What Happens If Your ADU Contractor Goes Out of Business ...

When Your ADU Contractor Disappears Mid-Project

It is every homeowner's nightmare: you are months into your ADU project, tens of thousands of dollars have been paid, and suddenly your contractor stops showing up. Calls go unanswered, emails bounce, and the construction site sits abandoned. Your contractor has gone out of business, and your half-built ADU is now your problem to solve.

While this situation is relatively rare, it does happen. Contractor businesses fail for many reasons: poor financial management, overextension, economic downturns, personal issues, or even fraud. According to the CSLB, contractor abandonment remains one of the most common complaints filed by California homeowners.

In this comprehensive guide, we will walk you through exactly what to do if your ADU contractor goes out of business mid-build, how to protect your financial interests, and how to get your project back on track.

Immediate Steps to Take

If you suspect your contractor has gone out of business or abandoned your project, take these steps immediately. Time is critical in these situations.

Step 1: Document Everything

Before anything else, thoroughly document the current state of your project. Take dated photos and videos of the entire construction site from multiple angles. Record what work has been completed, what is in progress, and what has not been started. Inventory all materials, tools, and equipment left on-site. Compile all financial records including your contract, payment receipts, change orders, and correspondence with the contractor.

Step 2: Secure the Construction Site

An abandoned construction site is a liability. Take steps to secure the property by installing temporary fencing or barriers if needed, locking any accessible openings, covering exposed framing or openings to protect against weather, and ensuring the site is safe from a public safety standpoint. Contact your homeowner's insurance company to report the situation and confirm your coverage for the partially completed structure.

Step 3: Attempt to Contact the Contractor

Make documented attempts to reach the contractor through every available channel: phone, email, text, certified mail to their business address, and even social media. Keep records of every attempt, including dates, times, and methods used. Send a certified letter to the contractor's last known business address requesting a formal response within 10 business days.

Step 4: Notify Your Building Department

Contact your local building department to report the situation. They can update the permit status, advise on next steps for the active permits, and help you understand the process for transferring permits to a new contractor.

Step 5: Consult a Construction Attorney

Engage a California construction attorney as soon as possible. They can advise you on your legal rights under the contract, help you recover funds from the contractor's bond, guide you through the mechanics' lien process, and represent you if legal action becomes necessary.

How to Recover Your Money

When a contractor goes out of business, recovering your money requires pursuing multiple avenues simultaneously.

The Contractor's License Bond

California requires licensed contractors to maintain a surety bond (currently $25,000 for general contractors). This bond provides a fund that homeowners can claim against when a contractor fails to perform. To access the bond, file a claim with the surety company listed on the contractor's CSLB record. The CSLB can help you identify the bonding company and initiate the process.

Keep in mind that the bond amount ($25,000) may not cover your full losses, and other homeowners may also be filing claims against the same bond. The bond is shared among all claimants, so acting quickly is important.

CSLB Complaint and Arbitration

The CSLB offers a complaint resolution process that can result in financial recovery. Filing a complaint is free and can lead to CSLB-facilitated mediation or arbitration, disciplinary action against the contractor, and referral to the CSLB's Contractors License Bond recovery process.

Small Claims Court

For losses up to $10,000 ($12,500 for businesses), California small claims court is a fast and inexpensive option. You do not need an attorney, and cases are typically heard within 30 to 45 days. However, winning a judgment and collecting on it are two different things, especially if the contractor's business has no assets.

Civil Lawsuit

For larger losses, a civil lawsuit in Superior Court may be necessary. Your attorney can pursue claims for breach of contract, fraud, negligence, and other causes of action. The cost of litigation must be weighed against the likelihood of recovery.

Insurance Claims

Check your homeowner's insurance policy for coverage that might apply, such as course of construction coverage or endorsements for incomplete construction. Additionally, if you used a credit card for any payments, your card issuer may offer dispute resolution services.

Understanding Mechanics' Liens After Contractor Failure

One of the biggest financial risks when a contractor goes out of business is mechanics' liens filed by unpaid subcontractors and material suppliers. Even though you paid the general contractor, if the GC failed to pay their subcontractors, those subcontractors can file liens against your property.

