North Carolina Building Contractor License Practice Exam

What is the purpose of a contractor's general overhead?

1. To cover material costs

2. To handle indirect expenses

3. To pay subcontractors

4. To finance equipment purchases

The correct answer is: To handle indirect expenses

The purpose of a contractor's general overhead is to handle indirect expenses that are not directly tied to a specific project. General overhead includes costs necessary for the operation of the business that cannot be attributed directly to any single job. This might encompass expenses such as office rent, utilities, administrative salaries, insurance, and other general business costs, which are essential for keeping the company functioning but do not relate directly to the construction work itself. Indirect expenses are critical because they allow the contractor to maintain a viable business infrastructure, which in turn supports project delivery and overall productivity. Understanding that general overhead serves to encompass these indirect costs is crucial for effective job costing and ensuring that the business remains profitable over time. This differentiation between direct costs—like materials and labor associated with specific projects—and indirect costs underlines the importance of accurately accounting for all financial aspects of contracting work.