diff --git a/api/tests/ProposalSystem.Tests/Helpers/DbContextFactory.cs b/api/tests/ProposalSystem.Tests/Helpers/DbContextFactory.cs
index 729fd3e..244b028 100644
--- a/api/tests/ProposalSystem.Tests/Helpers/DbContextFactory.cs
+++ b/api/tests/ProposalSystem.Tests/Helpers/DbContextFactory.cs
@@ -1,4 +1,5 @@
 using Microsoft.EntityFrameworkCore;
+using Microsoft.EntityFrameworkCore.Diagnostics;
 using ProposalSystem.Infrastructure.Data;
 
 namespace ProposalSystem.Tests.Helpers;
@@ -6,6 +7,7 @@ namespace ProposalSystem.Tests.Helpers;
 /// <summary>
 /// Creates isolated in-memory DbContext instances for unit tests.
 /// Each call produces a uniquely-named database so tests don't leak state.
+/// Transaction warnings are suppressed since InMemory provider does not support them.
 /// </summary>
 public static class DbContextFactory
 {
@@ -13,6 +15,7 @@ public static class DbContextFactory
     {
         var options = new DbContextOptionsBuilder<ProposalDbContext>()
             .UseInMemoryDatabase(databaseName: $"TestDb_{Guid.NewGuid()}")
+            .ConfigureWarnings(w => w.Ignore(InMemoryEventId.TransactionIgnoredWarning))
             .Options;
 
         var context = new ProposalDbContext(options);
diff --git a/api/tests/ProposalSystem.Tests/Helpers/SqliteDbContextFactory.cs b/api/tests/ProposalSystem.Tests/Helpers/SqliteDbContextFactory.cs
new file mode 100644
index 0000000..6177b97
--- /dev/null
+++ b/api/tests/ProposalSystem.Tests/Helpers/SqliteDbContextFactory.cs
@@ -0,0 +1,48 @@
+using Microsoft.Data.Sqlite;
+using Microsoft.EntityFrameworkCore;
+using ProposalSystem.Infrastructure.Data;
+
+namespace ProposalSystem.Tests.Helpers;
+
+/// <summary>
+/// Creates SQLite-backed in-memory DbContext instances for tests that require relational
+/// features (e.g., ExecuteSqlRawAsync, transactions). The SQLite connection is kept open
+/// for the lifetime of the context; disposing the context closes the connection and
+/// discards the in-memory database.
+///
+/// Registers stub Postgres functions (hashtext, pg_advisory_xact_lock) so that
+/// production SQL using these functions does not throw in the test environment.
+/// </summary>
+public static class SqliteDbContextFactory
+{
+    /// <summary>
+    /// Creates a new ProposalDbContext backed by a unique SQLite in-memory database.
+    /// The returned context owns the connection; dispose the context to clean up.
+    /// </summary>
+    public static ProposalDbContext Create()
+    {
+        var connection = new SqliteConnection("DataSource=:memory:");
+        connection.Open();
+
+        // Register Postgres-specific function stubs so ExecuteSqlRawAsync calls
+        // like "SELECT pg_advisory_xact_lock(hashtext('...'))" succeed in SQLite.
+        RegisterPostgresStubs(connection);
+
+        var options = new DbContextOptionsBuilder<ProposalDbContext>()
+            .UseSqlite(connection)
+            .Options;
+
+        var context = new ProposalDbContext(options);
+        context.Database.EnsureCreated();
+        return context;
+    }
+
+    private static void RegisterPostgresStubs(SqliteConnection connection)
+    {
+        // hashtext(text) -> integer — returns a constant; only needed so SQL parses
+        connection.CreateFunction("hashtext", (string _) => 0);
+
+        // pg_advisory_xact_lock(bigint) -> void — no-op in tests
+        connection.CreateFunction("pg_advisory_xact_lock", (long _) => 0);
+    }
+}
diff --git a/api/tests/ProposalSystem.Tests/ProposalSystem.Tests.csproj b/api/tests/ProposalSystem.Tests/ProposalSystem.Tests.csproj
index 41c44cf..a5ca9bf 100644
--- a/api/tests/ProposalSystem.Tests/ProposalSystem.Tests.csproj
+++ b/api/tests/ProposalSystem.Tests/ProposalSystem.Tests.csproj
@@ -9,6 +9,7 @@
   </PropertyGroup>
 
   <ItemGroup>
+    <PackageReference Include="Microsoft.EntityFrameworkCore.Sqlite" Version="8.0.11" />
     <PackageReference Include="Microsoft.NET.Test.Sdk" Version="17.12.0" />
     <PackageReference Include="xunit" Version="2.9.3" />
     <PackageReference Include="xunit.runner.visualstudio" Version="2.8.2">
diff --git a/api/tests/ProposalSystem.Tests/Services/LineItemServiceStateGuardTests.cs b/api/tests/ProposalSystem.Tests/Services/LineItemServiceStateGuardTests.cs
new file mode 100644
index 0000000..c3e068d
--- /dev/null
+++ b/api/tests/ProposalSystem.Tests/Services/LineItemServiceStateGuardTests.cs
@@ -0,0 +1,421 @@
+using FluentAssertions;
+using Microsoft.Extensions.Logging;
+using NSubstitute;
+using ProposalSystem.Application.DTOs;
+using ProposalSystem.Application.Interfaces;
+using ProposalSystem.Domain.Entities;
+using ProposalSystem.Infrastructure.Services;
+using ProposalSystem.Tests.Helpers;
+using Xunit;
+
+namespace ProposalSystem.Tests.Services;
+
+/// <summary>
+/// LineItemService state guard tests.
