As a contractor in California, knowing the ins and outs of how to handle deposits for your construction projects is an utterly crucial skill.

First of all, a deposit is a legal obligation on most projects, but beyond that, deposits serve as an essential mechanism of the construction process that functions as a shield for both the contractor and the client.

But how do deposits work? Do you need a deposit on your construction project? How do you go about determining and handling deposits? Let’s find out.

What is a Deposit?

A deposit in any industry is a guarantee of work. It’s a legal mechanism that is designed to encourage good faith agreements between both parties.

In practice, a deposit functions by a client and the service provider agreeing on a small percentage of the total project cost that is paid upfront. Usually this is a small amount – like 10-15% of the total project cost.

This amount protects the homeowner by ensuring they don’t spend a huge amount of money on a service provider that doesn’t provide the service they agreed upon. It also protects the service provider by ensuring that they are monetarily rewarded for taking on a project – even if the client ultimately backs out of seeing the project to completion.

In this way, deposits benefit both parties. Clients feel safe that they’re not losing a big chunk of money on an unscrupulous provider, while service providers know they are going to be paid at least a small amount for the work done on the project.

Deposits encourage good faith bargaining between both parties, creating a safety net to protect both parties’ interests.

How Deposits Work in Construction Projects

When it comes to construction, deposits are relatively straightforward. These are assurances guaranteed ahead of time, usually with a percentage of the entire project being paid to the contractor even before the first trench is dug or the first nail is hammered.

The size, scope, and payment terms of a deposit are influenced by the scale and nature of the project. Smaller projects have more flexibility with a deposit, while larger projects involving multiple contractors or firms may have multiple layers of deposits overlapping at the same time.

A deposit not only protects contractors against nonpayment by clients but it also ensures that initial startup costs – like materials and labor – can be paid for to get the ball rolling. Deposits, then, also function as early funding on a project to make sure it can get completed on time.

In construction, a deposit is a preliminary payment made by the client to the contractor, or by the general contractor to the subcontractor.

Legal Requirements for Deposits in California

When it comes to the legal requirements in the state of California, there’s a number of different frameworks for deposits, spanning the various areas of construction, various levels of complexity, and the various stages of a project.

The General Legal Framework For Construction Deposits In California

• Home Improvement Projects: Home improvement projects are one of the few areas of construction that have stringent contractual obligations set forth by the CSLB. California limits deposits for home improvement contracts to $1,000 or 10% of the project cost, whichever is less. This is a hard-and-fast rule that cannot be circumvented.
• Commercial Projects: Unlike home improvement projects, there is no specific legal cap on deposits for commercial construction projects in California. It’s up to the individuals and businesses involved in commercial construction to determine their own deposits.
• Other Projects: Like commercial projects, there are no deposit requirements for other types of construction projects, like municipal or large-scale infrastructure projects, which are often defined by specific contract terms, government regulations, or funding agreements.

Contractual Requirements

• Progress Payments: California law mandates that contracts must detail the schedule of progress payments, clearly outlining each phase of work, services provided, and associated payment amounts – including deposits! Contractors cannot legally collect payment for work not completed or materials not delivered. However, they can require a downpayment, which is just another term for a deposit!
• Change Orders: The law requires that any extra work or change orders be documented in writing and signed by both parties before commencement. This documentation should include the scope, cost changes, and impact on the payment schedule.

Mechanics Lien Warning

A crucial aspect of the contract is the mechanic’s lien warning, which works hand in hand with a deposit to ensure that a project is completed according to the contract.

A Mechanics Lien warning informs clients about the potential for liens against their property by unpaid subcontractors or suppliers, despite full payment to the prime contractor. It emphasizes the importance of preliminary notices from subcontractors and material suppliers.

Check out our article on contractor’s liens, and mechanic’s liens for California contractors for a deeper dive into these legal mechanisms.

Responsibilities and Consequences

Compliance with Deposit Limits

Contractors must comply with the deposit limits and progress payment regulations. Failure to adhere to these rules can lead to legal consequences, including disputes and potential litigation.

There’s only one legally enforceable deposit limitation in California – home improvement contractors cannot demand more than $1000 or 10% of the project cost, whichever is less. In this case, the State of California can hold the contractor legally liable for overstepping this law.

