California Business and Professions Code section 7031 has historically imposed a severe and unforgiving penalty on any licensed contractor or subcontractor (“licensee”) performing any construction work after its contractor’s license becomes suspended or is revoked. The penalty for many years has been a prohibition against the licensee bringing an action to collect payment owed and a draconian penalty allowing the party who paid the licensee to recover, or cause the licensee to “disgorge,” any payment the licensee received for the entire contract. This strict penalty could apply to funds received for the entire contract even when the license was suspended or revoked for only a short period of time during the project. This meant, for example, that a licensee who was paid $10 million under a contract for a project that took a year to build could have to disgorge the entire $10 million it received under that contract as a result of performing work while its license was suspended for only a week of the entire project duration. Draconian indeed. A limited statutory substantial-compliance exemption could provide relief, but it requires a court determination that the statutory conditions have been met.
Beginning on January 1, 2027, the licensee will be thrown a lifeline on this issue. Under California Senate Bill 342, becoming effective on January 1, 2027, California contractors on qualifying projects will no longer face the same severe penalties – but there are limitations.
Under the new version of section 7031, where the contract is for the construction of (1) a public work of improvement, a commercial, or institutional construction project, (2) a common interest development, or (3) a multifamily residential project of four or more units, then the draconian penalties no longer fully apply. For either of the latter two categories, a tenant or resident must not be a party to the contract. Instead, where the licensee is properly licensed when the contract was executed and properly licensed during the part of the work for which compensation is sought, the licensee may seek payment for that part of the work performed when the license was properly in effect. Separately, on these qualifying contracts, disgorgement is limited to compensation paid for work performed while the contractor was unlicensed – not compensation paid for work performed while properly licensed. This is certainly welcome relief from a penalty often viewed as very unfair.
Now to the limitations. While the revised statute provides relief in the case of public works, commercial and institutional projects and qualifying residential projects, it does not change the law for those licensees performing work on smaller residential projects outside the specified categories, generally including single-family homes and residential projects of three units or fewer that do not otherwise qualify as the construction of a common interest development. The statute’s common-interest-development category does not expressly impose a minimum unit count.
Less clear in the legislation is the ability of the licensee to use such secured remedies as a mechanics lien to cover work performed while properly licensed. SB 342 leaves subdivision (c) of section 7031 unchanged. Its language suggests that the mechanics lien remedy will not be available to secure a claim if the licensee was unlicensed during any part of the performance of the act or contract, subject to any applicable substantial-compliance relief. The interaction between this unchanged provision and the new payment-recovery provisions may require judicial clarification in the future.
To review the enacted amendments, follow this link:
https://leginfo.legislature.ca.gov/faces/billStatusClient.xhtml?bill_id=202520260SB342
While the revised statute provides welcome relief when unexpected events affecting licenses occur, it has its limitations. The best policy is to regularly review license status on the CSLB website and take immediate and effective action when license status might be impacted.
Article written by Garret Mandel, Esq. of Porter Law Group, Inc. in 2026. Mr. Mandel can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com
© Porter Law Group, Inc. 2026
