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Effective January 1, 2026: Time to Update Your Contracts
If your firm is involved in private construction in California, a fundamental change in payment security is coming. Effective January 1, 2026, for all contracts entered on or after that date, Senate Bill 61 (creating Civil Code §8811) will cap retention on most private works projects at a mandatory 5%.
This aligns private projects with the standards long applied to public works in the state and marks the end of the traditional 10% retainage practice.
The New Rules: What Everyone Needs to Know
The core of the new law is simple: You cannot withhold more than 5%.
- The Cap: Owners, direct contractors, and subcontractors at every tier are prohibited from withholding more than 5% of any progress payment as retention. The total retention proceeds withheld also cannot exceed 5% of the total contract price.
- Mandatory Flow-Down: If the owner and general contractor agree to retention less than 5% (e.g., 3%), that lower rate must flow down and apply to all subcontracts.
- The Penalty: The law is non-waivable. Any contract that attempts to enforce a higher retention rate will be void on that point. Furthermore, any action taken to enforce this statute includes a mandatory award of reasonable attorneys' fees to the prevailing party, significantly raising the financial risk of non-compliance.
Who Is Exempt From the 5% Cap?
The retention cap does not apply in two specific situations:
- Certain Residential Projects: The cap does not apply to a purely residential project that is not mixed-use and does not exceed four stories. If the project is mixed-use or five stories or taller, the 5% cap applies.
- Subcontractor Bonding: The cap is lifted for a subcontractor if they were formally notified in writing (before or at the time of bidding) that a performance and payment bond was required, and the subcontractor subsequently failed to furnish that bond.
Takeaways for Project Teams
For owners, developers, and contractors, the time to prepare is now.
- Review and Revise All Contracts: Immediately update all standard contracts and subcontract forms to reflect the 5% retention maximum.
- Align Downstream Rates: General contractors must ensure their subcontract retention terms precisely match or are less than the rate in their prime contract with the owner.
- Adjust Risk Mitigation: With less retention as a cushion, owners and developers may need to increase reliance on other risk mitigation tools, such as performance security, enhanced project controls, or stricter prequalification of bidders.
The 5% cap is designed to improve cash flow and financial stability across the construction industry. Be sure your contracts and payment practices are fully compliant before the clock runs out on January 1, 2026. Reach out to your Foley attorney or the author of this article if you have questions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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