Study guide · Law & Business · Contract Requirements and Execution
Payments: When the Money Must Move
About 20 minutes · 6 sections
What this guide covers
Money on a construction job moves under rules: what you may take before work starts, what you may collect while the job runs, and when held-back money must be released after the work is done. California writes each stage into law and backs it with discipline, penalties — and in a few places criminal exposure — and the exam leans on the exact numbers. This Brief covers the caps, the clocks, and the exceptions: the downpayment limit, progress-payment discipline, the pass-down deadlines, and retention.
Key terms
- Downpayment
- Money the customer pays before any work is performed or materials are delivered.
- Progress payment
- A payment made while the job is underway, tied to the work completed so far.
- Retention
- A slice of each payment the customer holds back until it comes due. Earned, but not yet collectible.
The rules the exam tests
15 rules · 9 minDown payments and progress payments
Your contract must promise a lien release for each portion the customer pays.
A full and unconditional release of lien claims gives up your lien rights for work already paid for. Your contract must state that after the customer satisfactorily pays for any portion of the work, and before you take further payment, you will furnish it.
On the job
A homeowner who has paid the contractor can still face a lien from a sub or supplier the contractor never paid, and end up covering the same work twice. Requiring the release promise in the contract gives the owner something to enforce at each payment step, instead of discovering unpaid claims after the last check clears.
Exact wording
The contract must state that after satisfactory payment for any portion of the work, and before taking further payment, the contractor will furnish a full and unconditional release of lien claims for the portion already paid.
On a home improvement contract, cap the downpayment at $1,000 or 10 percent, whichever is less.
The bond/joint-control exemption is the only way past the downpayment cap on a home improvement contract. Otherwise, work out 10 percent of the contract price, compare it to $1,000, and take no more than whichever amount is less.
On the job
It limits how much a customer can lose to someone who takes the money and never starts the job.
Exact wording
On a home improvement contract, the downpayment cannot be more than $1,000 or 10 percent of the contract price, whichever is less — unless the bond/joint-control exemption applies.
A qualifying bond or joint control lifts the downpayment cap and the payment-schedule limits.
Any one of these qualifies: a performance and payment bond, a lien and completion bond, a registrar-approved bond equivalent, or joint control covering full performance and payment. The exemption reaches only home improvement contracts as defined in Section 7151.2, between an owner or tenant and a contractor, general or specialty, that is licensed or subject to be licensed. Three limits then stop applying to you: the downpayment cap, the dollars-and-cents payment schedule, and the ban on taking payment ahead of the work. You may accept payment before completion, and you may leave the downpayment statement, the progress-payment details and statement, and the Mechanics Lien Warning out of the contract. Two conditions ride with the exemption: where the contract provides for you to furnish joint control, you may have no financial or other interest in that joint control; and before you apply for approval of a blanket performance and payment bond, you must have held an active California license for at least two years.
On the job
This is the one route out of the payment limits, so it is worth knowing exactly. The trap is treating it as automatic: a contractor who sets up a joint control they have an interest in has not met the condition, and skipping the downpayment cap or the Mechanics Lien Warning on that basis is a violation in its own right.
Exact wording
Exception: a contractor who furnishes a performance and payment bond, a lien and completion bond, or a registrar-approved bond equivalent or joint control covering full performance and payment is exempt from all three payment limits — the downpayment cap, the dollars-and-cents payment schedule, and the ban on taking payment ahead of the work. That contractor may accept payment before completion, and does not have to put the downpayment statement, the progress-payment details and statement, or the Mechanics Lien Warning in the contract. Two conditions ride with the exemption: where the contract provides for the contractor to furnish JOINT CONTROL, the contractor may have no financial or other interest in that joint control; and applying for approval of a BLANKET performance and payment bond requires the licensee to have held an active California license for at least two years beforehand. This section reaches only HOME IMPROVEMENT CONTRACTS as defined in section 7151.2, between an owner or tenant and a contractor — general or specialty — that is licensed or subject to be licensed.
If you charge a downpayment, state the cap in at least 12-point boldface type.
The downpayment cap is the most you may collect before work starts or materials are delivered. That cap must appear in the contract in boldface type of at least 12 point. You skip this only if the bond/joint-control exemption applies.
