Contract Requirements and Execution

Introduction

More exam questions come from this section than from any other, and there is a simple reason: the contract is where California's contractor law becomes concrete. Everything you learn elsewhere — licensing, bonds, liens, payment rules — is enforced through what the contract must say and how the money must move. About one in five questions on the Law & Business exam lands here.

The good news is that this material is learnable. Unlike the judgment-heavy safety or employment questions, most of Section 5 rewards knowing exact rules: what a home improvement contract must contain, how large a down payment you may collect, how many days a customer has to cancel, and how progress payments must track the work. The numbers are stable from year to year, and the traps are predictable. This chapter walks through the statutes that govern consumer construction contracts, then covers the business-side skills the exam folds into the same section: bidding, estimating, change orders, scheduling, and progress billing.

One current-law note before we begin. The master home improvement contract statute, Business & Professions Code §7159, was amended by SB 517 (Stats. 2025, Ch. 585), effective January 1, 2026. This chapter reflects the current requirements. Whenever a figure or deadline appears, treat it as the value in force today.

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Learning objectives

After working through this chapter you should be able to:

• State the elements that make any contract valid, and explain California's added rule that consumer construction contracts must be in writing and signed before work begins.
• List the disclosures a home improvement contract must contain under B&P §7159, including the mechanics-lien warning and the CSLB/bond notice.
• Apply the down-payment cap for home improvement — the lesser of $1,000 or 10% of the contract price — to specific jobs.
• Explain why progress payments may not exceed the value of work performed, and how that rule differs from ordinary business billing.
• Distinguish a home improvement contract from a new residential construction contract and a service and repair contract, and know which rules apply to each.
• Calculate the three-day right to cancel and its five-day (age 65+) and seven-day (declared disaster) extensions.
• Describe the common bid structures (lump-sum, unit-price, cost-plus) and who bears the risk under each.
• Explain change orders, cost control, critical-path scheduling, retention, and over/under-billing as project-management concepts the exam tests.

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Part A — Contracts: the legal backbone (B&P §7159 and related law)

What makes a contract valid, and California's writing rule

Every enforceable contract rests on the same general elements: an offer, an acceptance, consideration (something of value exchanged by each side), parties who are legally capable of contracting, and a lawful purpose. Drop any one of these and there may be no contract to enforce. Consideration in particular trips people up: a signed document alone is not enough if nothing of value passes between the parties.

For consumer construction, California adds a demanding layer on top of these basics. A home improvement contract and a contract to build a new home must be in writing and signed by the parties before the work begins (B&P §7159). This is not a mere formality or best practice — it is a licensing requirement. Starting a job on a verbal understanding, no matter how sincere, exposes the contractor to discipline and can wreck the contractor's ability to enforce the deal or collect. The reliable exam instinct: for consumer work, the contract is written and signed up front, or it is a problem.

California example. A licensed general contractor shakes hands with a Sacramento homeowner on a $40,000 kitchen remodel and starts demolition the next morning, planning to "write it up later." Even if both sides agree on price and scope, the contractor has already violated §7159 by beginning work without a signed written home improvement contract. If a dispute arises, the missing paperwork can leave the contractor unable to enforce the terms and facing a CSLB complaint.

What a home improvement contract must contain

A home improvement contract is far more than a price and a signature. Under §7159 it must be in writing and must carry an extensive list of mandated terms and disclosures, including:

• The contract price and a clear description of the work and materials.
• The total agreed to be paid, with a payment schedule tied to work actually performed.
• The approximate start and completion dates.
• Required notices, presented with the prominence the statute demands — the three-day right to cancel, the mechanics-lien warning, and the contractor's license and CSLB contact information.

Missing these elements is not a technicality. An incomplete contract can be unenforceable and can be grounds for discipline against the license. Because §7159 is the most "know-the-statute" rule in the most heavily weighted section, the disclosure list is worth memorizing.

The required notices: mechanics-lien warning and the CSLB/bond disclosure

Two mandated notices appear again and again on the exam, and they are separate requirements — do not treat them as one.

The mechanics-lien warning tells the homeowner, in plain terms, that subcontractors and material suppliers who go unpaid may place a lien on the home even if the owner already paid the contractor in full (B&P §7159). This warning exists precisely to correct the intuition that "paying the general in full ends my exposure." It does not. The warning links this section directly to the liens material in Section 4, and it is required text, not optional consumer education.

