Contract Requirements & Execution
This chapter walks through the full life of a job — from preparing a competitive bid, to estimating and controlling costs, to drafting a legally compliant contract, billing, and closing out. California writes very specific rules into contractor contracts, especially for residential work, and the exam tests the exact numbers and deadlines.
The Competitive Bidding Process
A bid is a formal offer to perform a defined scope of work for a stated price. On public projects and many large private jobs, the owner publishes plans and specifications, invites contractors to submit sealed bids by a deadline, and opens them publicly. The lowest responsible and responsive bidder is normally awarded the contract. Being 'responsive' means the bid follows every instruction in the bid documents; being 'responsible' means the contractor is qualified, licensed, bonded, and financially able to do the work.
Bid Bonds and Handling Bid Mistakes
On public works and competitive private jobs, the owner often requires a bid bond — typically 10% of the bid amount — guaranteeing that if the bidder wins it will sign the contract and post a performance bond. If the winning bidder backs out without legal cause, it can forfeit the bid bond or the difference between its bid and the next bid. California law gives limited relief: a bidder may withdraw a bid because of an honest, material clerical or mathematical error (not an error in judgment) if it gives prompt written notice — generally within five days of the bid opening — and proves the mistake.
Estimating Fundamentals and Cost Control
An estimate predicts what a job will cost; pricing it wrong is the fastest way to lose money or lose the bid. A complete estimate adds up direct costs — labor, materials, equipment, and subcontractors — then adds indirect costs such as job overhead (permits, supervision, temporary facilities), company overhead, contingency, and profit. Cost control means tracking actual spending against the estimate as the job runs, so the contractor catches overruns early. Comparing the estimate to job-cost reports on a regular basis is the core habit of a profitable contractor.
Project Organization, Scheduling, and the Schedule of Values
Once a job is won, the contractor organizes it: assigning responsibility, ordering long-lead materials, and building a schedule. The Critical Path Method (CPM) breaks the project into activities, links them in sequence, and identifies the longest chain of dependent tasks — the critical path. Any delay on a critical-path activity delays the whole job, while tasks with 'float' have slack and can slip without harm. The schedule of values is a separate document that breaks the contract price into line items so progress payments can be billed accurately as each portion is finished.
When a Written Home Improvement Contract Is Required
A home improvement contract must be in writing whenever the combined cost of labor and materials is more than $500. The law spells out the mandatory contents: the contractor's name, business address, and license number; the date the homeowner signed; an approximate start date and completion date; a description of the work and the materials; the total contract price; the down payment and the payment schedule; and several required consumer-protection notices. The contract must be legible, given to the homeowner before any work starts, and signed by both parties.
Down Payment Limit and Progress Payments
On a home improvement contract, the down payment may never exceed $1,000 or 10% of the contract price — whichever is less. The 10% is calculated on the price before any finance charge. On a $5,000 job, 10% is $500, so $500 is the cap; on a $30,000 job, 10% is $3,000, so the $1,000 ceiling controls. After the down payment, the contract must use a payment schedule tied to work actually performed or materials delivered — the amount billed at each stage cannot run ahead of the value of the work completed.
The 3-Day Right to Cancel
A buyer who signs a home improvement contract or a home solicitation contract has the right to cancel within three business days — by midnight of the third business day after signing — for any reason and with no penalty. The contractor must give the buyer a clearly worded notice of this right plus a cancellation form, and the contract itself must explain it. Certain buyers get longer: a senior citizen (age 65 or older) generally has five business days. For an emergency or immediately necessary repair, the buyer may waive the cancellation right in a separate signed statement.
Written Change Orders
A change order is a written, signed amendment to the contract that adds work, deletes work, substitutes materials, or adjusts the price or schedule. On residential contracts the law requires every change to be documented in writing before the extra work proceeds, and both the contractor and the homeowner must sign it. Doing extra work on a verbal promise is risky: an unsigned change is hard to enforce, so the contractor may not be able to collect for the additional labor and materials. A change order should describe the change, state the new dollar amount, and note any effect on the completion date.
New Residential (Home) Construction Contracts
Building a brand-new single-family home for an owner who will occupy it is governed by a separate statute from ordinary home improvement work. These contracts must be in writing and contain similar consumer protections, but they are not capped by the $1,000 / 10% down-payment limit. Instead the contractor and owner negotiate the down payment and a progress-payment schedule that the law requires to be commercially reasonable and tied to construction milestones. The contract must still disclose the contractor's license number and the required notices, and payment cannot outrun the work performed.
Contract Types and Who Carries Cost Risk
How a contract sets the price decides who absorbs cost surprises. In a fixed-price (lump-sum) contract the contractor names one price for the whole defined scope and bears the risk that costs run higher than estimated — but keeps the savings if costs come in low. In a cost-plus contract the owner reimburses actual costs plus an agreed fee or percentage, so the owner carries the cost risk. A time-and-materials contract bills labor at set hourly rates plus materials, again placing risk on the owner. A unit-price contract sets a price per unit (per cubic yard, per square foot), so the final total depends on the measured quantities installed.
Arbitration Clauses in Contracts
Many contractor contracts include an arbitration clause requiring disputes to be resolved by a private arbitrator instead of in court. California law allows these clauses in residential contracts but regulates how they appear. The arbitration provision must be clearly set apart in the contract, printed in a specified size and form, and placed immediately before the signature line so the consumer notices it. The clause must include a statutory disclosure telling the buyer that agreeing to arbitration gives up the right to a jury trial and to an appeal, and the buyer signs or initials that disclosure separately.
Prompt Payment Law
California's prompt payment statutes set deadlines for moving money down the construction chain so contractors and subcontractors are not left waiting. On a private project, once the owner approves a progress payment it generally must pay the direct (general) contractor within a set period. Once the general contractor receives payment, it must pass the subcontractor's share down within seven days. Missing these deadlines without a good-faith dispute exposes the paying party to a statutory penalty — commonly 2% per month on the amount wrongfully withheld — on top of the money owed, and the prevailing party can recover attorney's fees.
Retention and Liquidated Damages
Retention (retainage) is a percentage of each progress payment — often 5% to 10% — that the owner holds back until the job is finished, as security that the contractor will complete and correct the work. The general contractor may hold the same proportion of retention from its subcontractors, and retention is released after acceptance. Liquidated damages are a fixed sum the contract says the owner may collect for each day of unexcused late completion. California enforces a liquidated-damages clause only if it is a reasonable forecast of the actual harm; a clause set as a penalty rather than an honest estimate of loss is unenforceable.
Right to Repair Act, Abandonment, and Project Closeout
The Right to Repair Act (often called SB 800) sets statewide construction-quality standards and a process for handling defects in new residential construction. It defines specific functionality standards — for items like water intrusion, plumbing, electrical, and structural performance — and requires the homeowner to give the builder notice and a chance to repair before suing. Separately, abandoning a project without legal excuse is grounds for serious CSLB discipline. A job is normally closed out at substantial completion — when the owner can use the project for its intended purpose — after which the final payment, including released retention, becomes due once punch-list items are corrected.