Contract Requirements and Execution

The Contract Requirements and Execution section, which makes up 21% of the law and business exam, focuses on essential aspects of contract management in the construction industry. This includes understanding the bidding process, cost control measures, effective project organization, contract provisions, and payment structures. Mastery of this section is critical for contractors to ensure that projects are executed within legal and financial guidelines, safeguarding both their business and client relationships.

Bidding

Bidding refers to the process where parties propose a competitive price for a product or service, based on their cost or value. This process involves potential suppliers or buyers placing bids in accordance to the bidding context. Competitive contract bidding is achieved by openly inviting contractors to participate, receiving sealed bids, and granting the contract to the lowest bidder who meets the qualifications. The final bid is influenced by factors such as required materials, labor, and other elements of the estimate.

Estimating Bids

The goal of a contractor undertaking jobs is twofold: to maintain financial stability and to gain profit. If a contractor fails to make a profit, they risk going out of business. There are no legal protections for contractors who sign contracts based on poorly estimated bids. Hence, if a contractor commits to a contract that was not accurately estimated, they are still legally obligated to complete the job as per the contract.

Before bidding, a contractor should ensure proper job estimation. An optimal estimate will include all direct costs, overhead costs, and profit. An estimate that is incorrectly calculated may lead to reduced profit, or even a loss. Terms used in bid calculations include:

• Direct Costs: These are the wages for workers (including the contractor if they work on the job), materials, permits and fees, equipment (whether owned or rented), additional bonds, etc.
• Overhead Costs: These include office rent, supplies, wages, advertising, bad debts, storage charges, and other routine administrative costs. Overhead costs encompass fixed costs.
  • Fixed Costs are those that remain constant and do not fluctuate. An example of a fixed cost is office rent, which is typically included in overhead costs.
  • Variable Costs are those that vary with each invoice or bill. An example of a variable cost is an electric or phone bill. If the cost is directly related to the project, variable costs may be included in the overhead or direct costs.
• Profit: This is what should be earned once all costs have been totaled. Profits commonly range from 10-15%, but this can change depending on the contractor’s business. Bids that exceed 10-15% in profits may not be competitive.

Sample Bid Calculation

Consider a scenario where a contractor is preparing a bid for an available project. The contractor has identified that the direct cost, including labor and materials, will be $20,000. The overhead cost, which includes marketing expenses, office rent, and more, is typically 22%. The contractor wishes to achieve a profit margin of 10%.

When considering the total bid value as 100%, the $20,000 direct cost makes up 68% of the total bid. This is calculated by subtracting the 10% profit and 22% overhead from the 100% total bid.

To determine the total bid price, the contractor divides the direct cost by its 68% proportion.

$20,000 (direct cost) ÷ 0.68 (68% of total) = $29,411 (total bid price)

To further calculate the 10% profit, the total bid price of $29,411 is multiplied by 0.10 (10%), resulting in $2,941.

Common Bidding Mistakes

There are several common errors made during the bidding process, including:

• Rushed estimations due to lack of proper planning;
• Bidding based on unclear plans and specifications;
• Lack of comprehensive understanding of the project;
• Bidding on projects that exceed the contractor's managerial skills and financial capacity;
• Bidding against competitors rather than focusing on the project;
• Decreasing or eliminating profit margins.

Before submitting a bid, it is crucial for the entire construction project to be planned and documented. This pre-planning stage ensures that all components of the project are thoroughly evaluated and that a precise cost estimate can be made for each part of the project. This process should take into account:

• The cost of labor and materials;
• The cost of subcontractors and equipment;
• Overheads for the project and the company;
• Profit margins and markup (typically between 10-15%);
• The contractor's financing method.

Once a contractor's bid is accepted, they are legally bound by the contract's terms and conditions. If a contractor overlooks certain elements when preparing their bid, or uncovers an issue after the bid has been submitted, they are still legally required to complete the contract for the initial bid price. Contractors are not permitted to charge additional fees or money to compensate for losses occurred due to their own mistakes.

