California Contractor Deposit Limits: The 10% or $1,000 Rule

What Is the Maximum Deposit a California Contractor Can Legally Require?

California law is unusually specific on this question. The maximum down payment a licensed contractor can require on a home improvement contract is $1,000 or 10 percent of the contract price, whichever is less. This rule lives in California Business and Professions Code section 7159.5, and it is enforced by the Contractors State License Board (CSLB).

The math trips up homeowners and contractors alike. It is not “10 percent, unless that is under $1,000.” It is the lesser of the two numbers. On a $500,000 Bay Area whole-home remodel, the legal deposit cap is $1,000, not $50,000. On a $30,000 bathroom remodel, the cap is $1,000, not $3,000. The $1,000 ceiling is the binding constraint on almost every meaningful residential project. The 10 percent rule only controls on contracts under $10,000, where 10 percent produces a number below $1,000.

If a contractor hands you a proposal asking for 25 percent down, 33 percent at signing, or “half now, half at completion,” that contractor is either unaware of section 7159.5 or hoping you are. Either way, the request is not negotiable. It is an illegal contract term.

The Statute: California Business and Professions Code Section 7159.5

The exact statutory language is worth reading once. Section 7159.5(a)(3) states: “The downpayment shall not exceed one thousand dollars ($1,000) or 10 percent of the contract amount, whichever amount is less.” That is the core rule, and it has been on the books for decades in various forms.

Section 7159.5 is paired with section 7159, which defines what counts as a home improvement contract and what the written document must contain. As of January 1, 2025, assembly Bill 2622 amended section 7159(b) to raise the home improvement contract threshold from $500 to $1,000. That means any home improvement agreement with an aggregate price over $1,000 now triggers the full written-contract regime, including the deposit cap. (Source: California Business and Professions Code sections 7159 and 7159.5, leginfo.legislature.ca.gov.)

The statute covers most residential repair, remodeling, addition, alteration, conversion, modernization, improvement, and replacement work on existing homes. In practice, if a Bay Area contractor is touching your existing house, the deposit rule applies.

How Progress Payments Work After Work Starts

The deposit cap is only the first gate. Section 7159.5 also governs what happens after work begins. Progress payments requested after the project starts must not exceed the value of work and materials furnished to that point. Translated into practice: if your contractor has completed framing and rough plumbing, they can bill for the value of framing and rough plumbing. They cannot bill for drywall, tile, or finish carpentry that has not been performed.

This is why a clean payment schedule is always tied to milestones, not to the calendar. “25 percent at signing, 25 percent at month one, 25 percent at month two, 25 percent at completion” is not a compliant schedule unless the completed work at each billing matches the requested payment. A schedule that says “payment of $X upon completion of rough electrical inspection” or “payment of $Y upon installation of cabinets” is compliant because each draw is tied to a visible, verifiable milestone.

Homeowners who want a deeper walk-through of itemized estimate structure can review our guide on how to read a contractor estimate.

What Does Not Count as a Down Payment

The deposit cap applies to the home improvement contract itself. Several adjacent charges are legitimately outside its scope, and understanding the distinction prevents confusion at the signing table.

Design and architectural fees. A design agreement is a separate professional services contract, not a home improvement contract. An architect, designer, or design-build firm can charge a legitimate design fee or retainer for schematic design, construction documents, 3D visualization, and permit preparation. These fees are paid under a separate written agreement, not folded into an oversized construction deposit.

Material deposits for special orders. Section 7159.5 permits a contractor to accept payment “for the purpose of obtaining, or making payments for, goods and services from a third party” when those goods are a necessary part of the contract and the payment is applied to that specific purpose. In practice, this is used for long-lead items such as custom cabinetry, imported stone, or specialty windows. Any such payment should be documented in the contract with the vendor name, the item, and proof of order.

Permit fees. Fees paid to the city or county are passthrough costs, not deposits to the contractor. They should appear on the estimate as a line item paid to the jurisdiction, ideally with a receipt.

If any of these items are bundled into a single “deposit” line that exceeds $1,000, that is a red flag. Each category should be itemized so the contractor’s deposit, the design fee, the material deposit, and permit fees are all separately identifiable.

What to Do if a Contractor Demands More Than 10 Percent or $1,000

A contractor who asks for a deposit above the statutory cap is showing you how they run their business. You have a few options, in order of increasing firmness.

1. Cite the statute directly. “California Business and Professions Code section 7159.5 caps the down payment at $1,000 or 10 percent of the contract price, whichever is less. Can we adjust the payment schedule to comply?” A reputable contractor will correct the mistake without friction. Many contractors who ask for oversized deposits genuinely do not know the rule.