On the job
A cap only protects a customer who can find it. The type-size requirement puts the downpayment limit where a homeowner will see it before signing, rather than in body text they scan past.
Exact wording
If a downpayment will be charged, the contract must state the downpayment cap in at least 12-point boldface type — unless the bond/joint-control exemption applies.
You may not collect more than the value of the work you have done.
On a home improvement contract, apart from the downpayment, you may not request or accept payment that exceeds the value of the work performed or materials delivered — unless the bond/joint-control exemption applies. The same ban covers advance payment, in whole or in part, from any lender or financier for the performance or sale of home improvement goods or services.
On the job
This is the rule that keeps the customer's money and the contractor's progress in step. If payments can run ahead of the work, a customer can end up having paid most of the price for a fraction of the job, with the money that would have funded finishing it already spent.
Exact wording
On a home improvement contract, apart from the downpayment, a contractor may not request or accept payment that exceeds the value of the work performed or materials delivered — unless the bond/joint-control exemption applies. The prohibition extends to advance payment, in whole or in part, from any lender or financier for the performance or sale of home improvement goods or services.
Your payment schedule must give dollars and cents for named work. Percentages are not enough.
This applies when your contract takes payments before completion on top of a downpayment. Write each payment amount in dollars and cents, referencing the specific work or services and any materials and equipment supplied — unless the bond or joint-control exemption applies.
On the job
A schedule stated in dollars and tied to named work is what makes the value-of-work rule checkable. If the schedule gives only percentages or vague phases, neither the customer nor an investigator can test whether a particular payment ran ahead of what was actually built.
Exact wording
If a home improvement contract provides for payments before completion in addition to a downpayment, it must include a schedule of payments in dollars and cents, specifically referencing the work or services to be performed and any materials and equipment to be supplied — unless the bond/joint-control exemption applies.
If the customer asks for a lien release, hand it over before you take another payment.
On each payment, if asked, you must obtain and furnish a full and unconditional lien release for the portion already paid for before accepting any further payment. The owner or tenant may withhold all further payments until you do.
On the job
This is a payment-time duty, not contract boilerplate: when the customer asks for a release covering work already paid for, you must obtain and furnish it before taking another dollar — and they may withhold every further payment until you do. (The contract's own promise to furnish releases is a separate rule, taught above.)
Exact wording
On each payment, and before accepting any further payment, the contractor must if requested obtain and furnish a full and unconditional lien release for the portion of the work already paid for — and the person contracting for the home improvement, owner or tenant, may withhold all further payments until those releases are furnished.
Pay the salesperson's commission in step with the payments you receive.
If a salesperson's commission is paid out of the contract price, it must be paid pro rata: each share in proportion to the schedule of payments the disbursing party makes to the contractor.
On the job
A commission paid in full out of the first check pulls the early money away from the job, which is the same harm the payment rules address one step removed. Tying the commission to the payment schedule keeps it moving at the rate the work does.
Exact wording
If a salesperson's commission is paid out of the contract price, it must be paid pro rata, in proportion to the schedule of payments made to the contractor by the disbursing party.
You build the progress payment schedule from what is left after the downpayment.
The worksheet states that downpayment as 10 percent or $1,000, whichever is less. Subtract it from the total contract price, then divide the remainder into phases. State each phase in dollars and cents, tied to the work or services and the materials or equipment supplied in that phase, payable when that phase is finished.
On the job
The schedule is built on the downpayment, so an unlawful downpayment produces an unlawful schedule underneath it. CSLB's own worksheet prints the cap on the line where you subtract it, which is the clearest signal that the two are one calculation rather than two rules.
Exact wording
To build a progress payment schedule, subtract the downpayment — which the worksheet itself states as 10 percent or $1,000, whichever is less — from the total contract price, then divide what remains into phases — each stated in dollars and cents and tied to the work or services and the materials or equipment supplied in that phase, payable when that phase is finished.
CSLB contractor guides (Contracting for Success) — progress-payment-schedule
Your contract must tell the customer that collecting ahead of the work is illegal.