Separately, the contract must carry the CSLB consumer notice — the statement that the contractor is licensed, is regulated by the Contractors State License Board, carries a bond, and that consumers can check a license and file a complaint with CSLB (B&P §7030; §7159). This disclosure gives the consumer the tools to verify the contractor and seek remedies. Leaving it out of a signed contract is a violation.

California example. A Fresno homeowner pays her general contractor the full contract price for a bathroom remodel. The contractor never pays the tile subcontractor. Because the mechanics-lien warning was in the contract, the homeowner was warned that the unpaid sub could record a lien against her home — which is exactly what happens. The warning did its job: it disclosed a real risk the owner might otherwise have assumed was impossible.

Definitions and the home improvement salesperson

The statute defines its own terms — "home improvement," "home improvement contract," and "home improvement salesperson" — and those definitions matter because they decide which rules apply (B&P §§7151, 7151.2, 7152, 7153). A home improvement salesperson is a person who solicits, negotiates, or executes home improvement contracts on a contractor's behalf away from the contractor's fixed place of business — the classic example being someone selling door-to-door or at a home show. Such salespersons must be registered. Registration keeps the people selling the work accountable under the license law. A home improvement salesperson is not the same as a licensed contractor, and not just anyone may sell home improvement work in the field.

California example. A roofing company hires a commissioned rep to knock on doors after a hailstorm and sign up homeowners for new roofs. That rep is acting as a home improvement salesperson and must be registered; the company cannot simply turn an unregistered person loose to negotiate and sign contracts in customers' living rooms.

The three-day right to cancel — and the 5-day and 7-day extensions

When a contract is sold at the buyer's home or otherwise away from the seller's place of business — a home-solicitation sale — the buyer gets a three-business-day right to cancel without penalty (Civ. Code §§1689.5–1689.7). The contract must disclose this right and include the cancellation forms.

Two extensions are frequent trap answers:

• Five business days for a buyer who is 65 years of age or older.
• Seven business days for certain contracts to repair or restore a residence following a declared disaster.

Two details the exam loves: the period is measured in business days, not calendar days, and not every buyer gets only three — age and disaster circumstances can extend the window.

California example. A 70-year-old homeowner in San Diego signs a home-solicitation contract for gutter work at her kitchen table. She is entitled to five business days to cancel, not three, because of her age. If the same signing followed a governor-declared wildfire disaster and involved repairing her fire-damaged home, a seven-day window could apply.

The service and repair contract exception

Not every small job needs the full §7159 home improvement paperwork. The service and repair contract is a narrow exception for small, quick jobs the consumer initiates (B&P §7159.10). To qualify, a set of conditions must all be met — for example, the amount is capped, the contractor did not solicit the work outside statutory limits, the work is to be completed within a short set period, and the consumer contacted the contractor first, not the other way around. Miss any condition and the job falls back under the full home improvement rules. The exam tests both halves: recognizing when the narrow exception applies, and understanding that failing its conditions restores the standard requirements.

California example. A homeowner calls a plumber because a water heater failed; the plumber replaces it the same day for a modest, capped amount. That can fit the service and repair contract exception. But if the plumber had knocked on the door uninvited and sold the homeowner a larger job, the exception is gone and the full home improvement contract rules apply.

New residential construction is a different statute

Building a new single-family residence is governed by its own writing statute, separate from the home improvement rules (B&P §7164). These contracts must also be in writing with specified terms. Down-payment rules are commonly confused: the lesser of $1,000 or 10% cap is the home-improvement rule (§7159/§7159.5); §7164 governs the new-dwelling written contract, and its exact down-payment limit should be confirmed against the live statute rather than assumed to match the home-improvement cap. The exam point is structural: home improvement (existing home) and new residential construction (new home) are governed by different code sections. Answering a new-construction question with the home-improvement rule — or vice versa — is a classic wrong turn.

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Part B — Payments: how the money must move

The down-payment cap: the lesser of $1,000 or 10%

This is one of the most frequently tested numbers on the entire exam, and candidates routinely get it wrong. For a home improvement contract, the down payment a contractor may collect is limited to the lesser of $1,000 or 10% of the contract price (B&P §7159.5; §7159). It is not a flat 10%, and it is not always $1,000 — you always take whichever figure is smaller.