All other instances of deposits in the construction industry are not a civil, not criminal liability – which means it’s up to the individual or business to take the issue to court to receive compensation.

What Happens If You Don’t Have A Deposit?

If you don’t have a deposit on your construction project, you may or may not be in big trouble.

If you don’t have a deposit, you’re not legally in trouble, but you put yourself at significant risk of eating some serious costs without one. Without a deposit, the client can simply cancel the project at any time and you have basically no way to get your money back for things like materials and labor.

The reality is that you should not take on any construction project, no matter how big or small, without a deposit. It exists to protect you and the client, so there’s really no reason not to include one.

So…Do I Need A Deposit To Do Construction?

Do you need a deposit?

Yeah, you do. We can say that any contractor working in any industry, niche, or area of expertise in California should have a deposit in every single contract they sign with a client.

At the end of the day, there’s absolutely zero reason not to. It provides clarity to both the client and the contractor, while also protecting both parties financially in the case of non-fulfillment of a contract for a construction project.

It’s simply a no-brainer – get some money upfront and protect your business from losses!

Construction liability in general can be a difficult and confusing thing to nail down – it’s dictated by miles of paperwork and mountains of bureaucratic language that makes it impossible for the average Joes like us to understand.

Even worse, as construction projects become more complex, more subcontractors are required to take on the specialized work required in today’s world of hyper-complicated, highly bespoke construction. And the more people you bring on a job site, the higher the probability that something will go wrong.

When something does go wrong, you need to know how to fix it, and that first means establishing liability – which makes sense, as you need to establish liability before you can recover damages.

So, are subcontractors liable for damages on a construction job? The answer is…well, it depends. Let’s take a deeper look.

The Subcontractor-Contractor Relationship

In California, the relationship between subcontractors and contractors is complex and governed by specific laws and contractual agreements, but in general, contractors hire subcontractors to do specific, specialized construction work on their job sites.

The contractor – usually a general contractor in California, but possibly a foreman or a project manager – is responsible for finding the right person for their specialized task.

The subcontractor and contractor work hand-in-hand to get the work done. The general contractor establishes the scope, the process, and the schedule to get the work done – then the subcontractor is responsible for delivering as per the contract.

The subcontractor may work independently, but ultimately, they report to the general contractor, who is responsible for verifying and approving the work. When the job is completed, usually the general contractor is responsible for making sure the subcontractor is paid.

In some instances, a subcontractor may subcontract certain jobs out to other subs. While it’s not a general contractor hiring, the chain of command and liability is still the same.

Construction Liability in California

Who is liable for construction issues in California? What legislation defines construction liability?
There’s a series of frameworks that stipulate the entirety of construction liability law in California.

Key Aspects

• Contractual Agreements: Govern the scope of work, payment terms, and other conditions.
• Worker Classification: The California ABC test, established by Assembly Bill (AB) 5, is used to differentiate between employees and independent contractors on a state level, but in construction in particular, whoever is hiring is classified as a contractor, while anyone being hired is a subcontractor.
• Legal Penalties: Refusal or inability to cover the damages from construction defects can lead to even bigger penalties as clients seek to recover losses.

Key Legislation

• Assembly Bill 1701: Makes general contractors responsible for unpaid wages and benefits of subcontractors’ employees. Contractors have the right to inspect subcontractors’ payroll records to ensure compliance.
• Liability Limitations: In cases of defective construction, damages are strictly limited by law. The measure of damages is typically either the cost of repair or the diminution in value of the property, whichever is less. Basically, contractors have to cover the cost of poor delivery.

Legal Responsibilities For General Contractors

• Regular financial reviews of subcontractors.
• Ensuring subcontractors comply with wage and benefit obligations.
• Potential changes in contracting practices to mitigate risks.

