A construction contract is the single most important document in any building project. It defines who does what, when, for how much, and what happens when things go wrong. Yet many owners and contractors sign agreements without carefully reviewing the terms—sometimes because the contract is long and technical, and sometimes because they trust the other side.

That trust is often misplaced. In our experience representing both property owners and contractors across California, we see the same preventable problems arise from poorly drafted or one-sided contracts. The good news: most of these issues are identifiable before you sign.

Below is a practical checklist of red flags, organized by whether you are an owner hiring a contractor or a contractor taking on a project.

What Red Flags Should Property Owners Watch For in a Construction Contract?

If you are hiring a contractor for a residential remodel, commercial build-out, or any other construction project, these are the warning signs that should prompt a closer look—or a conversation with a construction attorney.

1. Vague or Incomplete Scope of Work

The scope of work is the heart of any construction contract. It should describe the work to be performed in enough detail that both parties know exactly what is—and is not—included. A vague scope (“renovate kitchen as discussed”) virtually guarantees disputes later about whether specific items were part of the deal. Look for specific materials, dimensions, finishes, and quantities. If the contract references plans or specifications, make sure those documents are actually attached.

2. No Timeline or Completion Date

A contract that lacks a start date, a substantial completion date, or interim milestones gives the contractor no enforceable obligation to finish on time. Without a timeline, you have limited legal recourse if the project drags on for months. California home improvement contracts under Business & Professions Code §7159 must include the approximate start and completion dates.

3. Inadequate Insurance Requirements

Your contract should require the contractor to carry, at minimum, commercial general liability (CGL) insurance and workers’ compensation coverage, and to provide certificates of insurance before work begins. Without these protections, you could face personal liability if a worker is injured on your property or if the contractor’s work damages neighboring properties.

4. Pay-When-Paid Clauses (Owner Perspective)

If you are an owner contracting directly with a general contractor, “pay-when-paid” or “pay-if-paid” clauses may not affect you directly. But you should be aware that your GC may be using these provisions to delay payments to subcontractors, which can lead to mechanics liens on your property and disrupted work.

5. One-Sided Indemnification

An indemnification clause requires one party to cover the other’s losses. Watch for provisions requiring you to indemnify the contractor for losses caused by the contractor’s own negligence—this is sometimes buried in fine print. A fair contract allocates indemnification based on fault.

6. Missing Change Order Procedures

Change orders are inevitable in construction. Your contract needs a clear, written process for proposing, approving, pricing, and documenting changes. Without one, you may face surprise charges or disputes about what was authorized. Note that SB 440 (the Private Works Change Order Fair Payment Act), effective January 1, 2026, establishes a statutory framework for change order claims on private projects—including mandatory response deadlines and 2% monthly interest on late payments.

7. No Dispute Resolution Mechanism

If the contract is silent on how disputes will be resolved, you may end up in expensive litigation as the default. Look for a dispute resolution clause that specifies mediation, arbitration, or a stepped process (mediation first, then arbitration or litigation). SB 440 now requires non-binding mediation for disputed change order claims on private projects entered into after January 1, 2026.

8. Missing Warranty Provisions

A warranty provision defines what the contractor stands behind after the project is complete, and for how long. Without one, you may have difficulty holding the contractor accountable for defective work that appears after final payment. At minimum, the contract should include a one-year warranty on workmanship and materials, with clear procedures for submitting warranty claims.

9. No Contractor License Number Listed

California law requires licensed contractors to include their license number on contracts, proposals, and advertising. A missing license number is a red flag that the contractor may be unlicensed. You can verify any contractor’s license status through the Contractors State License Board (CSLB) at cslb.ca.gov.

What Red Flags Should Contractors Watch For Before Signing a Contract?

Contractors face their own set of risks. These are the provisions that can put your cash flow, your profit, and your legal rights at risk.

1. Excessive Retention

Retention is the percentage of each progress payment that the owner withholds until the project is complete. Historically, 10% retention was standard on private projects in California. Under SB 61 (effective January 1, 2026), retention on private construction projects is now capped at 5%, and this cap cannot be waived by contract. The 5% cap applies to owner-to-contractor, contractor-to-subcontractor, and sub-to-sub relationships. A contract that specifies retention above 5% for projects starting after January 1, 2026 is unenforceable on that point (with limited exceptions for residential projects of four stories or less that are not mixed-use).

2. Unfair Change Order Requirements

Some contracts require the contractor to perform all change order work before pricing is agreed upon, or they give the owner unilateral authority to direct changes without adjusting the contract price. SB 440 now provides contractors with statutory protections: owners must respond to change order claims within 30 days, pay undisputed amounts within 60 days, and participate in mediation for disputed claims. Contracts that attempt to override these protections should be flagged.

3. One-Sided Termination Clauses

A termination-for-convenience clause allows the owner to cancel the contract at any time, for any reason. While these clauses are not inherently unreasonable, they become problematic if they do not provide for payment of work completed, materials procured, and reasonable demobilization costs. A fair contract gives both parties the right to terminate under defined circumstances, with clear payment obligations.

4. No-Damage-for-Delay Clauses

These clauses state that the contractor’s only remedy for owner-caused delays is a time extension—not money damages. In practice, this means you absorb the cost of extended overhead, idle equipment, and inefficiency caused by someone else’s delay. California courts have enforced these clauses in some circumstances, so it is critical to negotiate them before signing.

5. Broad Indemnification Requirements

Watch for indemnification clauses that require you to indemnify the owner for losses arising from the owner’s own negligence. Under California Civil Code §2782, certain types of broad-form indemnity provisions in construction contracts are void and unenforceable—but the analysis depends on the specific contract language and the type of project. Have your attorney review any indemnification clause carefully.