When your contract provides for payments before completion in addition to a downpayment, the progress payment section must carry a statement in at least 12-point boldface type, unless the bond/joint-control exemption applies. That statement says the schedule specifically describes each phase of work and the amount of each proposed payment, and states in capitals that it is against the law to collect payment for work not completed or materials not delivered — though a downpayment may still be required.
On the job
The value-of-work rule protects a customer who knows it exists. This notice is how they find out: the contract itself has to tell them that collecting for work not completed is against the law, in type they cannot miss.
Exact wording
Where the contract provides for payments before completion in addition to a downpayment, the progress payment section must carry a statement in at least 12-point boldface type saying that the schedule specifically describes each phase of work and the amount of each proposed payment, and stating in capitals that it is against the law to collect payment for work not completed or materials not delivered — though a downpayment may still be required — unless the bond/joint-control exemption applies.
Pay your subcontractors within 7 days of receiving each progress payment.
This applies to you as a prime contractor and to you as a subcontractor paying lower tiers. Each subcontractor is owed the amount allowed for that subcontractor's work, paid within 7 days of your receipt, unless you and the subcontractor agreed otherwise in writing. Private works and most public works are covered; certain public works governed by Public Contract Code 10262 follow that statute instead.
On the job
Money on a job moves down a chain, and each tier finances the one below it until payment arrives. The deadline stops a prime from holding a progress payment as working capital while the subs who earned it cover payroll and materials out of pocket.
Exact wording
A prime contractor or subcontractor must pay each of its subcontractors their share within 7 days of receiving a progress payment, unless they agreed otherwise in writing. This rule covers private works and most public works; certain public works governed by Public Contract Code section 10262 follow that statute instead.
When you dispute your sub's amount in good faith, hold back no more than 150 percent.
The dispute must be genuine and in good faith. The cap applies whether you are the prime contractor or a subcontractor paying your sub on a progress payment. You may hold back 150 percent of the disputed amount, no more.
On the job
A genuine dispute deserves protection, but calling an amount disputed could otherwise justify freezing an entire payment over a small disagreement. Capping the hold bounds the leverage: enough to cover the disputed item with margin, not enough to make the whole payment a bargaining chip.
Exact wording
When a prime contractor or subcontractor disputes, in good faith, an amount due to a sub on a progress payment, it may withhold no more than 150 percent of the disputed amount.
If you wrongly withhold a subcontractor's progress payment, you owe 2 percent a month.
Prime contractors and subcontractors both owe this duty. The 7 days run from receipt of each progress payment, not from your payables cycle, unless you agreed otherwise in writing. Pay the amounts allowed for that sub's work, to the extent of its interest. Withholding a sub's payment wrongly costs you 2 percent of the amount due per month, payable to that subcontractor, and the prevailing party in a collection suit recovers attorney's fees. These sanctions sit on top of every other civil, administrative, or criminal remedy, including discipline against your license.
On the job
The penalty only makes sense once you know the duty it enforces, and the duty is a seven-day clock that starts when YOU get paid — not when you choose to run payables. Teaching the sanction without the deadline tells a contractor what it costs to be late without telling them what late means.
Exact wording
A prime contractor or subcontractor must pay each subcontractor, not later than SEVEN DAYS after receipt of each progress payment unless otherwise agreed in writing, the respective amounts allowed on account of that subcontractor's work to the extent of its interest. Wrongly withholding a subcontractor's payment carries a penalty, payable to the subcontractor, of 2 percent of the amount due per month, and the prevailing party in a collection suit gets attorney's fees. These sanctions sit on top of every other remedy — civil, administrative, or criminal — including discipline against the license.
Apply for a blanket performance and payment bond only after two years on active status.
You apply to the registrar for approval of the blanket performance and payment bond. By that application date, you must have held a California license on active status for at least two years.
On the job
The two-year active-licensure requirement is written specifically for the BLANKET bond application — the statute imposes it there and nowhere else in this section.
Exact wording
To use a blanket performance and payment bond, a licensee must have been licensed in California on active status for at least two years before applying for the registrar's approval.
You commit a misdemeanor if you break the downpayment cap or collect ahead of the work.
