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CalContractorPrep

Section 5 of 7 · about 21% of the exam

Contract Requirements and Execution

Official subtopics: Bidding, Cost control, Project organization, Contracts, Payments.

Contract Requirements and Execution is the largest part of the CSLB Law and Business exam, at about 21%. The CSLB study guide lists five subtopics: bidding, cost control, project organization, contracts, and payments. This note focuses on the written rules for home improvement contracts and for paying subcontractors.

When a home improvement contract is required

  • A home improvement contract is an agreement, oral or written, between a contractor and an owner or tenant for home improvement work, when the total price for labor, services, and materials is more than $500. (Bus. & Prof. Code §7159)
  • The contract and any changes to it must be in writing and signed by both parties before the work starts. (Bus. & Prof. Code §7159)
  • Before any work starts, the contractor must give the buyer a copy of the contract signed and dated by both the contractor and the buyer. (Bus. & Prof. Code §7159)
  • Not following these rules is cause for discipline by CSLB. (Bus. & Prof. Code §7159)

What the contract must include

Some of the items Business and Professions Code section 7159 requires (Bus. & Prof. Code §7159):

  • the contractor's name, business address, and license number;
  • the heading "Home Improvement" on the contract form;
  • the contract price in dollars and cents, and any finance charge shown separately;
  • a description of the project and of the significant materials and equipment;
  • if there is a down payment, the down payment amount and the notice that it may not exceed $1,000 or 10 percent of the contract price, whichever is less;
  • if there are payments before completion, a schedule of progress payments, each in dollars and cents and tied to specific work;
  • an approximate start date and what counts as substantial commencement of work;
  • a notice that the owner or tenant can require the contractor to have a performance and payment bond;
  • whether subcontractors will be used on the project;
  • a change-order form. A change order becomes part of the contract only if it is in writing and signed by both parties before the changed work starts.

Every licensee must also put the license number on all construction contracts, subcontracts, and calls for bid. (Bus. & Prof. Code §7030.5)

Down payments and progress payments

  • Down payment limit. A down payment may not be more than $1,000 or 10 percent of the contract amount, whichever is less. (Bus. & Prof. Code §7159.5)
  • Example. On a $15,000 job, 10 percent is $1,500, so the limit is $1,000. On a $6,000 job, 10 percent is $600, so the limit is $600.
  • No payment ahead of the work. Except for the down payment, the contractor may not ask for or accept payment that is more than the value of the work done or materials delivered. (Bus. & Prof. Code §7159.5)
  • Lien releases. After the buyer makes a payment, the contractor must, if asked, give the buyer a full and unconditional release of liens for the work that was paid for. The buyer may hold back further payments until the releases are given. (Bus. & Prof. Code §7159.5)

The buyer's right to cancel

  • In most home improvement contracts, the buyer gets a written "Three-Day Right to Cancel" notice. For a senior citizen, it is a five-day right to cancel. (Bus. & Prof. Code §7159)
  • For repair or restoration of a home damaged by a disaster with a declared state of emergency or local emergency, the notice is a "Seven-Day Right to Cancel." (Bus. & Prof. Code §7159)
  • If the buyer cancels, the contractor must return anything the buyer paid within 10 days of receiving the notice of cancellation. (Bus. & Prof. Code §7159)

Paying subcontractors

  • Seven days. A prime contractor or subcontractor must pay each subcontractor its share within seven days after receiving each progress payment, unless they agreed otherwise in writing. (Bus. & Prof. Code §7108.5)
  • Disputes. If there is a good faith dispute, the contractor may withhold no more than 150 percent of the disputed amount. (Bus. & Prof. Code §7108.5)
  • Penalty. A violation is cause for discipline, and the contractor owes the subcontractor a penalty of 2 percent of the amount due per month while it is unpaid. (Bus. & Prof. Code §7108.5)

Owner payments and retention

  • Owner to direct contractor: 30 days. Unless the owner and the direct contractor agreed otherwise in writing, the owner must pay an undisputed progress payment within 30 days after the contractor gives notice demanding payment under the contract. (Civ. Code §8800)
  • Disputes and penalty. In a good faith dispute, the owner may withhold no more than 150 percent of the disputed amount. An owner who wrongly withholds payment owes a penalty of 2 percent per month on the amount withheld. (Civ. Code §8800)
  • Retention to subcontractors: 10 days. If a direct contractor withheld retention from subcontractors, it must pay each subcontractor its share within 10 days after receiving all or part of a retention payment. In a good faith dispute, it may withhold no more than 150 percent of the estimated disputed amount. (Civ. Code §8814)

Bidding, cost control, and project organization

These subtopics are general business and project-management skills. The free public sources this note relies on do not set specific rules for them, so this note does not summarize them. Remember one licensing rule that applies to bidding: you must be licensed before you submit a bid. (CSLB: Get Licensed to Build)

Sources