Work two examples until the pattern is automatic:

• $6,000 job: 10% is $600. Since $600 is less than $1,000, the cap is $600.
• $30,000 job: 10% is $3,000, but $1,000 is less. The cap is $1,000.

Notice the crossover point: once 10% of the job exceeds $1,000 — that is, on any contract above $10,000 — the $1,000 ceiling controls and the down payment is capped at $1,000 no matter how large the job. Below $10,000, the 10% figure controls. The three trap answers to reject: "flat 10%," "always $1,000," and "whichever is greater."

California example. A contractor signs a $50,000 whole-house repipe. Tempted to ask for 10% ($5,000) up front, the contractor may legally collect only $1,000 as a down payment, because $1,000 is the lesser figure. The rest must be collected through payments tied to completed work.

Progress payments may not exceed the value of work performed

After the down payment, every payment on a home improvement contract must be tied to work actually completed. A contractor may not collect payments that run ahead of the value of the work and materials delivered to date (B&P §7159.5). The payment schedule must reflect the value of work in place at each stage. The purpose is consumer protection: the rule stops contractors from front-loading collections and then walking off an underperformed job with the customer's money.

A key misconception to bury: it is not enough that the total stays within the contract price. Even if you never collect more than the full price overall, collecting ahead of the work at any stage violates the rule. On a consumer job, billing must track the work as it happens.

California example. On a $24,000 remodel, a contractor finishes roughly a quarter of the work and bills for it — appropriate. What the contractor may not do is demand half the contract price when only a quarter of the job is complete, even though half is still under the total. The bill must not outrun the work.

Progress payments and retention on larger jobs

On larger projects, the contractor is paid in progress payments as work is completed — typically against a schedule of values that breaks the job into priced components — rather than in one lump at the end. The owner commonly withholds a retention: a percentage of each progress payment held back until the work is complete and accepted, as security that the contractor will finish and correct any defects.

Understand what retention is: it is money the contractor has already earned but that the owner holds back temporarily — not an extra charge added to the job. When the work is done and accepted, the retention must be released within the time the law allows (Cal. Civ. Code §8814 governs retention release on private works). As with all progress billing, the amounts billed must reflect work actually in place.

California example. On a commercial tenant-improvement job, the owner pays each monthly progress billing minus a retention withheld from the earned amount. The contractor completes the punch list; the owner accepts the work; the withheld retention must then be released to the contractor within the statutory window.

Over-billing and under-billing

On progress-billed jobs, the billings can drift ahead of or behind the actual work, and the exam expects you to know the consequences of each.

• Over-billing means billing more than the value of the work completed to date. It flatters near-term cash flow, but it represents work not yet earned, it can hide trouble on a job, and on a consumer contract it can violate the law that payments may not exceed work performed (B&P §7159.5). Over-billing is not simply a clever cash strategy — on a home improvement job it can be a legal violation.
• Under-billing means the contractor has done more work than it has billed for. The contractor is effectively financing the owner and may run into a cash squeeze even on a profitable job.

The discipline that keeps a job both honest and solvent is tracking billings against percent complete — so the money collected stays lined up with the value actually installed.

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Part C — Bidding

Contractors price work through several bid structures, and the exam tests who bears the risk under each. There is no single California code section here — this is an estimating and business concept, not a statute.

• Lump-sum (fixed-price): one total price for a defined scope. The contractor bears the quantity risk — if the job takes more material or labor than expected, that is the contractor's loss (and any savings, the contractor's gain). Best when the scope and quantities are well defined.
• Unit-price: a price per unit — per cubic yard of excavation, per fixture, per linear foot. The final total depends on the actual quantities installed. Useful when the scope is known but the exact quantities are uncertain.
• Cost-plus: the owner reimburses the contractor's actual costs plus a fee or percentage. This shifts cost risk toward the owner, because the final number is not fixed. It does not cap the owner's exposure the way a fixed-price bid does.

California example. A grading contractor bidding an excavation of uncertain depth prices it per cubic yard (unit-price), so both sides are protected if the dirt quantity turns out higher or lower than estimated. Had the contractor bid a single lump sum, an unexpectedly large excavation would come straight out of the contractor's margin.

