What Should an ADU Contract Include Beyond the Bid?

Why Your ADU Contract Matters More Than the Bid

Many California homeowners spend weeks comparing contractor bids but barely skim the actual contract before signing. This is a costly mistake. The bid tells you how much the project will cost. The contract tells you what happens when things go wrong, and things almost always go wrong in construction, at least to some degree.

Your ADU construction contract is the single most important document in your entire project. It governs every aspect of the relationship between you and your contractor, from the scope of work and payment schedule to dispute resolution and warranty terms. A well-drafted contract protects you from cost overruns, delays, poor workmanship, and even contractor abandonment.

In this guide, we will walk through every essential clause your ADU contract should contain, explain why each one matters, and help you understand what to negotiate before signing.

California Legal Requirements for ADU Contracts

Before diving into best practices, it is important to understand what California law requires in a home improvement contract. Under Business and Professions Code Section 7159, any home improvement contract (including ADU construction) for work over $500 must include specific elements mandated by law.

Legally Required Contract Elements

These are the minimum legal requirements. A thorough ADU contract should go well beyond these basics to protect both parties.

Detailed Scope of Work

The scope of work is the heart of your contract. It should describe, in specific detail, exactly what the contractor will and will not do. An ambiguous scope is the leading cause of construction disputes in California.

What the Scope Should Include

• Architectural plans reference: The contract should specifically reference the approved architectural plans (by plan number, date, and revision number) and state that all work will be performed in accordance with those plans.
• Material specifications: Every major material should be specified by manufacturer, model, color, and grade. This includes flooring, countertops, cabinets, fixtures, windows, doors, roofing, and siding.
• Permits and inspections: Clearly state who is responsible for obtaining building permits, scheduling inspections, and paying permit fees. In most cases, this should be the contractor.
• Utility connections: Specify which utility connections are included (water, sewer, electrical, gas) and who coordinates with utility providers.
• Site preparation and cleanup: Include demolition, grading, debris removal, and final site cleanup and landscaping restoration.
• Exclusions: Explicitly list what is NOT included in the contract. Common exclusions include furniture, appliances (sometimes), window coverings, and landscaping beyond basic restoration.

Payment Terms and Schedule

Your payment schedule should be tied to completed milestones, not dates. This ensures the contractor is never significantly ahead on payments relative to work completed.

Recommended Payment Schedule for ADU Projects

Remember: California law limits the initial down payment to $1,000 or 10% of the contract price, whichever is less (Business and Professions Code Section 7159.5).

Change Order Procedures

Change orders are modifications to the original scope of work after the contract is signed. They are virtually inevitable in construction and can be a significant source of cost overruns if not properly managed. For a detailed guide on this topic, see our article on handling ADU change orders.

Essential Change Order Provisions

• Written approval requirement: No change order should be performed without your written approval of the scope change and associated cost.
• Markup limitations: The contract should specify the contractor's markup on change order work. A typical range is 15% to 20% for overhead and profit.
• Time impact: Each change order should include an assessment of how it will affect the project timeline.
• Documentation: Change orders should reference specific plan modifications and include before/after specifications.

Timeline and Delay Provisions

Your contract should address both the expected timeline and what happens when delays occur.

Timeline Elements to Include

• Substantial completion date: A specific date by which the ADU should be substantially complete (meaning you can occupy it, even if minor punch list items remain).
• Final completion date: A date by which all work, including punch list items, must be finished.
• Excusable delays: Define what constitutes an excusable delay (weather, material shortages, permit delays, acts of God) that extends the completion date without penalty.
• Inexcusable delays: Define what happens when the contractor causes unreasonable delays, including potential liquidated damages.
• Liquidated damages: A pre-agreed daily rate that the contractor pays for each day the project exceeds the completion date due to inexcusable delays. Typical rates range from $100 to $300 per day for ADU projects.

Warranty Provisions

California law provides some basic warranty protections for new construction, but your contract should go further.

Standard Warranty Coverage for ADUs

Warranty Response Time

Include a clause that requires the contractor to respond to warranty claims within a specified period, typically 48 to 72 hours for acknowledgment and 7 to 14 days for non-emergency repairs.

Dispute Resolution

How disputes are resolved can significantly impact your costs and stress level if problems arise during construction.

Options for Dispute Resolution

• Mediation first: Many contracts require the parties to attempt mediation before pursuing other remedies. Mediation is typically less expensive and faster than litigation or arbitration.
• Binding arbitration: Some contracts include binding arbitration clauses. While arbitration can be faster than litigation, you give up your right to a jury trial. Consider whether this tradeoff makes sense for your situation.
• Litigation: If the contract allows for court proceedings, specify the jurisdiction (usually the county where the property is located).
• CSLB complaint: Regardless of what the contract says, you always have the right to file a complaint with the CSLB.

Insurance and Bonding Requirements

Your contract should require the contractor to maintain specific insurance coverage throughout the project and provide proof of that coverage before work begins.

Required Insurance Types

• General Liability Insurance: Minimum $1,000,000 per occurrence, $2,000,000 aggregate. This covers damage to your property and injuries to third parties.
• Workers' Compensation Insurance: Required by California law for any contractor with employees. Protects you from liability if a worker is injured on your property.
• Builder's Risk Insurance: Covers the structure under construction against damage from fire, weather, theft, and vandalism. Clarify who carries this policy (you or the contractor).
• Automobile Liability: Covers damage caused by the contractor's vehicles on your property or in your neighborhood.

