Retention has long been a contentious issue in California construction. Traditionally, owners withheld retention of 10% from each progress payment until completion, arguing it was necessary to ensure performance, quality and timely delivery. Contractors and subcontractors, however, often struggled with cash flow, payroll, and material costs while waiting months—sometimes even years—for withheld retention.
Recognizing the financial challenges contractors and subcontractors face, the California legislature passed Senate Bill 61 (“SB 61”), now codified under California Civil Code Section 8811 and effective January 1, 2026, limiting retention to 5% on private works of improvement, aligning with the public works standard in place since 2012. The law’s intent is clear—ease financial strain on contractors and subcontractors while still providing owners with security (albeit reduced) with respect to project completion.
Section 8811 does not apply universally to all private projects. There are several, limited exceptions set forth in the statute:
Section 8811 also provides that the retention percentage under any subcontract must match the retention percentage under the prime contract. Moreover, in an action to enforce the requirements of 8811, the courts are required to award attorneys’ fees to the prevailing party.
For owners and contractors concerned about a contractor’s or subcontractor’s financial ability to properly and timely complete their work, other protections are available to offset the risk of reduced retention, though at an added cost to the project. The most obvious of which is the use of performance and payment bonds. Other less costly options may include, for instance, strengthening and/or broadening withholding provisions, default and step-in rights and warranty provisions under your construction agreements.
SB 61 is a landmark change for California’s private construction industry. For clients, the takeaway is clear: plan now, negotiate carefully, and align contracts with this new law in 2026.
The reduction from 10% to 5% retention represents a major liquidity shift for California contractors and subcontractors. On large commercial projects, the change could free millions of dollars that would previously have been locked up until final completion. Industry groups have argued for years that excessive retention effectively forces builders to finance projects on behalf of owners, increasing reliance on credit lines and inflating bid prices.
Legal practitioners note that the reform may also influence how subcontractors evaluate which projects to pursue. With faster access to earned funds, smaller specialty firms may be better positioned to compete for private work, potentially broadening the pool of qualified bidders and easing some of the capacity constraints seen across the state.
While the statute reduces financial pressure on the contracting community, it requires owners and developers to rethink risk management. Many are expected to rely more heavily on performance and payment bonds, parent guarantees, and enhanced contractual remedies to replace the security once provided by higher retention.
Attorneys advising project participants recommend immediate reviews of standard form agreements, lender requirements, and subcontract templates to ensure compliance. Because the law mandates matching retention percentages throughout the contractual chain, inconsistencies between prime contracts and subcontracts could expose parties to fee-shifting litigation.
Originally reported by Michael McKeeman in Seyfarth.
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