+/// Verifies that line items cannot be created, bulk-updated, or deleted on
+/// proposals in Approved or Sent status. Line item operations on InReview
+/// and Revised proposals must succeed.
+///
+/// Related findings: QA-C2 (state machine enforcement), API-H3 (status field exposure).
+/// </summary>
+public class LineItemServiceStateGuardTests : IDisposable
+{
+    private readonly Infrastructure.Data.ProposalDbContext _db;
+    private readonly IAuditService _audit;
+    private readonly LineItemService _sut;
+    private readonly Guid _userId;
+
+    public LineItemServiceStateGuardTests()
+    {
+        _db = DbContextFactory.Create();
+        _audit = Substitute.For<IAuditService>();
+
+        _userId = Guid.NewGuid();
+        _db.Users.Add(new User
+        {
+            Id = _userId,
+            CognitoSub = $"sub-{_userId}",
+            Email = "admin@test.com",
+            DisplayName = "Test Admin",
+            Role = UserRole.Admin,
+            CreatedAt = DateTime.UtcNow,
+            UpdatedAt = DateTime.UtcNow,
+        });
+        _db.SaveChanges();
+
+        _sut = new LineItemService(_db, _audit, Substitute.For<ILogger<LineItemService>>());
+    }
+
+    public void Dispose()
+    {
+        _db.Dispose();
+    }
+
+    #region CreateAsync Guards
+
+    [Theory(DisplayName = "QA-C2: CreateAsync throws on Approved and Sent proposals")]
+    [InlineData(ProposalStatus.Approved)]
+    [InlineData(ProposalStatus.Sent)]
+    public async Task CreateAsync_OnLockedStatus_ThrowsInvalidOperation(ProposalStatus status)
+    {
+        // Arrange
+        var proposal = CreateProposal(status);
+        _db.Proposals.Add(proposal);
+        await _db.SaveChangesAsync();
+
+        var request = CreateLineItemRequest();
+
+        // Act
+        var act = () => _sut.CreateAsync(proposal.Id, request);
+
+        // Assert
+        await act.Should().ThrowAsync<InvalidOperationException>()
+            .WithMessage("*approved/sent*");
+    }
+
+    [Theory(DisplayName = "QA-C2: CreateAsync succeeds on InReview and Revised proposals")]
+    [InlineData(ProposalStatus.InReview)]
+    [InlineData(ProposalStatus.Revised)]
+    public async Task CreateAsync_OnEditableStatus_Succeeds(ProposalStatus status)
+    {
+        // Arrange
+        var proposal = CreateProposal(status);
+        _db.Proposals.Add(proposal);
+        await _db.SaveChangesAsync();
+
+        var request = CreateLineItemRequest();
+
+        // Act
+        var result = await _sut.CreateAsync(proposal.Id, request);
+
+        // Assert
+        result.Should().NotBeNull();
+        result.Description.Should().Be(request.Description);
+        result.ProposalId.Should().Be(proposal.Id);
+    }
+
+    [Fact(DisplayName = "QA-C2: CreateAsync throws KeyNotFoundException for nonexistent proposal")]
+    public async Task CreateAsync_NonexistentProposal_ThrowsKeyNotFound()
+    {
+        var act = () => _sut.CreateAsync(Guid.NewGuid(), CreateLineItemRequest());
+        await act.Should().ThrowAsync<KeyNotFoundException>();
+    }
+
+    #endregion
+
+    #region BulkUpdateAsync Guards
+
+    [Theory(DisplayName = "QA-C2: BulkUpdateAsync throws on Approved and Sent proposals")]
+    [InlineData(ProposalStatus.Approved)]
+    [InlineData(ProposalStatus.Sent)]
+    public async Task BulkUpdateAsync_OnLockedStatus_ThrowsInvalidOperation(ProposalStatus status)
+    {
+        // Arrange
+        var proposal = CreateProposal(status);
+        _db.Proposals.Add(proposal);
+        await _db.SaveChangesAsync();
+
+        var request = new BulkUpdateLineItemsRequest(new List<UpdateLineItemEntry>
+        {
+            new(null, "Updated item", 1, "each", null, 100m, PricingMode.TotalPrice, 1, LineItemSource.Manual),
+        });
+
+        // Act
+        var act = () => _sut.BulkUpdateAsync(proposal.Id, request);
+
+        // Assert
+        await act.Should().ThrowAsync<InvalidOperationException>()
+            .WithMessage("*approved/sent*");
+    }
+
+    [Fact(DisplayName = "QA-C2: BulkUpdateAsync succeeds on InReview proposal")]
+    public async Task BulkUpdateAsync_OnInReview_Succeeds()
+    {
+        // Arrange
+        var proposal = CreateProposal(ProposalStatus.InReview);
+        _db.Proposals.Add(proposal);
+        await _db.SaveChangesAsync();
+
+        var request = new BulkUpdateLineItemsRequest(new List<UpdateLineItemEntry>
+        {
+            new(null, "Item A", 2, "hours", 50m, 100m, PricingMode.UnitPrice, 1, LineItemSource.Manual),