How to Protect Yourself from Liens

• Collect lien waivers: If you have been collecting conditional and unconditional lien waivers from subcontractors at each payment milestone (as recommended in your contract), you have protection for the payments already made.
• Check for preliminary notices: California law requires subcontractors and suppliers to send a preliminary notice within 20 days of starting work or delivering materials. Review any preliminary notices you received during the project.
• Monitor lien filings: Check with your county recorder's office for any mechanics' liens filed against your property.
• Consider a construction control account: For the remainder of the project with a new contractor, consider using a construction control (escrow) account that disburses payments directly to subcontractors, ensuring they are paid.

Getting Your ADU Project Back on Track

Hiring an Independent Inspector

Before bringing in a new contractor, hire an independent inspector or architect to assess the work completed by the failed contractor. This assessment should evaluate structural integrity and code compliance of completed work, quality of workmanship, whether any work needs to be demolished and redone, the accurate percentage of project completion, and a detailed inventory of materials on-site. This assessment serves multiple purposes: it establishes the value of work completed (for financial recovery efforts), it identifies any problems that need to be corrected, and it provides a clear starting point for the replacement contractor.

Finding a Replacement Contractor

Taking over a partially completed project is risky for contractors, so finding a willing and qualified replacement requires some effort. Be transparent about the full situation, provide the independent inspection report, share all project documentation, and be prepared for higher per-unit pricing. For guidance on evaluating potential replacements, see our article on evaluating ADU contractor portfolios.

Transferring Permits

Work with your building department to transfer active permits to the new contractor. This process typically involves submitting a change of contractor form, providing the new contractor's license and insurance information, scheduling a progress inspection (the building inspector may need to verify the existing work before the new contractor begins), and paying any applicable transfer fees. For more on permits, see our guide on verifying contractor permits.

How to Prevent This From Happening

While you cannot completely eliminate the risk of a contractor going out of business, you can take steps to minimize your exposure.

Before Hiring

• Verify the contractor's license and check for complaints on the CSLB website
• Check the contractor's financial stability (look for recent lawsuits, liens, or BBB complaints)
• Require proof of insurance with adequate coverage levels
• Ask for references from recent projects (within the last 12 months)
• Watch for red flags in the bid

During the Project

• Never pay ahead of completed milestones
• Collect lien waivers from all subcontractors and suppliers at each payment
• Keep a retention (typically 5% to 10% of each payment) until project completion
• Monitor the construction site regularly
• Maintain open communication with subcontractors on the job

In Your Contract

• Include detailed termination and abandonment clauses
• Require the contractor to maintain all insurance throughout the project
• Specify that all project documentation (plans, permits, inspection records) must be accessible to you at all times
• Include a performance bond requirement for projects over $200,000

Frequently Asked Questions About Contractor Business Failure

How common is it for ADU contractors to go out of business during a project?

While exact statistics are difficult to obtain, the CSLB reports that contractor abandonment is among the most common complaint categories. The risk is higher with newer contractors, those with thin profit margins, and those who take on too many projects simultaneously. Choosing an established contractor with a strong track record significantly reduces this risk.

Will my homeowner's insurance cover losses from a contractor going out of business?

Standard homeowner's insurance typically does not cover losses from contractor failure. However, some policies include endorsements for course of construction or builder's risk coverage that may apply. Contact your insurance agent immediately to review your coverage. Additionally, if you purchased a separate builder's risk policy for the project, it may cover some losses.

Can I sue a contractor who went out of business?

You can file a lawsuit against the contractor individually and their business entity. However, collecting on a judgment can be difficult if the contractor has no assets. Your attorney can advise on the best approach, which may include claims against the contractor's bond, insurance policies, and personal assets (if the contractor operated as a sole proprietorship or personally guaranteed the contract).

How long will it take to get my project back on track with a new contractor?

Expect a delay of 8 to 16 weeks from the time the original contractor abandons the project to when a new contractor begins work. This includes time for site assessment (2 to 3 weeks), finding and vetting a replacement contractor (3 to 5 weeks), negotiating a new contract (1 to 2 weeks), and permit transfer and progress inspection (2 to 4 weeks). The actual construction timeline for the remaining work will depend on the scope.

What happens to the warranty on work completed by the failed contractor?

If the contractor is out of business, their warranty is effectively worthless. This is why verifying that all work was properly inspected and meets code is critical. For components covered by manufacturer warranties (appliances, HVAC equipment, roofing materials), those warranties remain in effect regardless of the contractor's status. Keep all manufacturer warranty documentation.

Should I consider a performance bond for my ADU project?