Criminal exposure covers three payment rules: the written contract stating the amount in dollars and cents, the downpayment cap, and the ban on collecting beyond the value of work performed or materials delivered, apart from the downpayment. Violating one is a misdemeanor: a fine of $100 to $5,000, up to a year in county jail, or both. The separate finance-charge disclosure is not on that list. If the violation happens in a location damaged by the natural disaster behind a declared state of emergency or federal disaster, the court must impose the maximum fine.
On the job
These three are not just license discipline; they carry criminal exposure — and when the violation happens in a disaster-declared area, the court must impose the maximum fine, not choose within the range.
Exact wording
Three of these carry criminal exposure: the written contract stating the amount in dollars and cents, the downpayment cap, and the ban on collecting beyond the value of work performed or materials delivered (downpayment aside). Violating one is a misdemeanor — a fine of $100 to $5,000, up to a year in county jail, or both. The separate finance-charge disclosure is not on that list. If the violation happens in a location damaged by the natural disaster behind a declared state of emergency or federal disaster, the court must impose the maximum fine.
Take away
8 rules · 5 minPrompt payment and retention
On private work, the owner has 45 days after completion to pay your retention.
The 45-day deadline runs from completion on private works of improvement, covering retention the owner held back from you as direct contractor. One exception: in a good-faith dispute, the owner may withhold up to 150 percent of the disputed amount.
On the job
Retention is money the contractor has already earned, held back as the owner's security that the job will be finished properly. Once completion arrives that security has served its purpose, and the deadline keeps the held money from becoming an indefinite interest-free loan.
Exact wording
On a private work of improvement, an owner who withheld retention from the direct contractor must pay it within 45 days after completion. Exception: where there is a good-faith dispute, the owner may withhold up to 150 percent of the disputed amount.
On a private job, pass each sub's retention share down within 10 days.
The rule applies on a private work of improvement when you are the direct contractor and you withheld retention from your subs. Count the 10 days from the day a retention payment reaches you. One exception: in a good-faith dispute with a sub, you may withhold up to 150 percent of the estimated value of the disputed amount.
On the job
The same chain logic as the progress-payment deadline. Once retention reaches the direct contractor, the subs' shares are no longer that contractor's money to hold, and the clock runs from receipt rather than from completion so a delay upstream does not quietly become a longer wait for everyone below.
Exact wording
On a private work of improvement, a direct contractor who withheld retention from subcontractors must pass each sub's share down within 10 days of receiving a retention payment. One exception: in a good-faith dispute with a sub, the direct contractor may withhold up to 150 percent of the estimated value of the disputed amount.
Acceptance starts the 10 days to pay retention. Your completion notice does not.
On a private work of improvement, the party that did the disputed work gives notice, in the statutorily required form, that the work is complete under the contract. The owner or direct contractor then has 10 days to accept or reject it. If the work is accepted, the owner or direct contractor must pay the retention withheld for that work within 10 days of that acceptance.
On the job
Two clocks, two different starting events. Reading them as one 20-day window is the trap: acceptance can come on day one or day ten, and the payment deadline moves with it.
Exact wording
On a private work of improvement, when the party doing disputed work gives notice — in the statutorily required form — that the work has been completed according to the contract, the owner or direct contractor has 10 days to accept or reject it. If the work is ACCEPTED, a second 10-day clock starts — running from the ACCEPTANCE itself, not from the original notice — for paying the retention withheld for that work.
You cannot sign away your private-works retention rights in a contract.
The statute declares any waiver of the private-works retention rules against public policy, so a contract clause stretching the release deadlines is void even after you sign it. You keep these rights without negotiating for them.
On the job
A clause purporting to stretch the release deadlines is void; you do not have to negotiate to keep these rights.
Exact wording
These private-works retention rules cannot be waived by contract — the statute declares waiver against public policy.
An owner or direct contractor who pays retention late owes 2 percent a month.
On a private work of improvement, the 2 percent per month runs on the amount wrongfully withheld and replaces any other interest. In an action to collect that amount, the prevailing party recovers costs and reasonable attorney's fees.
On the job
Late retention is not free financing — it runs 2 percent per month on the amount withheld, plus costs and legal bills for whichever side wins a collection action.