+            new(null, "Item B", 1, "each", null, 200m, PricingMode.TotalPrice, 2, LineItemSource.AI),
+        });
+
+        // Act
+        var result = await _sut.BulkUpdateAsync(proposal.Id, request);
+
+        // Assert
+        result.Should().HaveCount(2);
+        result.Select(r => r.Description).Should().BeEquivalentTo("Item A", "Item B");
+    }
+
+    [Fact(DisplayName = "QA-C2: BulkUpdateAsync updates proposal TotalBidAmount")]
+    public async Task BulkUpdateAsync_UpdatesTotalBidAmount()
+    {
+        // Arrange
+        var proposal = CreateProposal(ProposalStatus.InReview);
+        _db.Proposals.Add(proposal);
+        await _db.SaveChangesAsync();
+
+        var request = new BulkUpdateLineItemsRequest(new List<UpdateLineItemEntry>
+        {
+            new(null, "Item A", 1, "each", null, 500m, PricingMode.TotalPrice, 1, LineItemSource.Manual),
+            new(null, "Item B", 1, "each", null, 300m, PricingMode.TotalPrice, 2, LineItemSource.Manual),
+        });
+
+        // Act
+        await _sut.BulkUpdateAsync(proposal.Id, request);
+
+        // Assert
+        var updated = await _db.Proposals.FindAsync(proposal.Id);
+        updated!.TotalBidAmount.Should().Be(800m);
+    }
+
+    [Fact(DisplayName = "QA-C2: BulkUpdateAsync replaces all existing line items")]
+    public async Task BulkUpdateAsync_ReplacesExistingItems()
+    {
+        // Arrange
+        var proposal = CreateProposal(ProposalStatus.InReview);
+        proposal.LineItems.Add(new LineItem
+        {
+            Id = Guid.NewGuid(),
+            ProposalId = proposal.Id,
+            Description = "Old item",
+            Quantity = 1,
+            Unit = "each",
+            TotalPrice = 999m,
+            PricingMode = PricingMode.TotalPrice,
+            Source = LineItemSource.Manual,
+            CreatedAt = DateTime.UtcNow,
+            UpdatedAt = DateTime.UtcNow,
+        });
+        _db.Proposals.Add(proposal);
+        await _db.SaveChangesAsync();
+
+        var request = new BulkUpdateLineItemsRequest(new List<UpdateLineItemEntry>
+        {
+            new(null, "New item", 1, "each", null, 100m, PricingMode.TotalPrice, 1, LineItemSource.Manual),
+        });
+
+        // Act
+        var result = await _sut.BulkUpdateAsync(proposal.Id, request);
+
+        // Assert
+        result.Should().HaveCount(1);
+        result[0].Description.Should().Be("New item");
+
+        var dbItems = _db.LineItems.Where(li => li.ProposalId == proposal.Id).ToList();
+        dbItems.Should().HaveCount(1);
+        dbItems[0].Description.Should().Be("New item");
+    }
+
+    [Fact(DisplayName = "QA-C2: BulkUpdateAsync throws KeyNotFoundException for nonexistent proposal")]
+    public async Task BulkUpdateAsync_NonexistentProposal_ThrowsKeyNotFound()
+    {
+        var request = new BulkUpdateLineItemsRequest(new List<UpdateLineItemEntry>());
+        var act = () => _sut.BulkUpdateAsync(Guid.NewGuid(), request);
+        await act.Should().ThrowAsync<KeyNotFoundException>();
+    }
+
+    #endregion
+
+    #region DeleteAsync Guards
+
+    [Theory(DisplayName = "QA-C2: DeleteAsync throws on Approved and Sent proposals")]
+    [InlineData(ProposalStatus.Approved)]
+    [InlineData(ProposalStatus.Sent)]
+    public async Task DeleteAsync_OnLockedStatus_ThrowsInvalidOperation(ProposalStatus status)
+    {
+        // Arrange
+        var proposal = CreateProposal(status);
+        var lineItem = new LineItem
+        {
+            Id = Guid.NewGuid(),
+            ProposalId = proposal.Id,
+            Description = "Item to delete",
+            Quantity = 1,
+            Unit = "each",
+            TotalPrice = 100m,
+            PricingMode = PricingMode.TotalPrice,
+            Source = LineItemSource.Manual,
+            CreatedAt = DateTime.UtcNow,
+            UpdatedAt = DateTime.UtcNow,
+        };
+        proposal.LineItems.Add(lineItem);
+        _db.Proposals.Add(proposal);
+        await _db.SaveChangesAsync();
+
+        // Act
+        var act = () => _sut.DeleteAsync(proposal.Id, lineItem.Id);
+
+        // Assert
+        await act.Should().ThrowAsync<InvalidOperationException>()
+            .WithMessage("*approved/sent*");
+    }
+
+    [Fact(DisplayName = "QA-C2: DeleteAsync succeeds on InReview proposal")]
+    public async Task DeleteAsync_OnInReview_Succeeds()
+    {
+        // Arrange
+        var proposal = CreateProposal(ProposalStatus.InReview);
+        var lineItem = new LineItem
+        {
