Legal Question in Construction Law in California

It depends on what the contract was for (i.e. is it something that California law requires a cancellation period for) and what the contract provided with respect to cancellation.

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Mr. Reich is exactly right. If it is something that requires a cooling off period, like some home contracts, then if they cancel within the cooling off period you must return the deposit. If they just cancel for no reason after signing a contract, you are entitled to your damages for breach of contract. The measure of that is the difference between the contract price and the amount it would have cost you to perform the contract. You can take that out of the deposit, or if it is a large enough amount, you can sue for it.