How to Hire a Contractor: Licenses, Contracts and Red Flags

Sooner or later, every homeowner needs to know how to hire a contractor, whether it’s for a new roof, a water heater or a kitchen update. The right pro saves you money and stress. The wrong one can leave you with a half-finished job, a lien on your home or a failed inspection. This guide covers the checks, paperwork and payment habits that protect you, based on guidance from the Federal Trade Commission (FTC) and state licensing boards.

Where should you start looking for a contractor?

Start with referrals from people you trust: neighbors, friends, coworkers or your HOA. Then research each name independently. Search the company with words like “complaint” or “review,” check with your licensing agency, and ask local consumer protection officials or your local home builders association about complaints.

The FTC says to be wary of contractors who find you, rather than the other way around (FTC). Door-to-door sellers who say they are “working in the neighborhood,” have leftover materials or need a decision today are common warning signs.

Before you call anyone, write down what you want done. A short scope (“replace the 40-gallon gas water heater in the garage, haul away the old one”) makes estimates easier to compare.

How do you check a contractor’s license?

Look the license up yourself on the website of the agency that issues it. Rules vary a lot by state. Some states license general contractors statewide, others leave it to cities or counties, and many have separate licenses for trades like electrical, plumbing and HVAC. Match the name, license type and status to the person you’re hiring.

• $1,000License needed at or aboveLabor and materials combined
• Any pricePermit or workers involvedLicense always required
• IllegalSplitting a job to stay underNot allowed in California

Source: California Contractors State License Board (as of October 18, 2026)

California is one example of how specific the rules can be. As of 2025, the state requires a license for jobs of $1,000 or more in labor and materials, and for any job that needs a building permit or uses workers, no matter the price (CSLB). Splitting a bigger job into small pieces to stay under the limit is illegal there. Your state may have a different threshold, or none.

Ask for proof of insurance

Ask for certificates showing both general liability insurance and workers’ compensation coverage. The NAIC’s disaster claims guide suggests getting a copy of the contractor’s business license (check the expiration date) and proof of both types of insurance, then calling the insurance company to confirm the coverage is active (NAIC). Without coverage, an injury on your property or damage to your home could become your problem.

How do you compare estimates?

Get at least three written estimates for the same scope of work. Each should describe the work, materials, timeline and price. Don’t automatically choose the lowest bid. Ask contractors to explain big price gaps, because a low number can mean cheaper materials, missing permits or costs that appear later as change orders.

What should the contract include?

A written contract should list the contractor’s name, address, phone and license number, a detailed description of the work and materials, the total price, a payment schedule, start and finish dates, who handles permits, and any verbal promises. If the deal is signed at your home, it should also explain your right to cancel.

The FTC recommends a written contract even if your state doesn’t require one, and it says never to sign a contract with blank spaces (FTC). California’s licensing board adds that the contract should say whether you or the contractor will pull permits and whether permit fees are included in the price (CSLB guide).

Use this checklist before you sign:

• Contractor’s legal business name, address, phone and license number
• Detailed scope of work and the specific materials
• Total price and what happens if the price changes (written change orders)
• Payment schedule tied to completed stages of work
• Start date and estimated completion date
• Who obtains and pays for permits and inspections
• Cleanup and debris removal
• Warranty terms for labor and materials
• A written notice of your right to cancel, if it applies

Your right to cancel

Under the FTC’s Cooling-Off Rule, you generally have three business days to cancel a covered sale of $25 or more made at your home (FTC). The seller must tell you about this right. Some states add longer or broader cancellation rights, so check your state’s rules if you sign in a hurry and regret it.

Why do permits matter?

Permits trigger inspections that check the work meets building and safety codes. Most places require them for projects like additions, major renovations, HVAC work and water heater replacements. California’s licensing board warns that skipping a permit can lead to significant fines and penalties, and even demolition of work that doesn’t meet code.

Who pulls the permit matters. In most jobs, the contractor should. The FTC lists a contractor who asks you to get the permits as a warning sign. If the permit is in your name, you may take on responsibility for the work as an “owner-builder.” Before work starts, ask to see the permit, and check your local building department’s website to see what your project needs.

How should you pay a contractor?

Keep the down payment small, make progress payments only after each stage of work is done, and hold the final payment until the job passes inspection and you’re satisfied. Pay by check or credit card so there is a record. Avoid cash, wire transfers, gift cards, payment apps and cryptocurrency.

View data as table

Figure	Amount
10% of price	$2,000
$1,000 cap	$1,000
Maximum down payment	$1,000

Worked example Source: The Homeowner Guide worked example (as of October 18, 2026)

Some states cap down payments. In California, for example, the down payment for a home improvement job generally can’t be more than $1,000 or 10% of the contract price, whichever is less (CSLB guide). Check with your state or local consumer protection agency for the rule where you live.

Example (hypothetical): A $20,000 bathroom remodel in California. Ten percent would be $2,000, but the cap is $1,000 or 10%, whichever is less, so the down payment can be no more than $1,000. The rest would be paid in stages, such as after demolition and rough plumbing, after tile and fixtures, and a final payment after inspection.

What are lien waivers, and why do you need them?

A lien waiver, also called a lien release, is a signed statement that a contractor, subcontractor or supplier has been paid and gives up the right to file a lien for that work. Collect one with each payment. Without them, a subcontractor your contractor didn’t pay could file a lien against your home, even though you paid in full.

California’s licensing board describes a common approach (CSLB):

1. Before each payment, get a signed conditional release from those who could file a lien. It only takes effect once they are actually paid.
2. After you pay, get an unconditional release from each person paid.
3. You may hold the next payment until you get unconditional releases for the previous one.
4. You can also pay with joint checks made out to both the contractor and the subcontractor or supplier.

Lien forms and rules differ by state, so ask your contractor which forms are used where you live, or check your state licensing board.

What are the biggest red flags?

The clearest warning signs are pressure and payment demands: a contractor who shows up uninvited, insists on a decision today, wants full payment up front or in cash, refuses to put things in writing, or offers to arrange financing through a lender they know. Walk away from anyone who won’t show a license or proof of insurance.

Other red flags from the FTC:

• They ask you to get the building permits.
• They offer to finance the work through a lender they know. The FTC warns this can end in a high-rate home equity loan while the work goes unfinished.
• They want you to sign documents you haven’t read or that have blank spaces.
• They give a price far below everyone else’s with no clear reason.

What can you do if something goes wrong?

Try to fix the problem with the contractor first, and put your complaint in writing. Send letters by certified mail with a return receipt and keep copies of everything. If that doesn’t work, contact the licensing agency, your state attorney general or local consumer protection office, or a dispute resolution program.

Report scams to the FTC at ReportFraud.ftc.gov. Licensing boards in many states take complaints and can discipline licensed contractors.

How does this fit into your home budget?

Big repairs are easier to handle when you’ve planned for them. Building a home maintenance budget gives you a cushion for the down payment and progress payments, so you don’t feel pushed toward the cheapest or fastest bid. Using a seasonal home maintenance checklist also helps you spot problems early and book contractors before the busy season. If you’re weighing a service plan instead of hiring repair pros directly, compare the trade-offs in our guide to home warranties versus insurance.

This guide is general information, not legal advice. For a large or complex project, consider having an attorney review the contract.