+            Id = Guid.NewGuid(),
+            ProposalId = proposal.Id,
+            Description = "Item to delete",
+            Quantity = 1,
+            Unit = "each",
+            TotalPrice = 100m,
+            PricingMode = PricingMode.TotalPrice,
+            Source = LineItemSource.Manual,
+            CreatedAt = DateTime.UtcNow,
+            UpdatedAt = DateTime.UtcNow,
+        };
+        proposal.LineItems.Add(lineItem);
+        _db.Proposals.Add(proposal);
+        await _db.SaveChangesAsync();
+
+        // Act
+        await _sut.DeleteAsync(proposal.Id, lineItem.Id);
+
+        // Assert
+        var deleted = await _db.LineItems.FindAsync(lineItem.Id);
+        deleted.Should().BeNull();
+    }
+
+    [Fact(DisplayName = "QA-C2: DeleteAsync throws KeyNotFoundException for nonexistent line item")]
+    public async Task DeleteAsync_NonexistentLineItem_ThrowsKeyNotFound()
+    {
+        // Arrange
+        var proposal = CreateProposal(ProposalStatus.InReview);
+        _db.Proposals.Add(proposal);
+        await _db.SaveChangesAsync();
+
+        // Act
+        var act = () => _sut.DeleteAsync(proposal.Id, Guid.NewGuid());
+
+        // Assert
+        await act.Should().ThrowAsync<KeyNotFoundException>();
+    }
+
+    #endregion
+
+    #region Audit Logging
+
+    [Fact(DisplayName = "QA-C2: CreateAsync logs audit event on success")]
+    public async Task CreateAsync_LogsAuditEvent()
+    {
+        // Arrange
+        var proposal = CreateProposal(ProposalStatus.InReview);
+        _db.Proposals.Add(proposal);
+        await _db.SaveChangesAsync();
+
+        var request = CreateLineItemRequest();
+
+        // Act
+        await _sut.CreateAsync(proposal.Id, request);
+
+        // Assert
+        await _audit.Received(1).LogAsync(
+            AuditAction.EditLineItem,
+            proposal.Id,
+            Arg.Is<string?>(s => s != null && s.Contains(request.Description)),
+            Arg.Any<CancellationToken>());
+    }
+
+    [Fact(DisplayName = "QA-C2: BulkUpdateAsync logs audit event on success")]
+    public async Task BulkUpdateAsync_LogsAuditEvent()
+    {
+        // Arrange
+        var proposal = CreateProposal(ProposalStatus.InReview);
+        _db.Proposals.Add(proposal);
+        await _db.SaveChangesAsync();
+
+        var request = new BulkUpdateLineItemsRequest(new List<UpdateLineItemEntry>
+        {
+            new(null, "Item", 1, "each", null, 100m, PricingMode.TotalPrice, 1, LineItemSource.Manual),
+        });
+
+        // Act
+        await _sut.BulkUpdateAsync(proposal.Id, request);
+
+        // Assert — audit detail may be plain text ("Bulk update: N items") or JSON
+        await _audit.Received(1).LogAsync(
+            AuditAction.EditLineItem,
+            proposal.Id,
+            Arg.Is<string?>(s => s != null),
+            Arg.Any<CancellationToken>());
+    }
+
+    [Fact(DisplayName = "QA-C2: DeleteAsync logs audit event on success")]
+    public async Task DeleteAsync_LogsAuditEvent()
+    {
+        // Arrange
+        var proposal = CreateProposal(ProposalStatus.InReview);
+        var lineItem = new LineItem
+        {
+            Id = Guid.NewGuid(),
+            ProposalId = proposal.Id,
+            Description = "Audit test item",
+            Quantity = 1,
+            Unit = "each",
+            TotalPrice = 100m,
+            PricingMode = PricingMode.TotalPrice,
+            Source = LineItemSource.Manual,
+            CreatedAt = DateTime.UtcNow,
+            UpdatedAt = DateTime.UtcNow,
+        };
+        proposal.LineItems.Add(lineItem);
+        _db.Proposals.Add(proposal);
+        await _db.SaveChangesAsync();
+
+        // Act
+        await _sut.DeleteAsync(proposal.Id, lineItem.Id);
+
+        // Assert
+        await _audit.Received(1).LogAsync(
+            AuditAction.EditLineItem,
+            proposal.Id,
+            Arg.Is<string?>(s => s != null && s.Contains("Audit test item")),
+            Arg.Any<CancellationToken>());
+    }
+
+    #endregion
+
+    private Proposal CreateProposal(ProposalStatus status)
+    {
+        return new Proposal
+        {
+            Id = Guid.NewGuid(),
+            ProposalNumber = $"SHI-2026-{Guid.NewGuid():N}"[..16],
+            WorkOrderNumber = "WO-TEST",
+            CustomerName = "Test Customer",
+            CustomerAddress = "123 Test St",
+            ScopeOfWork = "Test scope of work",
+            ServiceCategory = ServiceCategory.General,
+            Priority = Priority.Standard,