A performance bond guarantees that the project will be completed according to the contract terms, even if the contractor defaults. For ADU projects over $200,000, a performance bond is worth considering, although it adds 1% to 3% to the project cost. The bond issuer will step in to either complete the project or pay you the cost of completion if the contractor fails to perform.

Dealing with a contractor situation on your ADU project? Contact our team for immediate guidance and support in getting your project back on track.

How to File Insurance and Bond Claims When Your ADU Contractor Closes

When your ADU contractor goes out of business mid-build, one of the most important steps you can take is filing claims against their insurance and contractor bond. California requires licensed contractors to carry a surety bond, and many also carry general liability and workers' compensation insurance. Understanding how to access these protections can help you recover some of your financial losses and move forward with your project.

Filing a Claim Against the Contractor's Surety Bond

All licensed contractors in California are required to carry a $25,000 contractor surety bond. This bond exists specifically to protect homeowners from financial loss due to contractor fraud, abandonment, or failure to complete work. To file a bond claim, follow these steps:

• Visit the California Contractors State License Board (CSLB) website and look up your contractor's license number
• Identify the bonding company listed on the contractor's license record
• Contact the bonding company directly and request a claim form
• Submit your claim with supporting documentation, including your contract, proof of payments, photos of incomplete work, and any correspondence with the contractor
• The bonding company will investigate your claim and determine the payout amount, up to the $25,000 bond limit

Keep in mind that if multiple homeowners are filing claims against the same bond, the total payout is still capped at $25,000. Filing early gives you the best chance of recovering funds before the bond is exhausted.

Filing an Insurance Claim

If your contractor carried general liability insurance, you may be able to file a claim for property damage or defective work. Contact the insurance company listed on the certificate of insurance your contractor should have provided at the start of the project. You will need to document the specific damage or deficiency and demonstrate that it resulted from the contractor's work. Insurance claims can take several months to resolve, so begin the process as soon as possible. For more guidance on evaluating contractors before hiring, see our article on how many ADU bids you should get.

Filing a Complaint with the CSLB

In addition to bond and insurance claims, you should file a formal complaint with the CSLB. This creates an official record and may trigger an investigation into the contractor's business practices. The CSLB can also assist with mediation and may help you recover additional funds through their Consumer Recovery Fund if the contractor's bond is insufficient.

Frequently Asked Questions About ADU Contractor Business Failure

Can I get my money back if my ADU contractor goes bankrupt?

Recovery options depend on several factors. You can file a claim against the contractor's surety bond (up to $25,000 in California), file an insurance claim if applicable, and submit a complaint to the CSLB for access to the Consumer Recovery Fund. If the contractor files for formal bankruptcy, you may also be able to file a creditor's claim in bankruptcy court. The more documentation you have, including your contract, payment records, and photos of incomplete work, the stronger your recovery position will be.

How long does it take to resolve a bond claim for an ADU project?

Bond claims typically take 30 to 90 days to investigate and resolve, though complex cases can take longer. The bonding company must review your documentation, contact the contractor (if possible), and determine the valid claim amount. If multiple homeowners are filing claims simultaneously, the process may take additional time as the bonding company allocates the limited bond funds.

Should I hire a lawyer if my ADU contractor abandons the project?

Consulting with a construction attorney is advisable if the financial loss is significant, if the contractor disputes your claims, or if you need to navigate bankruptcy proceedings. An attorney can also help you pursue additional legal remedies beyond the bond and insurance, such as filing a mechanic's lien or civil lawsuit. For smaller losses, the CSLB mediation process may be sufficient. Review our guide on what your ADU contract should include to understand your legal protections.

What happens to the ADU building permits if the contractor goes out of business?

Building permits are typically issued to the property owner, not the contractor. This means your permits remain valid even if the contractor closes their business. However, you will need to find a new licensed contractor to continue the work, and the new contractor may need to pull additional permits or schedule re-inspections of completed work. Contact your local building department to discuss the transition and ensure continuity of your permit status.

How can I protect myself from contractor failure before starting my ADU project?

Prevention starts with thorough vetting. Always verify that your contractor's license is active with the CSLB, confirm their bond and insurance coverage, check references from recent projects, and never pay more than 10 percent down or $1,000 (whichever is less) as required by California law. Structure your payment schedule around verified milestones rather than a timeline, and include contract provisions that address what happens if the contractor cannot complete the work. Read more in our guide to verifying your ADU contractor pulled the right permits.