A contractor can only issue a change order, which charges the customer for extra costs, if the customer strays from the original contract's terms and conditions. As such, contractors are advised to use written checklists and take-off sheets to cross-check their work and prevent errors.

Bid Submission

Contractors are required to thoroughly examine all elements of the bid submittal, including shop drawings, material data, samples, and product data, to ensure all requirements are met before presenting their bid proposal. There may be additional criteria to comply with, such as timely delivery. Even though private contracts can be less stringent than governmental projects addressed in Chapter 8 – Public Works Contracts, it's crucial that bids are submitted promptly to the designated location in the bid package. Furthermore, private projects might necessitate contractors to submit their bids in a sealed manner, similar to public works contracts to foster equitable bidding procedures.

Submittals and Contract Documents

In the contract documents, there are comprehensive lists known as submittals. These provide critical information about the building materials and other relevant documentation necessary for an upcoming project to professionals like architects and engineers. The Standard Specifications for Public Works Construction, also known as the "Greenbook", states that these submittals must include items such as working diagrams, shop drawings, backing information, instructions for installation, and manufacturer's guidelines on operation, maintenance, and warranty.

In situations where the construction documents are in conflict, the document that ranks higher in the order of precedence takes precedence. Here is the order of precedence:

• Regulatory agency-issued Permits
• Change orders and supplemental agreements
• Contract/agreement
• Addenda
• Bid/proposal
• Special provisions
• Plans
• Standard plans
• Standard specifications
• Reference specifications

Cost Control

Cost control involves measuring the real expenses of a project against the projected expenses detailed in the bid. If the actual costs surpass the project's budget, action needs to be taken to control expenses and reduce costs.

Labor represents the largest segment of costs. Labor cost is the total of all payments made to employees, including hourly wages, payroll taxes, health benefits, insurance contributions, and vacation pay. These costs need to be accurately calculated and recorded by the business. Different labor classifications may require different calculations for labor costs. It's important to mention that wage settlements could impact these rates.

Issues such as inefficient workers, wasted materials, excessive downtime, unnecessary overtime, and high employee turnover may lead to an unwarranted increase in total cost. A contractor should establish efficient strategies to manage labor costs, ensuring high-quality output at a lower cost through effective labor utilization. This can be achieved through proper planning, scheduling, good record-keeping, effective inventory management, and hiring and training the right workforce.

Types of Labor Cost

Direct labor cost is the cost a business incurs for workers who are directly involved in a project. These costs can be allocated to a specific job and estimated ahead of time, but they ultimately depend on the amount of time required to finish a job.

Indirect labor cost refers to costs a business incurs for workers who are not directly participating in a project, but provide assistance or support to direct laborers to complete the project.

Tools and Techniques for Cost Control

Numerous elements can impact the cost throughout a project's lifecycle, leading to changes in cash flow. These aspects can include:

• Delays in the timeline;
• Overestimation of costs;
• Alterations in orders and corresponding cost variations.

Predicting these factors accurately can be difficult. As a result, cost control often relies on comprehensive schedules and plans formulated during the early stages of project planning.

Cost control outputs are adjustments made to align the actual project performance with the initial project plan. If this alignment does not occur, cost estimates may need to be updated. This change should be communicated to the project owner so adjustments can be made to cost estimates that may influence other parts of the project plan.

To further control labor costs, it might be beneficial to employ workers from outside the company. This could involve hiring extra laborers or even labor from unions. Note: While outsourcing labor can be costly, the advantages typically balance out the costs. A company can leverage external expertise without having to invest in additional training. To ensure outsourced labor remains cost-effective, companies should prioritize the creation of daily work schedules.

