Contractor Law Class

Contract Requirements and Execution

Official exam weight: 21%

Official subtopics

  • Home improvement contract content and cancellation notice
  • Down payment limits and progress payments
  • Required disclosures and the three-day right to cancel
  • Change orders and written contracts over $500
  • Lien notices in contracts

Study note

Contract Requirements and Execution is the largest Law and Business section, at about 21%. Its official outline includes bidding, cost control, project organization, contracts, and payments. Think of a bid as a plan for doing the described work at a price the business can support. Before calculating, confirm the scope, drawings and specifications, site conditions, required quality, schedule, and which tasks will be performed by employees or subcontractors. An estimate based on an incomplete scope can be arithmetically neat and still miss the work.

Build the estimate from quantities and resources. Measure or count the required materials, obtain current supplier and subcontractor quotes, and include relevant delivery, freight, sales tax, permits, and fees. Estimate labor hours by task and apply the employer's full cost for those hours, including applicable payroll taxes, benefits, and required insurance. Identify equipment needed and its project share of ownership, operating, or rental expense. Record quote dates and assumptions so an expired price or changed plan can be found before the bid is submitted.

Separate job costs from shared business costs. Direct costs can be traced to the project; indirect costs support multiple jobs or the company generally. Allocate shared overhead using a consistent basis that fits the business, and check that an item is not counted once in an equipment rate and again in another cost pool. Federal Acquisition Regulation section 31.105 discusses construction cost treatment for covered federal contracts; its rules govern those federal situations and are not a universal pricing law for California private work.

Then decide how the price covers estimated cost and the contractor's planned return. Markup is an amount added to a stated cost base; margin is profit divided by the final selling price. They are different percentages because their denominators differ. For illustration only, suppose direct job costs are $8,000 and the allocated overhead is $2,000. A 20% markup on that $10,000 cost base adds $2,000, producing a $12,000 price before any separately required taxes or contract adjustments. The $2,000 is 16.7% of the $12,000 selling price. This is just arithmetic, not a recommended rate: market conditions, risk, scope, and business needs vary, and no single markup fits every job.

Once accepted, the estimate becomes a useful job budget. Compare actual labor hours, purchased quantities, equipment time, subcontractor invoices, and schedule progress with the estimate while work is underway. A variance found early may allow the contractor to correct a purchasing or coordination problem; it does not automatically authorize charging the customer more. Document scope changes and follow the contract's approval process before performing changed work. Caltrans publishes detailed procedures for cost adjustments on its own public works contracts, which can illustrate cost records and change-order review but should not be treated as the private-job rulebook.

California public bidding also has its own procedural rules. Public Contract Code section 4104 addresses information bidders must list for covered subcontractors; section 4107 limits when an awarded prime may substitute a listed subcontractor. Read the project's invitation and specifications alongside those statutes. These requirements apply to the covered public work; they do not turn every private estimate into a public bid. For wage assumptions on a public works job, use the applicable DIR determination and requirements rather than a remembered hourly figure.

The contract remains the control document after award. For home improvement work, review the written scope, required notices, cancellation terms, payment schedule, and change documentation against the Business and Professions Code and CSLB regulations. A payment schedule should be checked against the legal limits and the work or materials it covers; a contractor should not rely on an informal promise to cure a defective contract later. Use the government references below to reach the governing text and the agencies' current instructions.

For practice, work in order: define the scope, calculate quantities and labor, add the job's other direct costs, allocate overhead once, choose and explain the price basis, then compare the contract and bid instructions for required terms and disclosures. Keep the arithmetic separate from the legal question: a mathematically sound estimate does not excuse a missing subcontractor listing, an unlawful payment term, or an unapproved change.

This is an original study note written for this site. It summarizes what the section covers so you can plan your studying; it is not legal advice. Practice questions in this section cite the underlying California statutes and regulations directly.

Government references for this section

These official guides and laws supplement the original study note. Check each source's scope and current version; statutes and regulations control California legal duties.

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Sources behind this section

Official documents cited by practice questions in this section, ranked by how many questions cite each one, from the September 27, 2026 law snapshot.

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Statutes (52)

Law snapshot date: September 27, 2026