Most private construction contracts executed on or after January 1, 2026, must limit progress payment retention to five percent or less under a new law that goes into effect on the first of the year in California. This requirement applies to retention withheld by an owner from the direct contractor, by the direct contractor from any subcontractor, and by any subcontractor from any lower-tier subcontractor.
California Governor Gavin Newsom approved California Senate Bill 61 (SB 61) on July 14, 2025. The bill adds Section 8811 to the California Civil Code, which will limit the amount of retention that may be withheld in private construction contracts. The statute provides limited exemptions for certain residential projects and subcontractors that fail to meet bond requirements.
What Is Changing?
Existing California law does not limit the amount of retention that can be withheld on private works of improvement, and 10 percent retainage is common practice. On public projects, however, California has generally been capping retention at five percent since 2012 under Public Contracts Code section 7201. (Public projects deemed “substantially complex” may have a higher percentage withheld, and the California Department of Transportation is prohibited from withholding any retention from progress payments on transportation projects.)
SB 61 now generally conforms retention practices for both public and private construction projects by also capping retention at five percent for private projects. The new law also aligns California with a number of other states that have enacted similar legislation. For example, both New York and Washington enacted laws in 2023 limiting retention on private construction projects to five percent.
Specifically, SB 61 limits retention to five percent of each individual payment and also limits aggregate retainage to no more than five percent of the total contract price. The new law provides for reasonable attorneys’ fees to the prevailing party in any action to enforce its provisions.
Is My Contract Covered?
The new cap applies to any construction agreement entered into for private works of improvement, subject to the exceptions listed below. Agreements between prime contractors and subcontractors, as well as subcontractors and lower-tier subcontractors, must mirror the retention provisions of the agreement between the owner and prime contractor.
SB 61 provides two exceptions to the retention limit. The first exception is for subcontractors that fail to furnish required performance and payment bonds. Specifically, the five percent cap does not apply to downstream contracts if (i) at or before the time the bid is requested the contractor provides written notice to a subcontractor (or the subcontractor to a lower-tier subcontractor) that performance and payment bonds are required for the contract, and (ii) the subcontractor subsequently fails to furnish performance and payment bonds issued by an admitted surety insurer.
The second exception is for smaller residential projects. That is, the five percent cap does not apply to any contract for purely residential projects, so long as the building is four stories or less. If the project is mixed-use, exceeds four stories, or both, the five percent cap still applies. (An example of a mixed-use project would be one that includes commercial facilities on the ground floor and residential units above.)
Conclusions
Owners and contractors should update their contract templates this year to ensure compliance ahead of SB 61’s effective date. Inaction could prove costly—SB 61 expressly provides that a court must award reasonable attorney’s fees to the prevailing party in any action to enforce its provisions. Updating forms now is a sensible risk-management step to avoid potential disputes and ensure future projects align with the new retention limits.