6. Unreasonable Liquidated Damages

Liquidated damages clauses impose a fixed daily or weekly penalty for late completion. While these clauses are enforceable in California if they represent a reasonable estimate of actual damages, an unreasonable amount can function as a penalty. If the proposed liquidated damages amount is disproportionate to the likely actual harm from delay, push back during negotiations.

7. Pay-If-Paid Clauses

A “pay-if-paid” clause conditions your payment on whether the owner pays the general contractor. Unlike “pay-when-paid” clauses (which are generally treated as timing mechanisms), true pay-if-paid provisions can eliminate your right to payment entirely if the owner defaults. California courts have been skeptical of these clauses, but clear contractual language can shift risk to you. Avoid them or negotiate alternatives.

What California-Specific Contract Requirements Should You Know About?

Beyond general contract principles, California imposes several statutory requirements that apply to specific types of construction contracts.

Home Improvement Contract Requirements (B&P Code §7159)

Home improvement contracts exceeding $500 must comply with detailed requirements under Business & Professions Code §7159. These include:

• A detailed description of the work to be performed, including materials and labor
• The contractor’s name, business address, license number, license classification, and expiration date
• Approximate start and completion dates
• A payment schedule that complies with statutory limits (e.g., the down payment cannot exceed $1,000 or 10% of the contract price, whichever is less)
• A mechanics lien warning
• The three-day right to cancel notice (see below)
• Change order procedures

Failure to include these provisions is grounds for CSLB disciplinary action against the contractor and may give the homeowner additional legal remedies.

Three-Day Right to Cancel (Now Modernized Under AB 1327)

California homeowners have a statutory right to cancel a home improvement contract within three business days of signing (five days for senior citizens, seven days for emergency repair contracts). Under AB 1327, effective 2026, homeowners can now exercise this right via email—not just by mailing a physical Notice of Cancellation. Contractors must include their email address on the contract’s first page and provide a telephone support number to assist buyers with the cancellation process.

Subcontractor Disclosure Under SB 517

Effective January 1, 2026, SB 517 requires home improvement contracts to include a disclosure regarding whether subcontractors will be used on the project. If subcontractors are involved, the contractor must provide a disclaimer stating that a list of subcontractors—including names, contact information, license numbers, and classifications—will be provided upon request. This gives homeowners the ability to verify that subcontractors are properly licensed before work begins.

Mechanics Lien Warning Requirements

California law requires home improvement contracts to include a mechanics lien warning that explains potential lien claimants’ rights. This notice informs the homeowner that subcontractors and suppliers who are not paid by the contractor may have the right to place a lien on the property. The warning should also advise homeowners to request unconditional lien releases before making progress payments.

When Should You Have a Construction Attorney Review Your Contract?

The short answer: before you sign. The cost of a contract review is a fraction of what it costs to litigate a dispute that could have been prevented with better contract language. At a minimum, consider attorney review in these situations:

• The project value exceeds $50,000
• The contract was drafted by the other party (not you)
• You are unfamiliar with any of the clauses described above
• The project involves subcontractors, particularly on home improvement work
• You are a contractor taking on a new client or project type
• The contract includes indemnification, liquidated damages, or dispute resolution provisions you do not fully understand

A qualified California construction attorney can identify risks, negotiate better terms, and help you understand your rights under current law—including the 2026 changes under SB 61, SB 440, and SB 517.

Protect Your Interests — Talk to a Construction Attorney

Schedule a consultation with Bay Legal’s construction law team to discuss your situation. Call us at (650) 668-8000 or visit baylegal.com/practice-areas/construction-law/.

Frequently Asked Questions

Q: Do I need a written contract for every construction project in California?

A: California law requires a written contract for home improvement projects exceeding $500 (Business & Professions Code §7159). Even when not legally required, a written contract is strongly advisable for any construction project to establish clear expectations, protect both parties, and provide a basis for resolving disputes.

Q: Can a California construction contract waive the 5% retention cap under SB 61?

A: No. SB 61’s 5% retention cap for private construction projects (effective January 1, 2026) cannot be waived by contract. Any provision withholding more than 5% is unenforceable. Limited exceptions apply to non-mixed-use residential projects of four stories or less. A court must award attorney’s fees to the prevailing party in an enforcement action.

Q: What happens if a home improvement contract does not include the required notices?

A: Failure to comply with Business & Professions Code §7159 requirements is grounds for disciplinary action by the Contractors State License Board (CSLB), which may include license suspension or revocation. It may also give the homeowner grounds to void the contract or pursue additional legal remedies.

Q: What is the difference between a pay-when-paid clause and a pay-if-paid clause?

A: A pay-when-paid clause is generally treated as a timing mechanism: you will be paid, but only after the owner pays the general contractor. A pay-if-paid clause conditions your right to payment on whether the owner actually pays—meaning if the owner defaults, you may not get paid at all. California courts disfavor pay-if-paid clauses, but clear contract language can still shift risk.

Q: How do I verify a contractor’s license in California?

A: Visit the Contractors State License Board (CSLB) website at cslb.ca.gov and use the license lookup tool. You can verify the contractor’s license number, classification, bond status, workers’ compensation coverage, and any history of disciplinary actions or complaints.

Disclaimer: This content is for informational purposes only and does not constitute legal advice. Results depend on the specific facts of each situation. No attorney-client relationship is created by reading this article. Contact Bay Legal, PC for advice on your specific situation.

Responsible Attorney: Bay Legal, PC