+            Status = status,
+            Notes = "",
+            SubmittedById = _userId,
+            SubmittedAt = DateTime.UtcNow,
+            CurrentRevision = 1,
+            CreatedAt = DateTime.UtcNow,
+            UpdatedAt = DateTime.UtcNow,
+        };
+    }
+
+    private static CreateLineItemRequest CreateLineItemRequest()
+    {
+        return new CreateLineItemRequest(
+            Description: "HVAC duct replacement",
+            Quantity: 2,
+            Unit: "each",
+            UnitPrice: 250m,
+            TotalPrice: 500m,
+            PricingMode: PricingMode.UnitPrice,
+            SortOrder: 1,
+            Source: LineItemSource.Manual
+        );
+    }
+}
diff --git a/api/tests/ProposalSystem.Tests/Services/ProposalNumberGeneratorTests.cs b/api/tests/ProposalSystem.Tests/Services/ProposalNumberGeneratorTests.cs
new file mode 100644
index 0000000..b630521
--- /dev/null
+++ b/api/tests/ProposalSystem.Tests/Services/ProposalNumberGeneratorTests.cs
@@ -0,0 +1,218 @@
+using FluentAssertions;
+using Microsoft.EntityFrameworkCore;
+using ProposalSystem.Domain.Entities;
+using ProposalSystem.Infrastructure.Services;
+using ProposalSystem.Tests.Helpers;
+using Xunit;
+
+namespace ProposalSystem.Tests.Services;
+
+/// <summary>
+/// Tests for ProposalNumberGenerator.
+/// Verifies format (SHI-YYYY-NNNN), uniqueness, and sequence logic.
+/// Uses SQLite in-memory provider because the generator calls ExecuteSqlRawAsync
+/// for pg_advisory_xact_lock, which requires a relational provider (InMemory throws).
+/// SQLite silently accepts the Postgres-specific SQL, allowing the sequence logic to
+/// be exercised end-to-end.
+///
+/// Related findings: QA-C1 (test coverage gaps).
+/// </summary>
+public class ProposalNumberGeneratorTests : IDisposable
+{
+    private readonly Infrastructure.Data.ProposalDbContext _db;
+    private readonly ProposalNumberGenerator _sut;
+    private readonly Guid _userId;
+
+    public ProposalNumberGeneratorTests()
+    {
+        _db = SqliteDbContextFactory.Create();
+
+        // Create a user required by FK constraints on Proposal.SubmittedById
+        _userId = Guid.NewGuid();
+        _db.Users.Add(new User
+        {
+            Id = _userId,
+            CognitoSub = $"sub-{_userId}",
+            Email = "test@seahavenind.com",
+            DisplayName = "Test User",
+            Role = UserRole.Dispatcher,
+            CreatedAt = DateTime.UtcNow,
+            UpdatedAt = DateTime.UtcNow,
+        });
+        _db.SaveChanges();
+
+        _sut = new ProposalNumberGenerator(_db);
+    }
+
+    public void Dispose()
+    {
+        _db.Dispose();
+    }
+
+    [Fact(DisplayName = "QA-C1: GenerateAsync returns SHI-YYYY-0001 format when no prior proposals")]
+    public async Task GenerateAsync_NoPriorProposals_ReturnsFirstSequenceNumber()
+    {
+        // Act
+        var result = await _sut.GenerateAsync();
+
+        // Assert
+        var year = DateTime.UtcNow.Year;
+        result.Should().Be($"SHI-{year}-0001");
+    }
+
+    [Fact(DisplayName = "QA-C1: GenerateAsync format matches SHI-YYYY-NNNN pattern")]
+    public async Task GenerateAsync_MatchesExpectedFormat()
+    {
+        // Act
+        var result = await _sut.GenerateAsync();
+
+        // Assert
+        result.Should().MatchRegex(@"^SHI-\d{4}-\d{4}$");
+    }
+
+    [Fact(DisplayName = "QA-C1: GenerateAsync increments sequence from last proposal")]
+    public async Task GenerateAsync_WithExistingProposals_IncrementsSequence()
+    {
+        // Arrange — seed a proposal with number ending in 0042
+        var year = DateTime.UtcNow.Year;
+        _db.Proposals.Add(CreateProposal($"SHI-{year}-0042"));
+        await _db.SaveChangesAsync();
+
+        // Act
+        var result = await _sut.GenerateAsync();
+
+        // Assert
+        result.Should().Be($"SHI-{year}-0043");
+    }
+
+    [Fact(DisplayName = "QA-C1: GenerateAsync skips revision proposals (containing -R)")]
+    public async Task GenerateAsync_IgnoresRevisionProposals()
+    {
+        // Arrange — seed a regular and a revision proposal
+        var year = DateTime.UtcNow.Year;
+        _db.Proposals.Add(CreateProposal($"SHI-{year}-0010"));
+        _db.Proposals.Add(CreateProposal($"SHI-{year}-0010-R2")); // revision should be ignored
+        await _db.SaveChangesAsync();
+
+        // Act
+        var result = await _sut.GenerateAsync();
+
+        // Assert — next after 0010, not after the revision
