I am a newly licensed California contractor, "B" General, specializing in re-model. I am just getting started and working on a shoe-string b...

Question

I am a newly licensed California contractor, "B" General, specializing in re-model. I am just getting started and working on a shoe-string budget. I met with a client here in Palm Springs over a period of several weeks. We discussed the scope of the work in great detail several times. He explained how the work had been first started by a contractor and friend he knew for years, but it went south quick, and he terminated the deal. He said he lost money, and was now on a tighter budget. He hired a second contractor (someone I actually know), to do the main structural work. And he hired me to do quite a bit of other work and the finishing work. We came to terms, and he signed the contract and gave me a $9000.00 deposit. This was three weeks ago. I am supposed to begin my part of the project once the second contractor is through (approx 1 or 2 more weeks). But, in the interim, he has found a couple other sub-contractors to do much of the work in my contract cheaper (I assume they are unlicensed). He just informed me that he found someone else to do the tile, which is about $8000 gone out of my contract. What do I do? The way things are going, he'll be wanting money back. I have spent much of the deposit, on workers comp, general liability, and other things in preparation for the project. How can a client sign a contract...I'm ready willing and able to fulfill my end...and before I am supposed to start, he pays the deposit, shops the contract around, and then asks for his deposit back?

Answer

I'm afraid you may be getting an early lesson in understanding the law regarding contracts, construction law in particular, and business in general. With regard to home improvements (not commercial jobs), California law prohibits contractors from taking a deposit larger than $1,000 or 10% of the job, whichever is less. Your $9,000 deposit would likely be found to be a violation and could result in discipline from the Contractors State License Board if this is a residential project. Also, you are not allowed to charge for work that has not yet been completed, aside from that small deposit.

Again, if this is a residential remodel, I'm guessing that your contract does not conform to California state law, because if it did, it would have had a disclaimer regarding the maximum deposit.

That all said, once the client signed your contract, it would technically be binding and he can't just cancel it because he found a better deal later. However, you'd have problems suing to enforce it because of the deposit issue (again, if it is residential), and the fact that work has not yet started. Even if you could show that you spent money in reliance on the contract (such as for project materials) and are entitled to keep the deposit, paying for workers comp and a CGL policy probably wouldn't qualify, as those things are not specific to the project. Had you started work, you might be entitled to recover for your time, materials, profit, etc.

If there is any way you can try to match the cheaper contractor's price and keep the job, maybe even at a small loss, it would be far better than having the owner ask for money back - particularly if you don't have it to give back to him. If you need to 'compete' to keep the job, nicely remind the client that you have a signed contract, that he agreed to the price, that in reliance on his word you bought materials and made preparations for the project, that you are a licensed and insured contractor, that you are committed to doing good work, etc. The more you show him why he should stay with you, the better off you'll be.

Also, congratulations on obtaining workers' comp insurance and a general liability policy. Already you are setting yourself apart from many contractors who just assume they don't need it, or don't want to pay for it.

On another note, if you find out that he ends up using an unlicensed person to do the work, feel free to report that person to the CSLB while the project is ongoing.

Good luck!

Answer

Ms. Darrow gave you a great answer. As a freshly minted contractor, you should have known better than to immediately commit two license violations - excessive deposit and applying project funds to expenses not directly related to the project. Don't they teach that in the prep class and test it on the exam anymore?

The only thing I can suggest in addition is if you can identify the "subs" who he got to do the work, and they are actually unlicensed, file a CSLB complaint on them and get them shut down. He'll have to come back to you. These days CSLB is on the warpath against unlicensed work, more so than your technical violations.