Exact wording
On a private work of improvement, an owner or direct contractor who does not make a retention payment within the required time owes the unpaid party a penalty of 2 percent per month on the amount wrongfully withheld, in place of other interest — and in an action to collect the wrongfully withheld amount, the prevailing party gets costs and reasonable attorney's fees.
The owner must pay an undisputed progress payment within 30 days after you demand payment.
The 30 days run from the demand notice your contract calls for, and you and the owner may agree otherwise in writing. In a good-faith dispute, the owner may withhold no more than 150 percent of the disputed amount. An owner who violates this section owes you, the direct contractor, 2 percent per month on the amount wrongfully withheld, in place of any interest otherwise due. In an action to collect, the prevailing party recovers costs and a reasonable attorney's fee. This does not replace the retention rules.
On the job
Thirty days, 150 percent, and 2 percent per month are the three tested figures on private progress payments.
Exact wording
Unless the owner and direct contractor agree otherwise in writing, the owner must pay the direct contractor any undisputed progress payment within 30 days after notice demanding payment under the contract is given. Where there is a good-faith dispute, the owner may withhold no more than 150 percent of the disputed amount. An owner that violates the section owes the direct contractor a penalty of 2 percent per month on the amount wrongfully withheld, in place of any interest otherwise due, and the prevailing party in a collection action recovers costs and a reasonable attorney's fee; the section does not supersede the retention rules.
The public entity must release public works retention within 60 days after completion.
Completion means any one of these: the agency occupies, beneficially uses and enjoys the work — operation only for testing, startup or commissioning does not count — together with a stop in labor on the work; the agency accepts the work; after work starts, labor stops for a continuous period of 100 days or more due to factors beyond the contractor's control; or after work starts, labor stops for a continuous period of 30 days or more and the agency files for record a notice of cessation or a notice of completion. In a dispute between the public entity and the original contractor, the entity may withhold from the final payment no more than 150 percent of the disputed amount. A state agency that retains no more than 125 percent of the estimated value of the work yet to be completed has 90 days instead of 60 to release undisputed retention; a state agency retaining more than 125 percent follows the 60-day rule. Any attempted waiver of this section is void.
On the job
Sixty days from completion, 150 percent of the disputed amount, the four definitions of completion, and the state-agency 90-day variant are what the exam tests on public retention; a commissioning run does not start the clock.
Exact wording
On public works contracts, retention withheld by the public entity must be released within 60 days after the date of completion of the work of improvement, and in a dispute between the public entity and the original contractor the entity may withhold from the final payment no more than 150 percent of the disputed amount. For this purpose completion means any of: the public agency's occupation, beneficial use, and enjoyment of the work — excluding any operation only for testing, startup, or commissioning — accompanied by cessation of labor on the work; the agency's acceptance of the work; after commencement, a cessation of labor for a continuous period of 100 days or more due to factors beyond the contractor's control; or after commencement, a cessation of labor for a continuous period of 30 days or more where the agency files for record a notice of cessation or a notice of completion. A state agency that retains no more than 125 percent of the estimated value of the work yet to be completed has 90 days, rather than 60, to release undisputed retention; a state agency retaining more than 125 percent follows the 60-day rule. Any attempted waiver of the section is void.
On public works, you have seven days to pay each subcontractor its retention share.
Your seven days run from the time you receive all or any portion of the retention, not from your own schedule. Pay each subcontractor you withheld retention from its share. If a retention payment is specifically designated for one subcontractor, pay it to that subcontractor, provided the payment is consistent with the subcontract terms. Where a bona fide dispute exists with a subcontractor, you may withhold from that subcontractor's portion no more than 150 percent of the estimated value of the disputed amount. A public entity or an original contractor that misses these time periods owes 2 percent per month on the improperly withheld amount, in place of any interest otherwise due, and the prevailing party in an action to collect wrongfully withheld funds is allowed attorney's fees and costs.
On the job
The prime's clock is seven days from receipt, not from its own convenience, and the same 2 percent per month and fee-shifting that bind the agency bind the prime.