+        result.Should().Be($"SHI-{year}-0011");
+    }
+
+    [Fact(DisplayName = "QA-C1: GenerateAsync ignores proposals from different years")]
+    public async Task GenerateAsync_IgnoresDifferentYearProposals()
+    {
+        // Arrange — seed proposals from a previous year
+        var lastYear = DateTime.UtcNow.Year - 1;
+        _db.Proposals.Add(CreateProposal($"SHI-{lastYear}-0099"));
+        await _db.SaveChangesAsync();
+
+        // Act
+        var result = await _sut.GenerateAsync();
+
+        // Assert — starts at 0001 for the current year
+        var year = DateTime.UtcNow.Year;
+        result.Should().Be($"SHI-{year}-0001");
+    }
+
+    [Fact(DisplayName = "QA-C1: GenerateAsync produces unique numbers across multiple calls")]
+    public async Task GenerateAsync_MultipleCalls_ProducesUniqueNumbers()
+    {
+        // Act — generate several numbers, persisting each to DB between calls
+        var numbers = new List<string>();
+        for (int i = 0; i < 5; i++)
+        {
+            var number = await _sut.GenerateAsync();
+            numbers.Add(number);
+            // Persist so the next call sees it
+            _db.Proposals.Add(CreateProposal(number));
+            await _db.SaveChangesAsync();
+        }
+
+        // Assert
+        numbers.Should().OnlyHaveUniqueItems();
+        var year = DateTime.UtcNow.Year;
+        numbers.Should().BeEquivalentTo(new[]
+        {
+            $"SHI-{year}-0001",
+            $"SHI-{year}-0002",
+            $"SHI-{year}-0003",
+            $"SHI-{year}-0004",
+            $"SHI-{year}-0005",
+        });
+    }
+
+    [Fact(DisplayName = "QA-C1: GenerateAsync zero-pads sequence to 4 digits")]
+    public async Task GenerateAsync_ZeroPadsToFourDigits()
+    {
+        // Arrange
+        var year = DateTime.UtcNow.Year;
+        _db.Proposals.Add(CreateProposal($"SHI-{year}-0003"));
+        await _db.SaveChangesAsync();
+
+        // Act
+        var result = await _sut.GenerateAsync();
+
+        // Assert
+        result.Should().EndWith("-0004");
+        // Verify the sequence part is exactly 4 characters
+        var sequencePart = result.Split('-').Last();
+        sequencePart.Should().HaveLength(4);
+    }
+
+    [Fact(DisplayName = "QA-C1: GenerateAsync handles sequence above 9999 (5+ digits)")]
+    public async Task GenerateAsync_HighSequenceNumber_StillFormatsCorrectly()
+    {
+        // Arrange — seed a proposal at 9999
+        var year = DateTime.UtcNow.Year;
+        _db.Proposals.Add(CreateProposal($"SHI-{year}-9999"));
+        await _db.SaveChangesAsync();
+
+        // Act
+        var result = await _sut.GenerateAsync();
+
+        // Assert — D4 format will produce 5 digits at 10000
+        result.Should().Be($"SHI-{year}-10000");
+    }
+
+    [Fact(DisplayName = "QA-C1: GenerateAsync picks highest existing sequence, not last inserted")]
+    public async Task GenerateAsync_OutOfOrderInsertion_PicksHighest()
+    {
+        // Arrange — insert out of order
+        var year = DateTime.UtcNow.Year;
+        _db.Proposals.Add(CreateProposal($"SHI-{year}-0050"));
+        _db.Proposals.Add(CreateProposal($"SHI-{year}-0020"));
+        _db.Proposals.Add(CreateProposal($"SHI-{year}-0075"));
+        await _db.SaveChangesAsync();
+
+        // Act
+        var result = await _sut.GenerateAsync();
+
+        // Assert — should pick 75 + 1 = 76 since OrderByDescending picks the highest
+        result.Should().Be($"SHI-{year}-0076");
+    }
+
+    private Proposal CreateProposal(string proposalNumber)
+    {
+        return new Proposal
+        {
+            Id = Guid.NewGuid(),
+            ProposalNumber = proposalNumber,
+            WorkOrderNumber = "WO-TEST",
+            CustomerName = "Test Customer",
+            CustomerAddress = "123 Test St",
+            ScopeOfWork = "Test scope",
+            ServiceCategory = ServiceCategory.General,
+            Priority = Priority.Standard,
+            Status = ProposalStatus.InReview,
+            Notes = "",
+            SubmittedById = _userId,
+            SubmittedAt = DateTime.UtcNow,
+            CurrentRevision = 1,
+            CreatedAt = DateTime.UtcNow,
+            UpdatedAt = DateTime.UtcNow,
+        };
+    }
+}
diff --git a/web/src/lib/api/__tests__/client.test.ts b/web/src/lib/api/__tests__/client.test.ts
new file mode 100644
index 0000000..aba0721
--- /dev/null
+++ b/web/src/lib/api/__tests__/client.test.ts
@@ -0,0 +1,277 @@
+/**
+ * API client interceptor tests (WEB-M2, WEB-C1).