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Part D — Cost control, change orders, and purchasing

Estimating and cost control

Sound cost control starts with an accurate estimate and continues as active tracking. A good estimate builds up from material and labor takeoffs, subcontractor quotes, equipment, and a markup that recovers overhead and profit — not just direct costs. Then, throughout the job, the contractor tracks actual costs against the estimate, comparing committed and actual spending to the budget so that overruns are caught early, while there is still time to adjust. Two ideas the exam rewards: an estimate is a living benchmark, not a one-time document; and covering direct costs alone is not profit — overhead and profit markup must also be recovered. Poor estimating and unmonitored spending are leading causes of contractor failure. (Cost-control math overlaps the markup and overhead-recovery calculations in Section 2, Business Finances.)

Change orders

A change order is a written amendment to the contract documenting a change in scope, price, or schedule after work has begun. Change orders should be in writing and signed before the extra work proceeds, and they should spell out the added or deleted work, the price adjustment, and any time impact. This is a contract-administration best practice rather than a single code section, but it is heavily tested because oral change orders are a classic source of disputes and nonpayment: months later the parties disagree about what was actually authorized, and the contractor who did extra work on a handshake may not get paid. Do not rely on papering a change after the extra work is finished.

California example. Mid-remodel, a homeowner asks the contractor to add recessed lighting. The contractor writes a change order describing the added work, the extra cost, and the added days, both parties sign it, then the electrician proceeds. When the final invoice arrives, there is a signed record of exactly what was authorized — no dispute over the extra charge.

Purchasing materials — sale-of-goods terms

When a contractor buys materials, that transaction is a sale of goods governed by the Commercial Code — California's version of UCC Article 2 (Cal. Commercial Code, Division 2). A few concepts matter for managing supplier relationships:

• Warranties, both express and implied — including the implied warranties of merchantability and of fitness for a particular purpose. Implied warranties can attach even when nothing is written down.
• When title and risk of loss pass from seller to buyer, which is not simply "when the buyer physically uses the goods" — it turns on the delivery terms of the sale.
• Remedies for nonconforming goods when what is delivered does not match what was ordered.

Understanding these terms helps a contractor handle supplier disputes and price materials with the right risk in mind. This is background law for the purchasing side of cost control, but it is testable.

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Part E — Project organization and scheduling

Organizing a project means sequencing the work and coordinating labor, materials, and subcontractors so tasks happen in the right order. The scheduling tool the exam names is the critical path method (CPM). The critical path is the longest chain of dependent tasks that determines the project's minimum possible duration. Two consequences follow:

• A delay to any task on the critical path delays the whole project.
• Tasks that are not on the critical path have float (slack) — they can slip somewhat without pushing the completion date.

Watch two misconceptions: delaying any single task does not automatically delay the whole job — only critical-path tasks do — and the critical path is the longest chain of dependent activities, not simply the single longest-duration activity. Good scheduling reduces idle crews, missed deadlines, and cost overruns. Like bidding and estimating, this is a project-management concept with no California code section.

California example. On a small commercial build, framing → rough electrical → drywall sit on the critical path; a two-day slip in framing pushes the finish date by two days. Meanwhile, ordering the final landscaping has plenty of float — it can wait without affecting completion, so the superintendent focuses attention on the critical chain.

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Key numbers & deadlines

Down-payment cap (home improvement): the lesser of $1,000 or 10% of the contract price (B&P §7159.5). Below a $10,000 job, 10% controls; above it, the $1,000 ceiling controls.

New residential construction (§7164): written contract required; do not assume the home-improvement down-payment cap applies — confirm §7164's own limit against leginfo before relying on a figure.

Progress payments: may never exceed the value of work performed to date (B&P §7159.5).

Right to cancel a home-solicitation sale: 3 business days (standard) · 5 business days if the buyer is 65 or older · 7 business days for certain declared-disaster residence repairs (Civ. Code §§1689.5–1689.7). Counted in business days.

Home improvement contract: must be in writing and signed before work begins, with §7159 disclosures — mechanics-lien warning, 3-day cancellation notice, and CSLB/license/bond information (B&P §7159; §7030).

Home improvement salesperson: must be registered (B&P §§7151.2, 7153).

Retention (private works): released within the statutory window after completion and acceptance (Cal. Civ. Code §8814).

Current-law flag: §7159 was amended by SB 517 (Stats. 2025, Ch. 585), effective 1/1/2026 — figures above reflect current law.