Home Improvement Contract

A "Home improvement" is defined as any modification to the interior or exterior of a residential property. It encompasses:

“...the repair, remodeling, alteration, conversion, or modernization of, or addition to, real or residential property. This includes, but is not limited to, the construction, erection, replacement, or enhancement of driveways, swimming pools, including spas and hot tubs, terraces, patios, awnings, storm windows, landscaping, fences, porches, garages, fallout shelters, basements, and other improvements to the structures or land adjacent to a dwelling house. Home improvement also implies the installation of home improvement products or the provision of home improvement services.” (Business and Professions Code section 7151)

A home improvement contract represents a legally binding agreement between a contractor and a property owner, a contractor and a tenant, or a home improvement salesperson and property owner or tenant. The contract encapsulates all labor and services to be rendered and all materials to be provided. (Business and Professions Code section 7151.2)

Down Payment

The Contractors State License Board (CSLB) caps the down payment at either $1,000 or 10% of the entire contract price, whichever amount is smaller. Following this, a contractor can only issue incremental progress payments for work or materials after the materials have been delivered to the work site or the work itself has been completed. An exception to the down payment cap exists for contractors holding a “Blanket Performance and Payment Bond”. These contractors can ask for larger down payments than contractors who have the mandatory $15,000 bond required for all contractors.

Owners have the option to use a joint check as a safeguard to guarantee that a subcontractor or a material supplier is paid. In this case, the owner writes a joint check in the name of both the contractor and the subcontractor or material supplier. The “Mechanics’ Lien Law” serves to protect contractors from owners who unjustly refuse payments. This law allows the contractor to place a property lien where the work was carried out. This way, the contractor can avoid any losses from unfair refusal of payment by the owner.

Note: In California, unlicensed contractors do not have protection from payment laws. Owners are not obligated to pay and can refuse payments to unlicensed contractors, even if a written contract was signed between the owner and contractor. This is another reason why contractors should ensure they are properly licensed before they bid on any project.

Cancellation of Home Improvement Contract

Homeowners are protected by numerous state laws that allow them to cancel a contract without facing penalties. These laws are intended to safeguard consumers from high-pressure sales tactics and door-to-door salespeople. Vendors of home goods or services are obligated to provide a predetermined period for buyers to reflect on the purchase of the proposed goods or services.

Until the expiration of the cancellation period, the contractor is prohibited from performing any services beyond preliminary tasks, such as securing building permits. During this period, the buyer has the right to cancel the contract without incurring any penalties or obligations.

Three-Day Right to Cancel

Buyers should be given a "Three-Day Right to Cancel" notice. This falls under the jurisdiction of the "Home Solicitation Sales Act" and the "Federal Truth in Lending Act".

• Home Solicitation Sales Act: This act allows the buyer to cancel any sales transaction of more than $25 occurring at the buyer's home or any location distant from the contractor’s main business premises, within 3 days after signing the contract.
• Business and Professions Code 7163 of the Federal Truth in Lending Act: According to Code 7163, a contract becomes non-enforceable if the contractor arranges a loan, refers the buyer to a lender, or provides financing, unless all parties agree to the loan and the three-day cancellation period has passed.

In order to cancel the contract, the buyer must notify the contractor in writing of their decision to not be bound by the contract. The specifics of the right to cancel, including the refund of any money or materials, are described in more detail in the following sections.

"THREE-DAY" RIGHT TO CANCEL

In a clear, 12-point boldface type, the notice should be:

“Within three business days, you, the buyer, hold the right to revoke this contract. You are entitled to cancel by sending a written notice via email, mail, fax, or directly delivering it to the contractor’s business location before the end of the third business day since you received a copy of the contract with this notice, duly signed and dated. Make sure to include your name, address, and the date when you received the signed contract copy and this notice.

If you opt for cancellation, the contractor is bound to return any payment you made within 10 days upon receipt of your cancellation notice. On your part, you are obliged to make any goods received under this contract available to the contractor at your residence, maintaining them in as good condition as when you received them. Alternatively, if you prefer, you may follow the contractor’s guidelines on returning the goods at their expense and risk. If you make the goods accessible to the contractor and they do not retrieve them within 20 days from your cancellation notice date, you are entitled to keep them without any additional obligation. However, if you fail to make the goods available to the contractor, or if you agree to return the goods to the contractor but fail to do so, you are still liable for fulfilling all obligations under the contract."

