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Retention has long been a contentious issue in California construction. Traditionally, owners withheld retention of 10% from each progress payment until completion, arguing it was necessary to ensure performance, quality and timely delivery. Contractors and subcontractors, however, often struggled with cash flow, payroll, and material costs while waiting months—sometimes even years—for withheld retention.
Recognizing the financial challenges contractors and subcontractors face, the California legislature passed Senate Bill 61 ("SB 61"), now codified under California Civil Code Section 8811 and effective January 1, 2026, limiting retention to 5% on private works of improvement, aligning with the public works standard in place since 2012. The law's intent is clear—ease financial strain on contractors and subcontractors while still providing owners with security (albeit reduced) with respect to project completion.
Section 8811 does not apply universally to all private projects. There are several, limited exceptions set forth in the statute:
- Not Retroactive: Section 8811 only applies to private works contracts entered into on or after January 1, 2026.
- Small Residential Projects: Section 8811 does not apply to small residential projects, provided the residential project is under four stories and does not constitute a mixed-use project.
- Subcontractor's Failure to Provide Performance and Payment Bond: Section 8811 does not apply to a contractor or a subcontractor if, prior to or at the time of a request for a bid, written notice is provided that a performance and payment bond is required and the subcontractor subsequently fails to provide said bonds from an admitted surety in California.
Section 8811 also provides that the retention percentage under any subcontract must match the retention percentage under the prime contract. Moreover, in an action to enforce the requirements of 8811, the courts are required to award attorneys' fees to the prevailing party.
For owners and contractors concerned about a contractor's or subcontractor's financial ability to properly and timely complete their work, other protections are available to offset the risk of reduced retention, though at an added cost to the project. The most obvious of which is the use of performance and payment bonds. Other less costly options may include, for instance, strengthening and/or broadening withholding provisions, default and step-in rights and warranty provisions under your construction agreements.
SB 61 is a landmark change for California's private construction industry. For clients, the takeaway is clear: plan now, negotiate carefully, and align contracts with this new law in 2026.
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.