2. Ask for a revised payment schedule tied to milestones. Propose a schedule where the first payment after the compliant deposit is tied to a visible, inspected milestone (permit issuance, demolition complete, rough-in inspection passed). This realigns the contract with the value-of-work-performed rule.

3. Walk away. If a contractor digs in and insists on a 25 percent deposit after you have cited the statute, that is a compatibility problem, not a negotiation. The contractor is either unwilling to comply with California law or unable to float normal cash flow. Neither is a good sign for a multi-month project.

4. Report the violation. The CSLB accepts complaints at cslb.ca.gov and at 1-800-321-2752. Repeated violations of section 7159.5 can trigger disciplinary action against a license. If you suspect the contractor is unlicensed, verify at cslb.ca.gov using the Check a License tool; you can also review our guide on how to verify a CSLB license in the Bay Area.

Under Business and Professions Code section 7031, unlicensed contractors cannot collect any payment in California civil court, deposit or otherwise. That protection exists precisely to deter the kind of “give me half up front” pressure tactics that unlicensed operators rely on.

Exceptions and Special Cases

The deposit cap has a narrow exception and a few adjacent rules worth knowing.

Bond-backed exception (section 7159.5(b)). A contractor who furnishes a blanket performance and payment bond, a lien and completion bond, or an equivalent approved by the CSLB registrar is exempt from the $1,000 or 10 percent cap. This exception exists because a bond functionally protects the homeowner if the contractor fails to perform. In practice, very few residential remodelers carry this type of bond, and the ones who do will tell you and show you the bond documentation. If a contractor claims the exception, ask for the bond number, the surety, and the registrar approval on file, then verify directly with the CSLB.

New custom home construction. Ground-up construction of a new home on a vacant lot is generally classified as new construction, not home improvement. The section 7159.5 deposit cap does not apply. In practice, new-construction contracts are governed by a construction loan draw schedule that ties payments to milestones such as foundation, framing, rough-in, and completion. The practical effect is similar: payments flow against completed, inspected work, not up front.

Swimming pool contracts. California has a distinct statutory framework for swimming pool contracts, including a separate payment schedule with different draw structures. If your project is a pool, confirm with your contractor which schedule governs and verify directly in the Business and Professions Code.

Service and repair contracts under $750. Small service calls that fall below the service-and-repair threshold have their own payment rules. These are usually same-day jobs where the full payment is collected after the work is complete.

How This Rule Interacts With Construction Loans

If you are financing your project with a construction loan, a home-equity line of credit, or a renovation loan product, the deposit cap still governs the contract between you and your contractor. The lender’s draw schedule is a separate agreement between you and the bank. Lenders typically disburse draws directly to the contractor after inspections, which aligns naturally with the section 7159.5 value-of-work-performed rule.

A common point of confusion is the initial draw. Some homeowners ask whether a $10,000 or $20,000 initial draw can be paid to the contractor at signing. The answer depends on whether that money is a deposit (capped at $1,000) or a payment for specific material purchases or permit fees that the contractor is making on your behalf (permissible if documented and itemized). Either way, the contractor cannot receive a free-floating $10,000 deposit under California law.

Your Protection Comes From the Statute, Not the Handshake

The single most important thing for a Bay Area homeowner to know about contractor payments is that California already wrote the protection into law. Business and Professions Code section 7159.5 was designed to prevent exactly the scenario where a homeowner pays a large deposit and the contractor disappears, slow-walks the work, or redirects the money to another project.

A contractor who structures the contract to comply with section 7159.5 is signaling that they run a healthy business with adequate cash flow, and that they expect to earn each payment by performing the work it is tied to. A contractor who resists the rule is signaling the opposite.

If you are comparing bids in the Bay Area, read the payment schedule on each estimate before you read the line-item total. A clean, milestone-tied schedule with a $1,000 deposit is worth more than a slightly lower bid with a 25 percent upfront demand.

Custom Home Design and Build (CSLB #986048, licensed since 2005) structures every home improvement contract to comply with section 7159.5. Our two-phase design and construction process resolves scope, materials, and budget during the design phase, then ties every construction draw to an inspected milestone.

Ready to Review a Contract or Start a Project?

If you are in the middle of evaluating a Bay Area contractor and you are unsure whether a payment schedule is compliant, contact Custom Home for a free consultation. We will walk you through what a compliant schedule looks like and answer any questions about the design and construction process. For additional reading, see our guides on mechanics liens in California and change order contract protections.