General Contractors’ Liability for Subcontractor Damages

When it comes to subcontractors’ construction defects, whether or not they’re liable for subcontractors’ construction defects really depends on the situation. In general, these are the things that dictate liability:

• Contractual Liability: The general contractor and subcontractor relationship is typically defined by a contract. This contract often includes clauses related to indemnification, where the subcontractor may agree to indemnify the general contractor against certain types of liabilities. However, the effectiveness of these clauses can depend on the specific language used and the legal interpretations of such agreements.
• Vicarious Liability: In some cases, general contractors can be held vicariously liable for the acts of their subcontractors. This can occur when the subcontractor is deemed to be an agent of the general contractor, which often depends on the degree of control the general contractor has over the subcontractor’s work. However, because subcontractors are usually independent entities, this type of liability is less common in construction.
• Direct Liability: General contractors can also be directly liable for damages caused by their subcontractors if it is found that the general contractor was negligent in some way. This could include situations where the general contractor failed to properly supervise the subcontractor, did not hire a competent subcontractor, or if the general contractor was involved in the activity that caused the damage.

While they are not directly liable for penalties or liquidated damages against the subcontractor, they are responsible for the unpaid wages, benefits, and interest. This responsibility necessitates a change in how general contractors manage and audit their subcontractors.

What Are Subcontractors Liable For?

Subcontractors are liable for their own taxes, liability insurance, and workers’ compensation coverage. They are responsible for the quality of their work and may be liable for damages caused by their negligence or contractual breaches.

In cases of defective construction, subcontractors can be held liable to the owner, with damages limited to repair costs or property value diminution. However, it’s dictated by the three types of liability we covered in the previous section.

Pursuing Damages from a Subcontractor

If a general contractor needs to pursue damages from a subcontractor, they must:

• Review the contractual agreement for breach clauses.
• Gather evidence of the subcontractor’s failure to comply with the agreement.
• Take legal action based on contract law and specific construction laws in California.

Protecting Against Unscrupulous Subcontractors

To protect against hiring unscrupulous subcontractors, general contractors should:

• Conduct thorough background checks.
• Review the subcontractor’s financial stability and past project history.
• Ensure clarity in contracts regarding responsibilities and liabilities.
• Regularly monitor the subcontractor’s compliance with laws and contract terms.

Situations Where Subcontractors Are And Are Not Liable

Here are some of the main areas when it comes to general contractor liability when dealing with subcontractors.

• Defective Construction Work
  • Subcontractor Liable: If a subcontractor performs a specific construction task (like plumbing or electrical work) and the work is faulty or doesn’t meet the contract’s specifications, the subcontractor is typically liable for the damages caused by this defective work.
  • Subcontractor Not Liable: If the defect is due to design errors provided by the general contractor or another party, the subcontractor may not be liable, provided they followed the design specifications accurately.
• Injury on the Job Site
  • Subcontractor Liable: If an employee of the subcontractor or a third party is injured due to the subcontractor’s negligence or failure to adhere to safety standards, the subcontractor can be held liable for these injuries.
  • Subcontractor Not Liable: If the injury is caused by the general contractor’s negligence or by hazards outside the subcontractor’s control or work area, the subcontractor may not be held liable.
• Non-Payment of Subcontractor’s Employees
  • Subcontractor Liable: Under California law, specifically Assembly Bill 1701, subcontractors are directly liable for paying their employees. If they fail to do so, they can be held responsible for the unpaid wages and benefits.
  • Subcontractor Not Liable: If the general contractor fails to pay the subcontractor, which in turn affects the subcontractor’s ability to pay their employees, the liability may shift to the general contractor, especially if there’s a breach of contract.
• Environmental Damage
  • Subcontractor Liable: If a subcontractor’s actions lead to environmental damage, such as improper disposal of hazardous materials, they can be held liable for the cleanup costs and any related damages.
  • Subcontractor Not Liable: If the environmental damage is due to factors beyond the subcontractor’s control or due to adherence to the general contractor’s specific instructions, the subcontractor might not be held liable.
• Project Delays
  • Subcontractor Liable: If a subcontractor fails to complete their portion of the project on time, and this delay is solely due to their mismanagement or lack of resources, they can be held liable for any damages resulting from the delay.
  • Subcontractor Not Liable: If the delay is caused by factors such as change orders from the general contractor, unforeseen site conditions, or delays in other parts of the project not related to the subcontractor’s scope of work, the subcontractor may not be liable for these delays.