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Summary

Section 5 is the largest slice of the exam because the contract is where California contractor law is put into practice. For consumer work the governing instinct is simple: the deal must be in writing and signed before work begins, and the writing must carry the §7159 disclosures — most importantly the mechanics-lien warning, the three-day cancellation notice, and the CSLB/bond information. The money is regulated too: the down payment is capped at the lesser of $1,000 or 10%, and every later payment must track the work actually performed. Different jobs follow different statutes — home improvement (§7159), new residential construction (§7164), and the narrow service and repair exception (§7159.10) — and matching the right rule to the right job is half the battle.

Woven through the same section are the business skills a contractor uses to execute the work profitably: choosing the right bid structure for the risk, building and then tracking an estimate, documenting every change with a signed change order, understanding warranties and risk of loss when buying materials, sequencing the job along the critical path, and keeping progress billings and retention lined up with the value in place. Master the statutes for the exam points, and the business concepts for the questions that ask you to reason like a working contractor.

Key takeaways

• Write it and sign it first. Home improvement and new-home contracts must be in writing and signed before work begins — a licensing requirement, not just good practice (B&P §7159).
• Down payment = the lesser of $1,000 or 10%. Not flat 10%, not always $1,000, and never the greater of the two (B&P §7159.5).
• Payments must track the work. Progress payments may never exceed the value of work performed, even if the total stays under the contract price (B&P §7159.5).
• Know the three notices. Mechanics-lien warning, 3-day cancellation right, and CSLB/bond disclosure are all required §7159/§7030 contract elements — and they are separate items.
• 3 / 5 / 7 days to cancel. Three business days standard; five if the buyer is 65+; seven for certain declared-disaster repairs (Civ. Code §§1689.5–1689.7).
• Right job, right statute. Home improvement (§7159), new residential construction (§7164), and service and repair (§7159.10) are governed by different sections with different rules.
• Home improvement salespersons must register (B&P §§7151.2, 7153).
• Bid risk differs by structure: lump-sum puts quantity risk on the contractor; unit-price floats with actual quantities; cost-plus shifts cost risk to the owner.
• Document every change with a signed change order before doing the extra work; oral change orders are a dispute waiting to happen.
• Only critical-path delays move the finish date; tasks with float can slip without pushing completion.
• Watch billing drift: over-billing can be a legal violation on consumer jobs and hides trouble; under-billing quietly finances the owner and squeezes cash.

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Sources

Official California primary law, cited to the Legislative Information site (leginfo.legislature.ca.gov) and the CSLB Law Book. Statutory figures reflect law in force as of the 2026 edition; §7159 was amended by SB 517 (Stats. 2025, Ch. 585), eff. 1/1/2026.

• Cal. Bus. & Prof. Code § 7030 — mandatory consumer notice (CSLB, bond, contact/complaint information).
• Cal. Bus. & Prof. Code § 7151; § 7151.2; § 7152; § 7153 — definitions of "home improvement," "home improvement contract," and "home improvement salesperson," and salesperson registration.
• Cal. Bus. & Prof. Code § 7159 — home improvement contract: required writing, terms, and notices (amended by SB 517, Stats. 2025, Ch. 585, eff. 1/1/2026).
• Cal. Bus. & Prof. Code § 7159.5 — home improvement down-payment cap (lesser of $1,000 or 10%) and rule that payments may not exceed the value of work performed.
• Cal. Bus. & Prof. Code § 7159.10 — service and repair contract exception and its conditions.
• Cal. Bus. & Prof. Code § 7164 — required written contract for new single-family residential construction (confirm its down-payment limit against leginfo before publishing).
• Cal. Civ. Code §§ 1689.5–1689.7 — Home Solicitation Sales Act: three-business-day cancellation right, with five-day (age 65+) and seven-day (declared-disaster residence repair) extensions.
• Cal. Civ. Code § 8814 — release of retention on private works of improvement.
• Cal. Commercial Code, Division 2 (Sales) — California's UCC Article 2: warranties, passage of title and risk of loss, and remedies for nonconforming goods.
• CSLB, California Contractors License Law & Reference Book (2026 ed.) — reprints B&P Code Chapter 9 and CSLB regulations with commentary.
• CSLB, Law and Business Study Guide — official exam content outline (Section 5: Contract Requirements and Execution).

Business and project-management topics in this chapter — bid structures, estimating and cost control, change orders, critical-path scheduling, and over/under-billing — are standard construction-management concepts with no single California code section, and are presented as business practice rather than as statutory law.