when the contractor is not ultimately found
liable.
:16
:\7 Workers Comp & CGL Disclosure
;rn Contractors' state license law does not require contractors to carry CGL insurance unless their business
'.\I> ,entity is a limited liability company. Even though it is not universally required by licensing law,
11() commercial property owners routinely require the contractors they hire to carry CGL insurance. These
11I
property owners understand that numerous, expensive mishaps can, and do, occur during construction
©2017-2019 Grand Space Construction Corp
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1
2
3
4
5
6
projects. On the other hand, the homeowner rarely requires the contractor to carry CGL insurance. The
primary reason is that it doesn't occur to a homeowner that a contractor would work on the house
without being insured. To alert homeowners to the value of CGL insurance, the California code
requiring home improvement contractors after 2006 to:
• Disclose in writing if they carry commercial general liability insurance. And provide the homeowner
with the name and phone number of the insurance company.
7
8 Workers' Compensation Injuries (NOT COVERED):
Caused by intoxication / Drunk
10 • Self-inflicted
11 • Fight started by employee
12 • Non-work related
13 • Employee suicide
9
•
14
15
3.TAX
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17
18 Independent Contractor vs. Employee
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23
24
25
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27
28
29
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31
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As a general rule, a worker is an independent contractor if an employer has the right to control or direct
only the result of the work and not the means and methods of accomplishing the result. If an employer
has the right to control what will be done and how it will be done, the worker is an employee. Other
standards that are used to determine whether a worker is an independent contractor or an employee
include:
• The extent to which a worker makes his or her services available to the general public. Independent
contractors are generally free to seek out business opportunities.
• How the worker is paid. Independent contractors are frequently paid for a result while employees are
guaranteed a regular wage for a set period of time.
• The extent to which the worker can realize a profit or loss. Independent contractors can make a profit
or loss.
• Written contracts describing the relationship.
• Whether the worker receives benefits such as vacation or sick pay, or insurance through the company.
A subcontractor is not usually an employee of the prune contractor but they have a contractual
34 relationship in order to complete a specific task. Any worker who is hired as an independent contractor
35 rather than an employee must be furnished with Form 1099-MISC by January 31 if they were paid more
36 than $600 over the course of the year. Payroll taxes~ req~d to be withheld from independent
37 contractors.
33
38
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I Fcderal\Tax: The Internal Revenue Service (IRS) regulate US federal tax laws
2
;J Federal Insurance Contribution Act (FICA), also called "social security tax" 1-t-i &-~.
,1 Employers and employees each pay 1/2 of the Social Security tax and 1/2 of the Medicare tax on
----
,~ employees' wages. The employer share of~cial Security tax is 6.2~ and the M.Jtdicare tax is 1.45%, for
h a .!Qt!l.oU.65.%.. The Social Security tax is payable up to the first $128400 of wages; the Medicare tax
~ does not have an upper limit and applies to all wages.
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Federal Unemployment Tax Act {FUTA) ~(:}{f
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lO FUTA must be reported to the IRS by January 31st of the following year. Employers who have 1 or more
11 employees in any 20 calendar weeks, or who pays $1500 dollars or more in wages in any calendar
quarter must pay FUTA for their employees. Federal unemployment tax is paid by the employer at the
rate ofµ% ot:~J)J..o..~ages (including corporate officers) on the ~~~_,:ach employee's
wages.
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Federal Income Tax {FIT)
fir A'{
The employee is ultimately responsible to pay their federal income tax (FIT). FIT is withheld by the
employer based on the information provided by the employee on the IRS Form W-4. Employers must
furnish their employees an IRS W-2 form by January 31 of the following year.
Employers must pay the IRS, any FICA and FIT taxes withheld Jfom employee's wages either quarterly,
monthly or semimonthly (depending on the size of the employer). The deadline for reporting to the IRS
is the last day of the month immediately following the end of the calendar quarter. Most employers will
make FICA and FIT deposits before their quarterly is due, and the amount will vary based on what is
owed. The exceptions to this filing requirement are self-employed contractors with no employees. They
pay FICA yearly and do not need a EIN, only a social security number.
,~J~
State Tax: is regulated by The Employment Development Department (EDD), file quarterly.
;\() Within20 days of hire a new employee, employer must report to EDD, and must register with the EDD,
;1 I obtain a state EIN, and pay state payroll and unemployment insurance for any employee that earns more
than $100.00 in wages in a calendar quarter. The law requires employers to register with EDD within 15
;1;1 <lays after paying $100 wages for employment in a calendar quarter.
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State Income Tax (SIT)
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% Employers withhold SIT based on the information provided by the employee on the IRS Form W-4. The
YI employee is ultimately responsible to pay their state income tax. Withholdings are reported quarterly to
:\H the EDD. The deadline for filing is the last day of the month immediately following the calendar quarter.
IQ Jf withholdings are not paid on time, they accumulate interest penalties at the rate of I% a month. An
,I() additional I 0% penalty if failing to make payments was without good cause; An automatic I 0% penalty
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