Beginning January 1, 2026, California will implement a major shift in how private construction projects manage retainage, marking one of the most significant payment-security reforms in years. Under Senate Bill 61, which creates Civil Code §8811, all new private construction contracts entered on or after that date must comply with a mandatory 5% retention cap, ending the widespread industry practice of holding back 10% on progress payments.
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The reform aligns private works with long-standing public works standards in California and is expected to dramatically improve contractor and subcontractor cash flow in the state’s vast construction market.
The centerpiece of the law is straightforward and strict: no party may withhold more than 5% retention.
Key provisions include:
Owners, general contractors, and subcontractors at every tier are barred from withholding more than 5% from progress payments. The total retention across the contract cannot exceed 5% of the overall contract value.
If the owner and general contractor negotiate a rate below 5%, that lower percentage — whether 4%, 3%, or even lower — must automatically flow down to all subcontractors. This prevents the common practice of GCs applying higher retention to subs than the owner applies to them.
Any contract clause that attempts to permit retention above 5% is automatically void. Violating parties also risk mandatory attorney fee awards, significantly increasing financial exposure in disputes.
There are two narrowly defined situations where the 5% cap does not apply:
Purely residential projects four stories or fewer may continue using higher retention if desired. But the moment the project is mixed-use or five stories or more, the 5% cap applies.
If a subcontractor is told in writing at the time of bid that they must furnish a performance and payment bond — and they fail to provide it — the retention cap can be lifted for that subcontractor alone.
The shift will ripple across California’s construction market, affecting contract drafting, risk management, and project financing. While the change is widely expected to improve liquidity for contractors and subcontractors, it also means owners and developers will need to rethink traditional risk mitigation strategies.
Retention has long been a contentious issue in construction finance. By capping retainage at 5%, legislators aim to reduce cash-flow strain, minimize payment disputes, and provide smaller contractors with greater financial stability — especially those operating in labor- and capital-intensive trades.
The reform reflects a broader national trend, as several states have been reevaluating retainage requirements as part of efforts to modernize construction payment laws.
With the rule officially taking effect on January 1, 2026, firms working in California’s private sector must ensure their contracts and payment processes are compliant. Failure to do so risks voided clauses, legal challenges, and attorney fee awards mandated under the statute.
Originally reported by Foley.