The buyer should date and sign this notice. If the contract includes a check box in at least 12-point boldface type, the notice can be attached to the contract. The check box statement should be:

“The contractor is legally obligated to provide you a notice explaining your cancellation rights. Tick the check box if the contractor has provided you the ‘Notice of the Three-Day Right to Cancel.’”

The contract can be voided only if the contract was negotiated at a location other than the contractor’s standard place of business.

Seven-day Right to Cancel

Post-disaster Home Repair Provision

In the event of damage caused by a disaster (fire, earthquake, riot) that has been declared a “State of Emergency” by the President of the United States or the Governor, a “Seven-day Right to Cancel” notice must be granted to the client alongside any signed repair contract. Within this seven-day period, the contract can be annulled by delivering a written notice via email or mail.

Should the project be cancelled, the contractor is obliged to refund any payments received from the owner. The owner, in turn, must return any materials supplied by the contractor within a span of 10 days. If the contractor fails to retrieve their materials within 20 days of the cancellation notice, the owner is entitled to keep them.

Price Gouging

As per Project Code (PC) §396, a contractor is prohibited from selling, repairing or offering construction services at a price that is more than 10% above the regular price for a duration of 180 days following a natural disaster or state of emergency. This restriction can only be lifted if the contractor can justify that the price increase is due to an increase in normal material or labor costs.

Breaching PC §396 is a misdemeanor that may result in a county jail sentence of up to one year, a $10,000 fine, or both. Such a violation is considered an unlawful business practice and unfair competition under the California Business and Professions Code, which may give rise to additional civil penalties.

Complaints and Warranties

Should a contractor extend a warranty for work performed or materials used, it must be issued in written form. The warranty should clearly outline:

• The scope of work it covers;
• The warranty's term;
• Any manufacturer-provided warranties for appliances or materials used in the project by the contractor.

A timeframe of four (4) years is provided to consumers to lodge a complaint with the CSLB concerning a flawed project. This period could be extended if the contract includes extra warranties.

The contractor bears an additional responsibility for construction defects:

• Patent Defects (defects that are evident or visible) – 4-year liability;
• Latent Defects (structural) – 10-year liability.

Pursuant to the Bid and Proposal (B&P) Code §7028(d), the CSLB has the authority to probe into unlicensed contractors for up to four (4) years since the occurrence of an illegal act.

Retention

Retention (retainage) pertains to a certain percentage of a contract's price that an owner retains until the project is successfully completed as per the agreement. The retained amount is paid to a contractor or a subcontractor upon completion and approval of the project. The contract should clearly specify these amounts; prime contractors usually retain the same percentage from their subcontractors. A common retention amount is 10%, which is deducted from progress payments.

Final Payment

A request for the final payment includes the sum of the final payment and any retentions that are due. This payment is made after the final inspection, acceptance of the project by the owner, and submission of the necessary documents.

Commencement of Work

The contractor is required to include the following notices in the contract with regards to the commencement of work:

• A definition of what constitutes substantial commencement of work;
• A notice indicating that the contractor's failure to substantially start work within 20 days from the agreed starting date (unless there is a legitimate reason), breaches the Contractors License Law.

Contracts

A contract is a legally binding agreement between two or more individuals or businesses, involving a promise or set of promises, and can be legally enforced. A contract can be implied, verbal, or written.

• Implied contract: This is an agreement established through the actions of the parties involved, rather than through any verbal or written contract. It ensures that the work will be performed to an acceptable standard, materials are of good quality, and the contractor will receive fair compensation.
• Verbal contract: This is a contract agreed upon verbally but not written down. It is usually suitable for small jobs, but it can be difficult to enforce in case of a disagreement compared to a written contract.
• Written contract: This is a contract that specifies all duties and responsibilities in writing. A written contract provides the best guarantee for all parties that the terms of the agreement will be met. If a verbal contract is later put in writing and signed, only the written contract is admissible evidence in a lawsuit.

Key Elements of a Contract

For a contract to be recognized as legally valid and enforceable, there are several essential elements that it must contain. The absence of any of these elements can result in the contract being deemed invalid.