+ *
+ * Tests that:
+ * - Request interceptor attaches Bearer token from sessionStorage
+ * - Request interceptor handles missing/invalid token data gracefully
+ * - Response interceptor dispatches Redux logout and redirects on 401
+ * - Response interceptor returns friendly error message on 403
+ * - Response interceptor returns friendly error message on 404
+ * - Response interceptor extracts server error detail from response body
+ * - Response interceptor handles network errors (no response)
+ */
+import { describe, it, expect, vi, beforeAll, beforeEach } from 'vitest';
+import type { InternalAxiosRequestConfig } from 'axios';
+
+// vi.hoisted returns values accessible in both the hoisted mock scope and test scope.
+const { interceptors, mockDispatch } = vi.hoisted(() => {
+  // eslint-disable-next-line @typescript-eslint/no-explicit-any
+  const state: Record<string, any> = {};
+  const dispatch = vi.fn();
+  return {
+    interceptors: state,
+    mockDispatch: dispatch,
+  };
+});
+
+// Mock the Redux store
+vi.mock('../../../app/store', () => ({
+  store: {
+    dispatch: (...args: unknown[]) => mockDispatch(...args),
+    getState: () => ({ auth: { user: null, isAuthenticated: false, loading: false, error: null } }),
+    subscribe: vi.fn(),
+    replaceReducer: vi.fn(),
+    [Symbol.observable]: vi.fn(),
+  },
+}));
+
+// Mock the authSlice logout action
+vi.mock('../../../app/slices/authSlice', () => ({
+  logout: () => ({ type: 'auth/logout' }),
+  setUser: (user: unknown) => ({ type: 'auth/setUser', payload: user }),
+  default: (state: unknown) => state,
+}));
+
+// Mock axios
+vi.mock('axios', () => {
+  const mockInstance = {
+    interceptors: {
+      request: {
+        // eslint-disable-next-line @typescript-eslint/no-explicit-any
+        use: (fulfilled: any, rejected: any) => {
+          interceptors.requestFulfilled = fulfilled;
+          interceptors.requestRejected = rejected;
+          return 0;
+        },
+      },
+      response: {
+        // eslint-disable-next-line @typescript-eslint/no-explicit-any
+        use: (fulfilled: any, rejected: any) => {
+          interceptors.responseFulfilled = fulfilled;
+          interceptors.responseRejected = rejected;
+          return 0;
+        },
+      },
+    },
+    defaults: { headers: { common: {} } },
+  };
+
+  return {
+    default: {
+      create: () => mockInstance,
+    },
+  };
+});
+
+// Mock sessionStorage
+const sessionStorageData: Record<string, string> = {};
+vi.stubGlobal('sessionStorage', {
+  getItem: vi.fn((key: string) => sessionStorageData[key] ?? null),
+  setItem: vi.fn((key: string, value: string) => { sessionStorageData[key] = value; }),
+  removeItem: vi.fn((key: string) => { delete sessionStorageData[key]; }),
+  clear: vi.fn(() => { Object.keys(sessionStorageData).forEach(k => delete sessionStorageData[k]); }),
+  get length() { return Object.keys(sessionStorageData).length; },
+  key: vi.fn((index: number) => Object.keys(sessionStorageData)[index] ?? null),
+});
+
+// Mock window.location
+const mockLocation = { href: '' };
+Object.defineProperty(window, 'location', {
+  value: mockLocation,
+  writable: true,
+  configurable: true,
+});
+
+describe('API client interceptors', () => {
+  beforeAll(async () => {
+    // Dynamically import the module under test after all mocks are set up
+    await import('../client');
+  });
+
+  beforeEach(() => {
+    vi.clearAllMocks();
+    Object.keys(sessionStorageData).forEach(k => delete sessionStorageData[k]);
+    mockLocation.href = '';
+  });
+
+  describe('request interceptor', () => {
+    it('WEB-C1: attaches Bearer token from sessionStorage when valid token data exists', () => {
+      const tokenData = JSON.stringify({ token: 'my-jwt-token-123' });
+      sessionStorageData['proposal_system_token'] = tokenData;
+
+      const config = {
+        headers: {} as Record<string, string>,
+      } as unknown as InternalAxiosRequestConfig;
+
+      const result = interceptors.requestFulfilled(config);
+
+      expect(result.headers.Authorization).toBe('Bearer my-jwt-token-123');
+    });
+
+    it('WEB-C1: does not attach Authorization header when no token in sessionStorage', () => {
+      const config = {
+        headers: {} as Record<string, string>,
+      } as unknown as InternalAxiosRequestConfig;
+
+      const result = interceptors.requestFulfilled(config);
+
+      expect(result.headers.Authorization).toBeUndefined();
+    });
+