Exact wording
Within seven days from the time all or any portion of the retention proceeds are received by the original contractor, the original contractor must pay each subcontractor from whom retention was withheld its share of the retention received; a retention payment specifically designated for a particular subcontractor is paid to that subcontractor if the payment is consistent with the terms of the subcontract. Where a bona fide dispute exists between the original contractor and a subcontractor, the original contractor may withhold from the subcontractor's portion no more than 150 percent of the estimated value of the disputed amount. A public entity or original contractor that does not make retention payments within the section's time periods is subject to a charge of 2 percent per month on the improperly withheld amount, in lieu of any interest otherwise due, and in an action to collect wrongfully withheld funds the prevailing party is entitled to attorney's fees and costs.
Take away
2 rules · 1 minWaivers and releases
You may not waive another claimant's lien rights in advance. That contract term is void.
An owner, a direct contractor, or a subcontractor may not waive, affect, or impair any other claimant's rights under the works-of-improvement law, by contract or otherwise, with or without notice. Such a term is void and unenforceable unless and until that claimant executes and delivers a statutory waiver and release.
On the job
A subcontract clause giving up lien and stop-notice rights in advance is void; only the statutory release forms, signed by the claimant, waive them.
Exact wording
An owner, direct contractor, or subcontractor may not, by contract or otherwise, waive, affect, or impair any other claimant's rights under the works-of-improvement part, with or without notice, and any contract term that purports to do so is void and unenforceable unless and until the claimant executes and delivers a statutory waiver and release.
You may settle a lien claim without signing a statutory waiver form.
The statutory waiver and release rules leave two endings enforceable: an accord and satisfaction of a good-faith dispute, or an agreement settling a pending court action. Either ending holds only if it makes specific reference to the lien or claim.
On the job
The statutory forms are not the only way a lien claim ends: a genuine settlement that names the lien or claim stands on its own.
Exact wording
The waiver-and-release article does not affect the enforceability of an accord and satisfaction concerning a good-faith dispute, or of an agreement settling a pending court action, if the accord and satisfaction or the settlement makes specific reference to the lien or claim.
Take away
Important numbers to know
Practical example
You land a $38,000 kitchen remodel — your biggest job yet. The customer offers a $3,800 downpayment: "ten percent, like we discussed."
Run the rule: 10 percent of $38,000 is $3,800, but the law takes whichever is LESS of that or $1,000. A performance and payment bond, a lien and completion bond, or a registrar-approved bond equivalent or joint control lifts the cap — and with it the payment-schedule requirement and the no-payment-ahead rule. Without one, three rules bind you. You can accept $1,000 and not a dollar more before work begins or materials arrive. You must write the payment schedule into the contract in dollars and cents. And every payment has to follow work you have actually completed or materials you have actually delivered. On a job this size that means almost all of your money arrives as progress payments. Unless you carry one of those bonds or approved joint control, never take payment ahead of the work completed or the materials delivered.
Where people go wrong
Sounds right: The downpayment cap is whichever is more: $1,000 or 10 percent of the price.
Where’s the catch?
Easy to mix up: Downpayment rules vs. progress payment rules
Which is which?
Sounds right: "The contract says retention terms are different, so the statute doesn't apply"
Where’s the catch?
Sounds right: The three dispute rules measure the 150 percent withholding cap differently.
Where’s the catch?
Keep going
- Practice questions for Law & Business — Contract Requirements and Execution is 21% of the exam.
- Job scenario: The $38,000 Kitchen
- Also in Contract Requirements and Execution: Contracts: The Paper That Runs the Job
- Every number on one page — this guide’s figures alongside every other Law & Business guide’s.
Test yourself: 5 questions for this guide
A paid account adds more ways to practice and prepare: study questions after every chapter, practice questions for every topic, timed practice exams, and job scenarios drawn from real jobs. A free account gets you one timed practice exam and saves your progress across devices. Here is one of this guide's questions:
A customer offers you a $5,000 downpayment on a $20,000 bathroom remodel of their home. What's the most you can legally take?
Answer$1,000. The cap is $1,000 or 10 percent, whichever is less — 10 percent of $20,000 is $2,000, so the $1,000 cap wins. (Exception: a performance and payment bond, a lien and completion bond, or a registrar-approved bond equivalent or joint control lifts the cap.). This section reaches only HOME IMPROVEMENT CONTRACTS as defined in section 7151.2, between an owner or tenant and a contractor — general or specialty — that is licensed or subject to be licensed.
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