• Offer;
• Acceptance;
• Consideration;
• Legality.

In most cases, a contractor submits a proposal or offer. This offer can be accepted, declined, or negotiated by the client. If the client approves the offer, it must be in line with the mirror image rule, meaning the acceptance should be of the original offer without any modifications. If the client refuses the offer, the offer becomes null and void. A counter-offer introduces changes to the terms or price of the contract, but the contractor is not obligated to agree to these changes.

Consideration refers to the exchange of something valuable or a service between the parties involved. For instance, the client provides payment in exchange for the contractor's work and materials. A contract lacking consideration, containing a false or unwarranted promise, is not recognized as a valid contract.

The final element ensuring a contract is enforceable under law is legality. This means the contract adheres to applicable laws. Any contract that breaks the law is deemed invalid.

A contract can be altered or updated through a change order, which includes additions or removals of work, substitutions of materials or equipment, adjustments to the completion date, or other similar changes. A signed change order acts as an extension to the original written contract.

A contract valued at $500 or greater must be in written form. It is best practice to have a written contract for all jobs undertaken by the contractor, as it clarifies the responsibilities of both parties and makes the contract easier to enforce. This is the main reason why a contractor’s license is required for any jobs over $500.

A contract valued below $500 can be verbal, unless both parties request a written contract. Both verbal and written contracts are equally binding. If a contract changes from verbal to written, only the written contract will be accepted as evidence in court. Therefore, any modifications to a contract must be written.

When a person who is not the owner but represents themselves as such interacts with a contractor, the contractor must include a signed statement in the contract identifying the actual property owners. If an authorized agent of an owner contracts with a contractor, the agent must sign a statement affirming legal responsibility for contract payments.

Methods of Contracting

There are several ways to approach contracting, but the two most common approaches are single prime and multiple prime contracting.

Single Prime: In this method, the owner engages a single company to carry out the whole project from beginning to end under one bid. This company may then employ subcontractors to carry out specific tasks. The extent of work and responsibility for a single prime contractor can vary. For instance, in a turnkey model, the contractor is also responsible for securing financing and land for the project. The owner might hire an architect for designing the project or a manager for overseeing the work, but all the work is covered under a single bid accepted by the owner.

Multi-Prime: Under this method, each component of the work (such as framing, plumbing, electrical work) is contracted out to an individual contractor. While this approach demands that the owner actively manages various prime contractors, it can be less costly than single prime contracting. This is because multiple bidding stages are involved and there’s no markup for subcontractors.

Service and Repair Contracts

Service and Repair Contracts are a special category of contracts and are applicable only if ALL the following four conditions are met:

1. The total contract cost does not exceed seven hundred fifty dollars ($750).
2. The work order is initiated by the customer, requesting the contractor's services.
3. The contractor does not sell additional goods or services to the customer that are not necessary for resolving the specific issue that led to the customer's initial request.
4. No payment is required until the work is fully completed.

If a residential remodeling contract does not meet all these four criteria, it must be composed as a Home Improvement or Swimming Pool Contract.

The right to cancel a Service and Repair contract is nullified once the contractor provides a signed and valid contract and commences work.

Service and Repair Contracts share many characteristics with standard Home Improvement Contracts. However, they have some distinct elements according to the Business and Professions Code 7159.10:

REPLACEMENT PARTS

The contract must include a heading titled "The law requires that the contractor offer you any parts that were replaced during the service call. If you do not want the parts, initial the checkbox labeled ‘OK for contractor to take replaced parts.'"

SERVICE CHARGES

If a service charge is applicable, the contract must include a heading "AMOUNT OF SERVICE CHARGE," followed by the amount of the service charge, and the statement:

"You may only be billed for one service charge, which includes any trip charge or inspection fee."