+    it('WEB-C1: handles malformed JSON in sessionStorage gracefully', () => {
+      sessionStorageData['proposal_system_token'] = 'not-valid-json{{{';
+
+      const config = {
+        headers: {} as Record<string, string>,
+      } as unknown as InternalAxiosRequestConfig;
+
+      const result = interceptors.requestFulfilled(config);
+
+      expect(result.headers.Authorization).toBeUndefined();
+    });
+
+    it('WEB-C1: does not attach header when token field is missing in parsed data', () => {
+      sessionStorageData['proposal_system_token'] = JSON.stringify({ email: 'user@test.com' });
+
+      const config = {
+        headers: {} as Record<string, string>,
+      } as unknown as InternalAxiosRequestConfig;
+
+      const result = interceptors.requestFulfilled(config);
+
+      expect(result.headers.Authorization).toBeUndefined();
+    });
+
+    it('WEB-C1: request error rejection propagates the error', async () => {
+      const error = new Error('request setup failed');
+      const promise = interceptors.requestRejected(error);
+
+      await expect(promise).rejects.toEqual(error);
+    });
+  });
+
+  describe('response interceptor', () => {
+    it('WEB-M2: 401 response dispatches Redux logout and redirects to /login', async () => {
+      const error = {
+        response: {
+          status: 401,
+          data: {},
+        },
+        request: {},
+      };
+
+      const promise = interceptors.responseRejected(error);
+
+      await expect(promise).rejects.toThrow('Session expired. Please log in again.');
+      expect(mockDispatch).toHaveBeenCalledWith({ type: 'auth/logout' });
+      expect(mockLocation.href).toBe('/login');
+    });
+
+    it('WEB-M2: 403 response returns permission error without dispatching logout', async () => {
+      const error = {
+        response: {
+          status: 403,
+          data: {},
+        },
+        request: {},
+      };
+
+      const promise = interceptors.responseRejected(error);
+
+      await expect(promise).rejects.toThrow('You do not have permission to perform this action.');
+      expect(mockDispatch).not.toHaveBeenCalled();
+    });
+
+    it('404 response returns resource-not-found error', async () => {
+      const error = {
+        response: {
+          status: 404,
+          data: {},
+        },
+        request: {},
+      };
+
+      const promise = interceptors.responseRejected(error);
+
+      await expect(promise).rejects.toThrow('The requested resource was not found.');
+    });
+
+    it('extracts detail message from server error response', async () => {
+      const error = {
+        response: {
+          status: 422,
+          data: { detail: 'Validation failed: scope too short' },
+        },
+        request: {},
+      };
+
+      const promise = interceptors.responseRejected(error);
+
+      await expect(promise).rejects.toThrow('Validation failed: scope too short');
+    });
+
+    it('extracts title message when detail is absent', async () => {
+      const error = {
+        response: {
+          status: 500,
+          data: { title: 'Internal Server Error' },
+        },
+        request: {},
+      };
+
+      const promise = interceptors.responseRejected(error);
+
+      await expect(promise).rejects.toThrow('Internal Server Error');
+    });
+
+    it('falls back to generic message when no detail/title/message in response', async () => {
+      const error = {
+        response: {
+          status: 500,
+          data: {},
+        },
+        request: {},
+      };
+
+      const promise = interceptors.responseRejected(error);
+
+      await expect(promise).rejects.toThrow('An error occurred');
+    });
+
+    it('handles network error (no response from server)', async () => {
+      const error = {
+        request: {},
+      };
+
+      const promise = interceptors.responseRejected(error);
+
+      await expect(promise).rejects.toThrow('No response from server. Please check your connection.');
+    });
+
+    it('passes through non-axios errors unchanged', async () => {
+      const error = new Error('Something unexpected');
+
+      const promise = interceptors.responseRejected(error);
+
+      await expect(promise).rejects.toEqual(error);
+    });
+
+    it('response success passes through unchanged', () => {
+      const response = { data: { id: 1 }, status: 200 };
+
+      const result = interceptors.responseFulfilled(response);
+
+      expect(result).toBe(response);
+    });
+  });
+});