California Construction Rules Changing in 2026

Starting January 1, 2026, California will implement two major reforms that significantly alter how private construction projects are contracted, billed, and paid. These new laws — SB 440 and SB 61 — introduce mandatory processes for handling change orders and reduce retention limits, creating new compliance requirements for owners and contractors across the state.

The changes are expected to affect every phase of private construction work, from contract drafting and billing to dispute resolution and subcontractor protections.

SB 440: New Statewide Change Order Payment System

SB 440, known as the Private Works Change Order Fair Payment Act, establishes the first statewide rule governing how extra work and change-order payments must be handled on private projects.

The new law applies to contracts signed on or after January 1, 2026, and requires owners to follow strict response and payment deadlines. Key provisions include:

• Owners must provide written responses to contractor claims within 30 days.
• Undisputed payments must be made within 60 days, or the amount will accrue 2% interest per month.
• Disputed claims must go through meet-and-confer negotiations, followed by mediation if unresolved.
• Contractors may suspend work if owners do not comply with required timelines or refuse mediation.
• Subcontractors gain expanded protection, including the ability to compel general contractors to submit claims and approve settlements.
• Any contract clauses that waive these protections will be unenforceable.

The statute includes a sunset date of January 1, 2030, which gives the state the ability to reassess the legislation’s impact after several years.

Impact: SB 440 boosts cash-flow protection for contractors and subcontractors, while owners may face higher compliance burdens, tighter planning schedules, and possible penalties if they fail to respond or pay on time.

SB 61: Retention Limits Cut in Half

SB 61 brings another significant shift for private construction by capping retention — the portion of payment withheld until work is complete — at 5% instead of the commonly used 10%.

This new 5% cap applies to most private projects beginning in 2026, with the following rules:

• Owners cannot retain more than 5%, and contractors cannot retain more than the amount withheld by owners.
• The cap does not apply to most residential projects, unless they are mixed-use and more than four stories tall.
• Higher retention is allowed if a subcontractor does not provide a performance or payment bond.
• The law also allows attorneys’ fees for the prevailing party, making enforcement more consequential.

Impact: Reducing retention puts more money in the hands of contractors and subcontractors during construction, improving project finance and cash flow. Owners, however, may need to rely more heavily on performance bonds and tighter quality-control systems.

What the Industry Should Do Now

Both laws require detailed preparation well before they take effect. Construction firms that delay adjustments risk penalties, stalled negotiations, or costly disputes.

Firms should begin:

• Updating contracts and templates
• Restructuring internal billing and approval procedures
• Creating compliance checklists for project managers
• Training administrative and legal teams prior to 2026

Legal advisers are already working with builders to rewrite agreements and establish new workflows. As one advisory group noted, clients are actively seeking help to:

• “Update contracts to reflect new requirements”
• “Refine change-order and retention procedures”
• “Develop compliance checklists and team training”

Originally reported by Jessica A. Robison in JD Supra.