RIGHT TO CANCEL

The contractor must inform the customer that the right to cancel the contract is forfeited once the contract is signed and work begins. The contract, or an attachment to the contract, must include the following statement near the space reserved for the customer's signature, in 12-point or larger boldface type, which the customer should date and sign:

"YOUR RIGHTS TO CANCEL BEFORE WORK BEGINS

(A) You, the buyer, have the right to cancel this contract until:

1. You receive a copy of this contract signed and dated by you and the contractor; and
2. The contractor starts work.”

Disclosure Requirements

According to the Contractors License Law, specific statements and notices must be included in the contract. This information should be presented in a 10-point typeface or larger, unless the Business and Professions Code states otherwise, and headings should be displayed in 10-point boldface type.

• For contractors who have had their licenses suspended or revoked twice or more within an eight-year timeframe, there is an obligation to disclose all suspensions or revocations related to violations in the last eight years. This disclosure is a prerequisite before entering into a contract to perform work on residential property comprising four or fewer units.
• Contracts for single-family dwellings (kept by the owner for a minimum of one year) must include provisions about additional work and change orders (Example 5.1), as well as the execution of extra or change-order work (Example 5.2).
• Contracts that necessitate General Liability Insurance and Worker’s Compensation should be accompanied by disclosure attachments (Example 5.3).
• All contracts are required to contain a Mechanics’ Lien Warning, which educates the owner about their rights and responsibilities, as well as those of the contractor, in relation to the Mechanics’ Lien Warning. Refer to Example 5.4.
• A notice concerning the CSLB must be included in a typeface size of 12-point or larger. See Example 5.5.

Contract Provisions

Clarity and Brevity: The contract's conditions ought to be easily comprehensible and succinct for all parties involved. Some clauses or provisions are essential to make sure all specifics are covered.

Contract Provisions: Essential elements to be incorporated in a contract are:

• Cost and payment arrangements;
• Responsibilities of all parties;
• Extra stipulations;
• Termination in case of contract violations.

Obligations of Contractor and Owner

The responsibilities in a contract should be explicitly defined and should involve the duties of both the contractor and the owner.

Contractor’s Obligations: Here are some primary obligations a contractor should fulfill:

• Maintaining appropriate licensing.
• Acquiring building permits and ensuring all necessary materials and supplies are ordered and delivered to site.
• Providing the necessary labor to complete the job correctly.
• Scheduling and ensuring all required inspections are fulfilled and verifying that all work is code-compliant.
• Guaranteeing the work is completed according to the agreed-upon plans and specifications.
• Maintaining a clean job site and removing all debris after the completion of the project.

Owner’s Obligations: The owner has certain responsibilities, which include:

• Making sure all project plans and specifications are approved in a timely manner.
• Verifying the project adheres to zoning specifications.
• Making payments according to the specified payment schedule.
• Paying for all required permits, assessments, and other public agency charges.
• Providing all necessary surveys and a legal description of the property.
• Ensuring the construction site is accessible in a timely manner.

Both lists of obligations can be tailored to fit the specific job. Most contracts stipulate mutual agreement for responsibilities that are assigned to another party.

Supplemental Conditions

Supplemental conditions are typically drafted as separate documents to modify the general terms of the contract. They are tailored to the individual needs of each project and may detail aspects such as specific project procedures, legal needs, and insurance necessities.

Getting Paid

The contract will usually outline the method of price calculation and exact payment terms. This could be a lump-sum, cost-plus, unit-price, or guaranteed-maximum cost contract. All charges should be included in this. The total cost, initial payments, fees, and the payment schedule should be part of the detailed cost breakdown.

Progress Payments: These are partial payments made after certain stages (milestones) of construction are completed as agreed upon. These payments are usually calculated by subtracting the difference between the completed work and materials and the predetermined schedule of unit costs. Contracts typically detail three (3) or more progress payments that account for 90% of the work during the construction phase, with a 10% retention.

Progress payments serve three purposes:

• They protect the owner by establishing a schedule for the contractor.
• They enable a contractor to cover the costs of labor and materials as they arise.
• They safeguard all parties in the event of a contract breach.

The Prompt Payment Act: This federal act ensures timely payment for all contractors working on federal government projects. Late payments are subject to interest penalties. Payments for construction projects must reach the prime contractors within 14-days after a payment invoice has been submitted. Subcontractors must be paid within 7 days after a prime contractor has received payment, or the prime contractor must pay interest penalties.

