Law & Business · Module 2
Business Finance for Plumbing Contractors
Learn the money side of a plumbing business the way the Law and Business exam frames it: revenue, direct job costs, gross profit, overhead, net profit, the balance sheet and the profit and loss statement, cash flow, and the difference between markup and margin. You will also see the California rules that shape cash flow on home improvement jobs (the down payment limit and progress payments) and the difference between the $25,000 contractor bond and insurance.
Key Takeaways
- Revenue minus direct job costs (materials, and usually direct labor and subcontracts) is gross profit; gross profit minus overhead is net profit.
- Overhead, also called general and administrative cost, is anything that cannot be traced to one job, such as a car used by the sales staff and its depreciation.
- The balance sheet is a snapshot on one date: assets = liabilities + owner's equity. The profit and loss statement covers a period of time.
- Markup is figured on cost and margin on the selling price: a 50 percent markup is only a 33.3 percent margin.
- On a California home improvement contract the down payment is limited to $1,000 or 10 percent of the price, whichever is less, and progress payments may not get ahead of the work (B&P 7159, 7159.5).
- The $25,000 contractor bond (B&P 7071.6) protects the public; it is not insurance for you. Workers' compensation is required for any employee (Labor Code 3700).
- Individuals, including sole proprietors and partners, generally pay federal estimated tax in four installments if they expect to owe $1,000 or more (IRS).
Why This Matters
CSLB's Law and Business study guide lists "Business Finances" as one of the seven sections of the Law and Business exam, covering cash management, budget and planning, taxes, and financial reporting (CSLB marks its section percentages as approximate). You do not need to be an accountant. You do need to read a profit and loss statement, know which costs belong to a job and which are overhead, and price work so the business survives.
Plenty of good plumbers go broke because they never learned the difference between profit and cash, or between markup and margin. This lesson gives you the vocabulary and the math, then shows the California rules that change how cash moves on a job.
The Five Lines of a Profit and Loss Statement
Think of the profit and loss statement (P&L, also called an income statement) as a ladder you walk down:
- Revenue: what you billed customers for the period.
- Direct job costs (cost of sales, or cost of goods sold): the costs you can trace to specific jobs. For a contractor that means job materials and, in most contractor books, direct field labor and subcontracts as well.
- Gross profit: revenue minus direct job costs.
- Overhead (general and administrative cost, or G&A): the costs of running the company that are not tied to one job, such as office rent, office staff, the estimator's truck, advertising, accounting, license and bond fees.
- Net profit: gross profit minus overhead. This is what the business actually earned before income tax.
Gross profit and net profit are often shown as percentages of revenue. Gross margin is gross profit divided by revenue. Net margin is net profit divided by revenue.
A point the exam likes: CSLB's own sample question asks where depreciation on a new car bought for general use by the sales staff is charged. The answer is general and administrative costs, because the car is not tied to any one job. If a truck is dedicated to one project, its cost can be charged to that job; a car shared across the whole company is overhead.
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