California Contractor Deposit Law: What Every ADU Homeowner Must Know

Cory and Christy Johnson of Woodland paid Nonna Homes $83,706.25 over nine months. Not a single worker stepped on their property. The CSLB accusation documents excessive down and progress payments, abandonment, and failure to pay subcontractors — 23 complaints in total, eight referred to the California Attorney General.

What could have limited their exposure from the start? California’s contractor deposit law — Business and Professions Code §7159.5 — which caps the maximum deposit at $1,000 or 10% of the contract price, whichever is less. On the Johnsons’ $275,000 contract, the legal limit was $1,000. Multitaskr and Anchored Tiny Homes showed the same pattern — excessive deposits collected before work began.

If you’re hiring a contractor for an ADU project in California, this law is the first line between your money and a contractor who hasn’t earned it yet. This guide breaks down every part of the California contractor deposit law, the fees that should raise your alarm, and what to do if a contractor has already taken more than they’re legally allowed.

This is part of our ongoing ADU contractor scam investigation series.

California Business and Professions Code §7159.5 governs deposits on home improvement contracts. The rule is simple: a contractor cannot demand, accept, or collect more than $1,000 or 10% of the contract price — whichever is less — as a down payment before work begins.

This applies to every home improvement contract between a homeowner and a licensed (or subject-to-be-licensed) contractor. ADU construction on your property qualifies as a home improvement contract. So does a garage conversion, a kitchen remodel, or a roof replacement.

The law also requires that this deposit limit be stated in the contract itself — in 12-point boldface type. If the deposit limit clause isn’t printed in your contract, that’s already a red flag. It means the contractor either doesn’t know the law or is choosing to ignore it.

Violating this law is a misdemeanor. Penalties include a fine of $100 to $5,000, up to one year in county jail, or both. The CSLB can also use it as grounds for license suspension or revocation.

One important exception: a contractor who provides a performance and payment bond covering the full project value may be exempt from this deposit limit. If a contractor claims this exemption, ask to see the bond certificate. If they can’t produce it, the $1,000/10% rule applies.

ADU projects in California typically range from $150,000 to $400,000+ for a detached unit. At those price points, the math is straightforward: your maximum legal deposit is always $1,000.

Here’s how it works:

• $250,000 ADU contract → 10% = $25,000. But $1,000 is less, so max deposit = $1,000
• $150,000 garage conversion → 10% = $15,000. $1,000 is less, so max deposit = $1,000
• $8,000 garage door job → 10% = $800. $800 is less than $1,000, so max deposit = $800

For any ADU project over $10,000, the legal deposit cap is always $1,000. No exceptions — unless the contractor has a qualifying performance bond covering the full contract value.

After the deposit, every subsequent payment must be tied to work actually completed. The contractor cannot bill ahead of progress. A legitimate ADU contractor will put a detailed progress payment schedule in the contract — with specific milestones tied to specific dollar amounts.

You can check the deposit limit for any contract amount using our deposit calculator.

The deposit limit is clear. But some contractors work around it by inventing fees with official-sounding names — fees that don’t exist in any building code. Here’s how to tell what’s normal from what’s a warning sign.

Fee	Normal Range	Red Flag	What to Watch For
Design / architectural plans	$3,500–$15,000	Contractor demands you pay THEM for plans drawn by a third-party architect	If they won’t let you keep the plans if you cancel, that’s a red flag
Engineering (structural, soils, Title 24)	$3,000–$8,000	Lumped into a vague “pre-construction” fee with no itemization	You should receive copies of all engineering reports
Permit fees	$2,000–$20,000 (varies by city)	Contractor asks you to pay permit fees to THEM with no city receipt	Permits are paid to the city — ask for the city receipt
“Pre-construction onboarding” fee	Does not exist	Any amount — this is a fabricated fee	Known scam pattern — Nonna collected excessive payments before work began (case study)
“Expediting” or “rush” fees	$500–$2,000 (for legitimate city expedited review)	Contractor charges their own “expediting fee”	Some cities offer paid expedited review — that’s real. A contractor’s own fee is padding
Site survey / soil report	$1,500–$3,000	Contractor charges this but produces no report from a licensed professional	You should receive a copy of the survey or report
Feasibility study	$500–$2,000	Non-refundable AND they pressure you to sign the full contract immediately after	Reasonable if credited toward the contract
“Material reservation” / “lumber lock” fee	Does not exist	Any amount — urgency tactic to extract money early	Legitimate contractors include materials in contract milestones
Change order fees	Normal during construction	Contract allows markup above 15–20% on changes	Read the change order clause before signing

The common thread: any fee collected before construction starts — other than the legal deposit — should correspond to a real, documented service performed by a licensed third party. If the contractor can’t show you an itemized breakdown with the name and license number of the professional who performed the service, treat it as a red flag.

A legitimate ADU contractor ties every payment to a construction milestone you can see and verify. A typical schedule looks like this:

1. Deposit — $1,000 or 10%, whichever is less (per BPC §7159.5)
2. Foundation complete — city inspection passed
3. Framing complete — walls up, roof structure in place
4. Rough-in complete — plumbing, electrical, HVAC roughed in, inspected
5. Drywall / insulation — insulation installed, drywall hung
6. Finish work — cabinets, flooring, fixtures, paint
7. Final inspection passed — last payment after city sign-off

Each milestone should represent roughly equal portions of the remaining contract balance. If a contractor’s schedule asks for 50% or more before framing is complete, that’s a front-loaded schedule designed to extract money before most of the work is done.

Another red flag: no payment schedule at all. If the contract says “pay as invoiced” with no milestones, you have zero protection against a contractor who invoices faster than they build.

And at every milestone, request a conditional lien release from every subcontractor — a signed document confirming they’ve been paid for their portion. If the general contractor won’t provide lien releases, that’s one of the clearest warning signs that money isn’t going where it should. Nonna Ada Construction owed subcontractors tens of thousands while still collecting deposits from new clients.

If a contractor has already collected more than $1,000 (or 10%, whichever is less) as a down payment on your ADU project, here are your options:

1. File a complaint with the CSLB. The California Contractors State License Board investigates deposit law violations. Call 1-800-321-CSLB (2752) or file online. BPC §7159.5 violations are taken seriously — they’re a misdemeanor.
2. Pursue recovery through the CSLB bond program. Every licensed contractor in California carries a surety bond (typically $25,000). You can file a claim against the bond to recover losses.
3. Consult a California construction attorney. BPC §7159.5 violations support civil claims for damages. An attorney can advise on whether small claims court or a civil suit is the better path.
4. Document everything. Save the contract, all receipts, text messages, emails, and bank/Zelle/Venmo records showing payments. Screenshot any social media promises or advertisements. This documentation supports both your CSLB complaint and any legal action.
5. Do NOT continue with a contractor who violated this law. If they broke the deposit rule before work started, the risk only gets worse once they have access to your property and your money.

You can verify any contractor’s CSLB license status here — including bond status, workers’ comp, and complaint history.

Every builder listed on VerifiedADU passes our 6-point verification standard — including active CSLB license, current bond, workers’ compensation, clean complaint history, general liability insurance, and a minimum of 2 years licensed. We check these against CSLB public records every 12 hours. Contractors who fail any standard are removed and documented publicly.

Start with a verified builder — then use this guide to make sure the contract protects you too.