SACRAMENTO — In a major boost for small businesses and minority-owned construction firms, Governor Gavin Newsom has signed Senate Bill 61, authored by Senator Dave Cortese, into law. The measure, which takes effect in January 2026, aims to ease chronic cash flow burdens for contractors and subcontractors working on privately financed projects by cutting maximum retention from 10% to 5%.

The change aligns California’s private sector retention rules with the 5% cap already used in public works — a move industry leaders say will deliver more financial predictability and reduce project delays.

“What this law will do is enable small business owners, minority contractors and subcontractors working on private projects, to keep the cash flowing for materials used and labor performed just as if the private project was a public works project,” said Senator Dave Cortese, a long-time labor advocate. “Keeping the cash flowing will reduce construction timelines and costs.”

Contractors say the reform is long overdue. “SB 61 is a long-overdue fix to a harmful practice that has placed enormous financial strain on contractors for decades,” said Eddie Bernacchi, Legislative Advocate for the National Electrical Contractors Association (NECA). “By reducing from 10 percent to 5 percent retention, the bill creates a more equitable and stable business environment, particularly for small and emerging contractors, and will ultimately help reduce construction costs for developers and property owners.”

Family-run firms say the impact will be felt immediately in better cash flow and reduced reliance on credit lines. “Without the passage of SB 61, contractors will continue to rely on expensive credit lines to cover the cost of labor, materials, and overhead for work they’ve already completed to the owner’s satisfaction, driving up construction costs across the board,” said Rob Meadows, President of Morrow-Meadows Corporation, a California-based electrical construction firm. “We’re grateful to Senator Cortese for championing this critical reform and standing up for California contractors. His leadership will bring lasting change, financial fairness, and more competition to construction projects throughout the state.”

The new law follows a trend in more than 20 states, including Oregon, Nevada, and New York, which have already capped private project retention at 5%.

Why it matters

‍This change is expected to help small firms, minority-owned businesses, and emerging contractors compete more fairly in the private market — many of whom struggle with tight margins and high borrowing costs when retention withholds large sums of earned payments.

Affordable housing impact

‍The new law aligns well with California’s push to accelerate privately financed affordable housing projects. Faster payments free up cash for contractors to take on more work, hire crews, and pay suppliers promptly — speeding up construction cycles.

What to expect next

• Contractors should update contracts to reflect the new retention maximum before January 2026.
• Developers should adjust payment schedules and work with legal teams to revise standard contract templates.
• Subcontractors can use the new cap to negotiate better terms and lower credit line costs.

National context

‍With more states adopting 5% caps for private projects, experts say this could spur wider reforms in states still holding onto higher retention rates that squeeze small construction businesses.

Originally reported by SD 15.