Conclusion

In California, both general contractors and subcontractors have specific responsibilities and potential liabilities. Keeping strict track of these liabilities and responsibilities for operating within the legal framework and ensuring a smooth construction process.

As a general contractor or a homeowner signing on with a subcontractor – the best thing you can possibly do for yourself is to outline liability specifically and comprehensively in the contractor. That way, you have it in writing – so you have a legal leg to stand on if something goes wrong.

The California construction contractor industry – with over 300,000 general contractors alone – is one of the most competitive regions in the country. From San Diego to San Francisco, you’re competing against dozens if not thousands of people for the same jobs.

With the intensity of competition for limited jobs by contractors who all have similar skills, and deliver similar services, one of the best ways to gain a competitive advantage as a contractor is through marketing.

Furthermore, most contractors are doing the same thing when it comes to marketing – joining the local chamber of commerce, creating a business profile for Facebook, and putting your logo and contact info on your work truck. This means that the competition for marketing your services as a contractor is just as intense as the jobs themselves.

With that in mind, the best way to gain an advantage over your competition and win more new clients is by going further than the traditional pathways to your new clientele.

The real way to win new clients as a California contractor is to seek out marketing opportunities that aren’t saturated with your competitors’ messaging already.

Here’s five ways to go above and beyond with your marketing to find those new clients for your contracting business.

1. Develop Relationships With Real Estate Professionals and Organizations. Working together with real estate folks is an obvious route to finding new clients. For example, realtors will often have little bits and bobs to address on their various properties, while sellers may need reno work to get the home in perfect condition before a sale. Alternatively, new buyers might want to make improvements so that the home will better suit their needs. Over time, having just a few realtors, developers, home inspectors, and other RE professionals in your network can give you a big boost in referrals.

2. Workshops. Workshops are a great way to meet your clients directly while also demonstrating your skills and personality at the same time. If you can show your clients how to update their kitchen or install a new closet system, you’re the first person they’ll call when they need help with their home.

3. Parties. Sounds weird, right? But everyone loves a party – especially when there’s something in it for them. Throw a customer appreciation party and give them free food and drink – and maybe even a discount on their next service. Bring together local construction-adjacent professionals to build connections and confidence in your name and company. Plus ones are extra, extra invited!

4. Video Ad Campaigns. Online ads are a great way to gain attention for your business, but VERY FEW companies actually advertise their company through moving pictures. With a video ad campaign, you can add life and personality to your business, while also demonstrating what the customer can expect before, during, and after the process. Video campaigns represent incredible potential to ease customers’ fears about you and your service – so they’ll be more likely to call you when a problem arises.

5. Billboards. You’ve seen the car wrap and you’ve seen the banner on the job site, but why do so few construction professionals advertise their services on billboards or similar out-of-home advertising platforms? Marketing a construction business is 90% awareness, and outdoor advertising is incredibly effective at increasing the number of people who are aware of your business. For most construction jobs, that’s enough for people to call you over your competitors.

The Bottom Line: Think Outside The Box (Or Screen)

To win more clients than your competitors in one of the world’s most competitive construction landscapes in the world, you have to think outside the box to find them.

The best way to get people to pay attention to you is to do something that grabs their attention – and that means not doing the same thing everyone else is doing. Take some time and write down some special and interesting ways you can reach your local audience – you know it better than we ever could!

When it comes to doing contracting work in California, there are few more common words than these three: “general contractor license.”

As by far the most popular contractor license classification in the state – with over 300,000 Class B license holders – becoming a general contractor is a highly desired and highly lucrative career path for many in the state.

But can anyone get a Class B General Contractor license from the Contractors State License Board (CSLB) – and become a licensed general contractor?

In this article, we’ll take a look at whether just anyone can become a GC in California – and the steps you need to take to get there.

The Journey From Apprentice To General Contractor

So, can anyone become a general contractor?

Maybe you know someone else who went after it and successfully obtained their general contractor license. Maybe you’re the first person you know to even try. In any case, taking on this significant milestone can be satisfying and rewarding – financially, professionally, and personally.

