CSLB Contractor's Law & Business Practice Exam

Which of the following is considered a direct cost?

1. Pay telephone use by employees

2. Personal vehicle expenses

3. Insurance

4. Payroll tax

The correct answer is: Payroll tax

Direct costs refer to expenses that can be directly attributed to the production of goods or services. In the context of construction and contracting, payroll taxes that are incurred specifically for the labor that is directly involved in a project align with this definition. These taxes are calculated based on the wages paid to employees who are working on a specific job, thereby linking them directly to the project itself. Other expenses, such as pay telephone use by employees or personal vehicle expenses, do not directly tie to a specific project in the same manner, as they can be viewed as indirect costs. Similarly, while insurance can be necessary for business operations or a specific project, it is typically classified as an indirect cost since it does not fluctuate based directly on the work performed but rather ensures overall coverage for various operations.