Termination Clauses

Nobody wants to think about firing their contractor, but having clear termination provisions is essential. For more on this topic, see our guide on when to fire your ADU contractor.

Key Termination Provisions

• Termination for cause: Your right to terminate the contract if the contractor fails to perform, abandons the project, or materially breaches the agreement.
• Termination for convenience: Your right to terminate the contract for any reason, with payment for work completed to date plus reasonable demobilization costs.
• Contractor's right to terminate: The contractor's right to stop work if you fail to make scheduled payments or create unsafe working conditions.
• Consequences of termination: How final payments are calculated, what happens to materials already purchased, and the timeline for the contractor to remove equipment and personnel from the site.

Additional Essential Clauses

Permits and Code Compliance

State that the contractor is responsible for obtaining all necessary permits, passing all required inspections, and ensuring the completed ADU complies with the California Building Code, Title 24 energy requirements, and local zoning regulations as outlined by the California HCD.

Lien Waivers

Require the contractor to provide conditional and unconditional lien waivers from all subcontractors and material suppliers at each payment milestone. This protects you from mechanics' liens filed by unpaid subcontractors.

Cleanup and Restoration

Specify that the contractor must maintain a clean and safe work site, remove all debris at the end of each workday (or weekly at minimum), and restore your property to pre-construction condition upon completion.

Neighbor Relations

Include provisions about working hours (typically 7:00 AM to 6:00 PM on weekdays in most California cities), noise management, dust control, and street parking for construction vehicles.

Assignability

Ensure the contract cannot be assigned to another contractor without your written consent. You chose this specific contractor for a reason, and you should not be surprised to find a different company showing up to do the work.

Frequently Asked Questions About ADU Contracts

Should I have an attorney review my ADU contract before signing?

Yes, especially for projects over $150,000. A construction attorney can identify missing protections, unfavorable clauses, and legal issues that a homeowner might overlook. The cost of a contract review (typically $500 to $1,500) is negligible compared to the financial risk of a poorly drafted contract on a $200,000 or more ADU project.

Can I modify a contractor's standard contract?

Absolutely. A contract is a negotiated agreement between two parties. You have every right to request modifications, add clauses, or remove provisions before signing. Any changes should be initialed by both parties and clearly documented. If a contractor refuses to negotiate any contract terms, consider it a red flag.

What happens if my contractor does not have a written contract?

Under California law, any home improvement project over $500 must have a written contract. A contractor who is willing to work without a written contract is violating the law and leaving both parties unprotected. Never proceed without a proper written agreement.

How detailed should the material specifications be in the contract?

As detailed as possible. For every major finish material (flooring, countertops, cabinets, fixtures, appliances), the contract should specify the manufacturer, model number, color/finish, and quantity. For items you have not yet selected, include an allowance amount and specify what happens if your selections exceed the allowance.

What is the difference between substantial completion and final completion?

Substantial completion means the ADU is usable for its intended purpose (you could move in or begin renting it), even though minor items like paint touch-ups or hardware adjustments may still be needed. Final completion means every item on the punch list has been addressed and the project is 100% finished. Your payment schedule should have separate milestones for each.

Should the contract address what happens if the contractor goes out of business?

Yes. Include provisions that address the contractor's obligation to maintain insurance and bonding throughout the project, your right to access the job site and all project documentation if the contractor ceases operations, and procedures for transferring permits and inspections to a replacement contractor. For more on this topic, see our guide on what happens when your ADU contractor goes out of business.

Need help understanding your ADU contract? Our team can connect you with experienced construction attorneys and guide you through the contracting process.

Frequently Asked Questions About ADU Contract Essentials

What payment schedule should an ADU contract include?

A well-structured ADU contract in California should include a milestone-based payment schedule that ties payments to verified completed work rather than calendar dates. California law limits the initial down payment to 10 percent of the contract price or $1,000, whichever is less. After the down payment, payments should be structured around major milestones such as foundation completion, framing completion, rough inspections passed, and final inspection approval. Each payment should require that you verify the work has been completed satisfactorily and that all required inspections have passed before releasing funds. Never pay the final installment until all punch list items are resolved, final inspections are approved, and you have received lien waivers from all subcontractors and suppliers. For more on evaluating contractors before signing, see our article on how many ADU bids to get before choosing a contractor.

Should my ADU contract include a dispute resolution clause?

Yes. A dispute resolution clause is an essential component of any ADU construction contract. This clause specifies how disagreements between you and the contractor will be handled, whether through mediation, arbitration, or litigation. Many California construction contracts include a stepped process that starts with informal negotiation, moves to mediation if needed, and then proceeds to binding arbitration or court as a last resort. Mediation is generally the fastest and least expensive option, while arbitration provides a binding decision without the cost and time of a full court proceeding. Make sure the clause specifies who pays for dispute resolution costs and which party selects the mediator or arbitrator.

How should warranty terms be defined in an ADU contract?

Your ADU contract should include a clear warranty section that covers both workmanship and materials. A standard workmanship warranty in California ranges from one to two years, during which the contractor agrees to repair any defects in their work at no additional cost. Material warranties are typically passed through from the manufacturer and can range from 5 to 25 years depending on the product. The contract should specify the process for submitting warranty claims, the contractor's response time for addressing warranty issues, and any exclusions or limitations. Make sure the warranty survives the completion of the project and is not voided by minor homeowner modifications. Learn more about protecting yourself from contractor issues in our guide on when to fire your ADU contractor.