The beauty of a career as a general contractor is that anyone can become a general contractor if they’re willing to put in the time and effort to learn the trade. Yes, even you. With no traditional school requirements – only on-the-job experience – becoming a GC is a great way to make good money in a stable industry.

However, there is a long journey ahead – a journey that is, in many ways, much more difficult than the cushy classrooms of a university. Every contractor must complete four years’ worth of journeyman experience in their given trade to even be eligible to apply for their license. For general contractors, that means they must do 4 years’ worth of journeyman work as a general contractor!

An apprenticeship with a general contractor can also pay dividends massively by allowing you to only need three years’ work experience as an apprentice – plus one year of journeyman experience.

Becoming an apprentice or journeyman is critical for your path to becoming a general contractor. In many ways, it’s a lot like a four-year university – except in this case, you’re getting paid to learn your future job!

Review And Understand The Eligibility Requirements

Before you apply for your general contractor license, you must make sure that you meet the eligibility requirements set by the Contractors State License Board (CSLB).

In order to get a Class B License, applicants must meet the following requirements. In some cases – such as situations where an applicant has a criminal record – you may be required to meet other, more rigorous standards to even apply for a general contractor license.

Here are the basic requirements to become a general contractor:

• Be 18 or older.
• Have a valid Social Security number or Individual Taxpayer ID.
• Have at least four years of work experience as a journeyman working as a general contractor
• OR have three years’ apprenticeship experience and one year of on-the-job training
• Pass the CSLB exam

Prep for The CSLB Exam

Besides the rigorous four-year training period for all contractors, the other most difficult part of becoming a general contractor is passing the notoriously rigorous CSLB exam. This two-part exam, covering both general contractor knowledge and contractor law and business respectively, has broken many contractors in their pursuit of licensure.

With a stunning 130+ questions, we suggest enrolling in exam prep courses and using study materials provided by the CSLB. You can also find practice exams online to help you gauge your level of readiness. Either way, practice and preparation are critical for saving time, money, and energy.

Submit Your Application

If you meet the experience requirements and pass your exam, then congratulations! You’re past the worst stuff. You can apply online through the CSLB website!

You can submit your application online, or you can submit a physical application instead if that is your preference. Make sure you complete all required sections accurately!

Get Bonded and Insured

In California, it is required for general contractors to secure a contractor’s bond and liability insurance for themselves.

All general contractors are required to have a contractor’s bond – a financial guarantee that you will fulfill contractual obligations on your side. Most GCs will also have to have liability insurance and workers’ compensation insurance, which protects you financially in case of accidents or damages on the job site.

Be advised that your license will not be approved unless you provide proof of and maintain sufficient bonding and insurance coverage throughout your career.

Pay The Fees

Our least favorite section rears its ugly head once again! You must pay any and all fees to the CSLB before you can receive a general contractor’s license (or any contractor license for that matter!).

Take a look at the current fee schedule on the CSLB website and determine which fees pertain to your chosen license classification. Check this information carefully and submit your payment with your application.

Prepare for Your Interview If Applicable

In some cases, the CSLB may request an interview. This part of the process is meant for reviewing your qualifications and past business experience. If this requirement applies to you, do not sweat it.

Look over the detailed record of your work history that you prepared and practice natural ways to reinforce your commitment to your work as a contractor. This part of the process can only help you better your chances of landing a positive result.

Receive Your License And Stay Compliant!

Congratulations! You’ve put in the hard hours, done the diligence, studied your buns off, passed the exam, paid the fees, and finally – finally! – you’re a licensed, bonded, and insured Class B General Contractor.

Receiving your Class B license is a massive milestone in your career and your life. With a Class B license, you can take on almost any job, of any size, and build a new life for yourself and your family.

With that in mind, it’s critical that you don’t stop here and rest on your laurels. Sure, you have your license now, but contractors’ licenses are only valid for 2-3 years. It’s important that you stay on top of your education, resources and more so that your Class B license stays valid throughout your career as a general contractor.

Best of luck to you on your journey!

Can Felons Get A General Contractor License?

While this is a complex question that varies based on every situation, the answer is yes – many felons can qualify for a CSLB Class B license, but the path to get there is different from the typical way.

Check out our article on this topic for a more in-depth guide on this topic.