Liens: A lien is a security measure for any unpaid labor or materials used to improve a property by contractors and material suppliers. The lien prevents the owner from selling the said property with a clear title. A court may order the property to be sold, and the proceeds from the sale are used to pay the contractor, subcontractors, material suppliers, or laborers. Liens are discussed in more detail in Chapter 4 – Mechanics Liens and Notices.

Breach of Contract

A contract is considered breached when either a contractor or an owner fails to fulfill their outlined responsibilities in the contract. This can happen through outright refusal to perform the contract, committing an act that infringes upon the contract, or obstructing the other party from performing their contractual obligations.

Breaches can be categorized as either material or immaterial.

Material Breach: This refers to a significant failure from any party to adhere to the terms and conditions of a project, resulting in a severe violation of the contract that negatively impacts the contractual agreement. Instances of material breaches include a contractor stopping work on an ongoing project or an owner refusing to pay for completed work. This type of breach terminates the contract and often leads to legal proceedings. In such a scenario, the injured party may be awarded monetary compensation for the losses incurred as a result of the breach. These damages might be specified in the contract and are known as liquidated or stated damages.

Failure to complete a contract within the agreed-upon timeframe also constitutes a breach of contract. Even if no specific timeline for the project's completion is provided in the contract, the contractor is expected to complete the project within a reasonable timeframe. Unexcused project delays make the contractor liable for liquidated damages for the ‘loss of use’. Some contracts may specify a daily liquidated damages rate. For instance, if the contractor agrees to a $300 per day rate and the project is delayed by 50 days, the contractor would owe $15,000 in liquidated damages. However, if an owner seeks liquidated damages, they cannot also sue for actual damages.

The injured party must file a lawsuit for a breach of contract within a certain deadline. This timeframe depends on the type of claim and the case's circumstances. If a claim is not filed before this statutory deadline, the right to file may be lost.

Immaterial Breach: Also known as a partial breach, an immaterial breach is less severe as it pertains to minor details of the contract and does not affect the overall agreement, nor does it void the contract. In this case, the injured party can only sue for the actual value of the damages.

Litigation

When a significant breach of contract occurs, it often leads to legal proceedings. Civil cases, which can be brought in both small claims and superior courts, require demonstrating that a contract was in place, that the owner or contractor experienced substantial harm due to unpaid debts or a failure to fulfill the contractual obligations, and that damages should be awarded.

Superior Court

The Superior Court, also known as the "trial court", is the setting where a judge (and occasionally a jury) makes a decision on a case after hearing testimonies and reviewing evidence. The Superior Court deals with small claims as well as civil cases. A contractor is obligated to report a decision from a small claims or civil court to the CSLB within 90 days.

If the defendant (the person being sued) lodges an appeal, the case is escalated from the Superior Court to the Appellate Court.

Small Claims Court

Small Claims Court is a section of the county court system designed for the speedy and cost-effective resolution of disputes, without the need for a lawyer. Small claims lawsuits can be filed for matters such as property damage, personal injury, violation of verbal or written agreements, fraud, and similar issues. Small claims are lodged at the office of the county clerk. See the below details on the maximum amounts that can be claimed in Small Claims Court.

Individual Suing: $10,000*
‍Business Suing: $5,000

• An individual cannot file more than two claims over $2,500 in a year.

The statute of limitations (the time limit to file a claim) is between 2 to 4 years after the event, depending on the nature of the claim. When suing a government or public agency, the deadline to file a claim with that agency is six (6) months.

Attorney Representation

If you prefer to have legal representation, a limited civil lawsuit can be initiated in the local superior court in place of a small claims case. Such lawsuits are for values up to $25,000, and entail considerably higher fees. All rules pertinent to a regular civil case apply, but the case may take up to one (1) year to reach trial, as opposed to the three (3) months for small claims. If a lawyer provides guidance without actual representation in court, it is called a limited-scope lawyer. For lawsuits exceeding $25,000, they are referred to as unlimited civil cases and are subject to the same filing procedures and norms as regular civil cases.

