The Contracts section: the fifth of the exam that decides it
Contract Requirements and Execution is 21% of the Law and Business exam, the largest single section. Most of the points sit in one statute: the home improvement contract rules.
If you only had time to master one section, this would be it. It is heavier than any other, and it is where the exam gets most exact: a dollar figure, a number of days, a word like “less” or “business”. Contractors who write their own contracts usually do well here. Contractors who use whatever form the supply house gave them usually do not.
What CSLB says it covers
The official study guide lists five topics under Contract Requirements and Execution (21%):
- Bidding — walking the job, takeoffs, what goes into an estimate.
- Cost control — direct costs, overhead, keeping the job to its budget.
- Project organization — scheduling, the critical path, choosing subcontractors.
- Contracts — above all the home improvement contract rules in Business and Professions Code §7159.
- Payments — down payments, progress payments, paying your subcontractors.
The numbers that get asked
| Rule | Number |
|---|---|
| A contract is a “home improvement contract” when the price exceeds B&P §7159(b) | $500 |
| Maximum down payment B&P §7159.5 | $1,000 or 10%, whichever is less |
| Buyer's right to cancel B&P §7159 | 3 business days |
| Right to cancel, buyer 65 or older B&P §7159, §7150 | 5 business days |
| Right to cancel, disaster repair in a declared emergency B&P §7159 | 7 days |
| Refund after a cancellation B&P §7159 | within 10 days |
| Service and repair contract ceiling B&P §7159.10 | $750 |
| Pay your subcontractor after you receive a progress payment B&P §7108.5 | 7 days |
| Most you may withhold from a sub in a good-faith dispute B&P §7108.5 | 150% of the disputed amount |
| Penalty for paying a sub late B&P §7108.5 | 2% per month |
| Fine for breaking the down payment or progress payment rules B&P §7159.5(b) | $100 – $5,000 |
Business and Professions Code, as printed in the CSLB Contractors License Law & Reference Book, 2026 edition. Checked 28 September 2026.
Where people lose points
- “Whichever is less.” The down payment cap is $1,000 or 10% of the contract price, whichever is less. On a $6,000 bathroom, the cap is $600, not $1,000. On a $40,000 addition, it is $1,000, not $4,000. The exam will offer you the other number.
- Three different dollar figures. $500 is where a job becomes a home improvement contract (§7159). $750 is the ceiling for a service and repair contract (§7159.10). $1,000 is the minor-work exemption from needing a license at all (§7048), and only for casual work that needs no building permit. They answer three different questions.
- A service and repair contract needs all four conditions. $750 or less, the customer called you, you sell nothing beyond what fixes the problem, and no payment is due until the work is done. Miss one and the full home improvement rules apply, whatever the price.
- Business days, and the clock starts on receipt. Three business days — five for a buyer 65 or older — counted from when the buyer receives a signed and dated copy of the contract, not from the day you shook hands.
- Never get paid ahead of the work. Apart from the down payment, you may not ask for or accept payment that exceeds the value of the work done or materials delivered. The exemption is for contractors with a performance and payment bond, a lien and completion bond, or approved joint control — not for “the customer offered”.
- Change orders in writing, before the work. A change order is not enforceable against the homeowner unless it states the scope of the change, the amount added or subtracted, and the effect on the payment schedule or completion date.
- The contract price includes profit. It is the whole cost of the contract — labor, materials and profit — but not finance charges, which must be stated separately.
- New for 2026. The first page of a home improvement contract now has to show the contractor's email address and phone number, the buyer may cancel by email, and the contract must say yes or no to whether subcontractors will be used. Older study material will not have this.
How the questions tend to read
Many are a homeowner, a contract amount and a payment, and you work out whether the payment was legal. Some are pure calculation: a down payment cap, a markup, a job cost. Here is an example of our own, written the same way (not an actual exam question):
A homeowner, age 70, signs a $14,000 kitchen remodel contract on a Friday and gets a signed copy the same day. What is the largest down payment the contractor may accept, and how long does the homeowner have to cancel?
$1,000, and five business days. 10% of $14,000 is $1,400; the cap is the lesser of that and $1,000. At 70 the buyer is a senior citizen, so the three-day right becomes five business days from receiving the signed copy.
You bid a job at a cost of $20,000 and want a 20% markup. What is the contract price, and what is your margin?
$24,000, and a margin of about 16.7%. Markup is on cost: $20,000 × 1.20 = $24,000. Margin is profit over price: $4,000 ÷ $24,000 = 16.7%. The choices will include 20% for both.
How to study it
- Read §7159 once, properly. It is in the Law Book, free on CSLB's website. It is long, but it is the backbone of the section, and it includes the exact wording of the notices a contract must carry.
- Drill the payment math. Down payment caps on ten different contract prices. Markup to price, price to margin. Until you do them without thinking.
- Keep the three dollar figures on one card: $500, $750, $1,000 — and what each one decides.
- Budget. In our study plan Contracts gets the most hours: about 3½ in two weeks, 6 in four.
Common questions
Is this section only about home improvement?
No, bidding, cost control and project organization are in it too. But the home improvement contract rules produce the most exact, most testable questions, so they deserve most of your time.
Does the down payment rule apply to commercial jobs?
The cap in §7159.5 is part of the home improvement contract rules, which apply to work on residences. Read each question for who the customer is and what the work is.
Where are the lien rules?
Mechanics liens, preliminary notices and lien releases are tested under Insurance and Liens. See the Insurance and Liens section.
Last reviewed 28 September 2026 against Business and Professions Code §§7048, 7108.5, 7150, 7159, 7159.5, 7159.6, 7159.10 as printed in the CSLB Contractors License Law & Reference Book (2026), CSLB's 2026 new-laws bulletin and the Law and Business Examination Study Guide. Laws change; confirm at cslb.ca.gov. Study guidance, not legal advice. We are not affiliated with CSLB or PSI.