Two new California statutes taking effect January 1, 2026, will significantly reshape payment practices, contract administration and dispute resolution for private-sector construction projects statewide, requiring contractors, owners and subcontractors to revise long-standing procedures.
Senate Bill 61 establishes a uniform 5% cap on retention for most private construction projects, replacing the industry’s traditional 10% standard. Meanwhile, Senate Bill 440 — known as the Private Works Change Order Fair Payment Act — introduces mandatory timelines for reviewing, disputing and paying change order and time-extension claims, along with new stop-work rights for unpaid contractors.
Together, the laws mark one of the most comprehensive overhauls of private construction payment rules in California in decades.
SB 61 adds Civil Code Section 8811 and applies to all private works contracts entered into on or after January 1, 2026. The statute limits retention to no more than 5% across every tier of contracting, preventing owners or general contractors from passing cash-flow burdens downstream to subcontractors.
The cap represents a major departure from the long-standing 10% retention norm, with lawmakers aiming to improve liquidity throughout the construction chain.
There are only two narrow exceptions. Retention of up to 10% may still be withheld if a subcontractor fails to provide required performance and payment bonds after receiving written notice at or before bid time. In addition, the statute does not apply to non-mixed-use residential projects that are four stories or fewer.
The law includes strong enforcement provisions, allowing prevailing parties to recover attorney fees in actions brought to enforce the retention cap — increasing financial risk for parties that fail to comply.
SB 440 creates a standardized claims resolution framework for private construction projects, modeled after public works statutes. The law is designed to address delayed payments and unresolved disputes related to change orders and time extensions.
Under the statute, a claim includes any written demand seeking a time extension, compensation for approved changes in scope or payment of disputed amounts. Owners must conduct a reasonable review and issue a written response within 30 days, identifying both disputed and undisputed portions of the claim.
Undisputed amounts must be paid within 60 days. Late payments accrue interest at a rate of 2% per month. Failure to respond constitutes a denial but does not count as a ruling on the merits.
If disputes remain, the statute requires a structured sequence of meet-and-confer discussions followed by nonbinding mediation. Litigation or arbitration may proceed only after mediation, unless both parties agree to waive certain steps after a claim arises.
SB 440 also strengthens stop-work rights. Contractors and subcontractors may suspend performance without penalty if undisputed sums remain unpaid, provided they issue proper notice and follow the statute’s waiting periods.
Direct contractors are required to present subcontractor claims upon request and may not settle those claims without the subcontractor’s consent. Subcontractors retain all statutory remedies, including mechanics’ lien rights and stop-work authority.
The statute includes a sunset provision and is scheduled to expire on January 1, 2030.
Taken together, SB 61 and SB 440 significantly alter how private construction projects are financed, administered and disputed in California. The laws aim to improve cash flow, reduce payment abuse and create more predictable dispute resolution timelines, but they also impose strict compliance obligations.
Industry participants are encouraged to review and update all contract forms, revise internal workflows, train project teams on new deadlines and documentation requirements, and ensure bidding and payment practices align with the new statutory framework before the laws take effect in 2026.
Originally reported by JD Supra.