Arbitration

Arbitration serves as an alternative to initiating a lawsuit. Under arbitration, a dispute is resolved by a neutral third party, which can be a single arbitrator or a panel. Compared to regular lawsuits, arbitration leads to quicker dispute resolution. There are also arbitrators specialized in resolving construction-related disputes. The plaintiff (the party who files the complaint) must notify the CSLB or the defendant of their intention to arbitrate. Consent to the process must be given by all parties.

Arbitration can be binding or non-binding, which are defined as:

• Binding arbitration implies that all parties have relinquished their right to a trial and cannot contest the arbitrator's decision. CSLB arbitration falls under this category.
• Non-binding arbitration allows either party to demand a trial if they disagree with the arbitrator's decision.

Arbitration through CSLB

Two free-of-cost arbitration programs, Mandatory and Voluntary Arbitration, are offered by the CSLB for contractors in good standing. Eligibility for these programs requires:

• Maintenance of a good standing status with the CSLB;
• No history of violations or pending disciplinary actions;
• Absence of prior commitments to private arbitration.

See further details below.

Mandatory (Less than $15,000):

• For the CSLB to handle the complaint, both parties must be present.
• If the complainant fails to return the CSLB-provided form within 30 days, the complaint might be closed. If the respondent doesn't return the completed form within 30 days, the arbitration decision will proceed without the respondent.
• Both parties have the right to self-representation or to hire a lawyer at their own expense.
• The decision of the arbitrator is binding. Compliance with the decision must be achieved within 30 days; otherwise, their license may be suspended/revoked.

Voluntary ($15,000 - $50,000):

• Both parties voluntarily participate.
• If neither party returns the completed CSLB form in 30 days, the complaint might be closed.
• Both parties have the right to self-representation or to hire a lawyer at their own expense.
• The decision of the arbitrator is binding. Compliance with the decision must be achieved within 30 days; otherwise, their license may be suspended/revoked.

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Arbitration in a Private Setting

Private arbitration occurs independently between the two parties involved, without the involvement of the CSLB, and is conducted by an arbitrator chosen by both parties. Contractors are required to report the outcome of private arbitration to the CSLB in written form within 90 days, failing which their contractor's license may be suspended.

Violation of Contract

Violation of contract, either significant or minor, happens when either the owner or contractor does not fulfil their obligations as per the contract's terms and conditions. Examples of such violations include:

• Refusal to adhere to the contract;
• Committing an act that contradicts the contract;
• Hindering the other party from fulfilling their contractual duties.

Violations can be either significant or minor.

Significant Violation: This refers to a grave failure by any party to perform the duties as stated in the contract. This kind of violation is severe and adversely impacts the contractual agreement. For instance, a contractor discontinuing work on an ongoing project, or an owner declining to pay for finished work constitutes a significant violation. This type of violation ends the contract and often results in legal proceedings (lawsuit). In such a situation, the affected party may be compensated for the losses incurred due to the violation. These compensations may be outlined in the contract and are known as stipulated or declared damages.

Violation of contract can also happen if a project is not completed within the specified timeframe. If there's no timeframe mentioned in the contract, the contractor is obligated to complete the project within a reasonable timeframe. If there's an unjustified delay in the project, the contractor has to pay stipulated damages for the 'loss of use'. Sometimes, the contract might specify a daily rate for stipulated damages. For instance, if the contractor agrees to a $300 per day charge, and the project is delayed by 50 days, the contractor owes $15,000 as stipulated damages. If an owner sues for stipulated damages, they can't sue for actual damages.

A lawsuit for violation of contract must be filed within a certain deadline. This deadline depends on the type of claim and the case's circumstances. If no claim is filed before the statutory deadline ends, the right to file a claim might be forfeited.

Minor Violation: Also known as a partial violation, a minor violation is less severe as it only violates minor details and does not affect the overall agreement or annul the contract. In this case, the affected party can only sue for the value of the damages.

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