Retention payments are a longstanding practice in construction contracts, serving as a form of financial security for project owners to ensure proper and timely completion of work. It is typical for Owners in private work contracts to withhold up to ten percent (10%) from each payment owed to contractors and subcontractors. While this practice was intended to guarantee quality and incentivize completion, it often resulted in considerable financial stress for contractors and subcontractors, particularly in an industry characterized by slim profit margins and steady ongoing obligations for payroll, benefits, and material costs. Recognizing these challenges, California legislators introduced and recently passed Senate Bill 61 (“SB 61”) to update retention laws for private construction projects, with the stated goal of fostering greater fairness and financial stability across the construction industry.
SB 61’s Modifications to Retention Rules
Under existing California law, parties contracting for private works of improvement are allowed to negotiate the percentage retention to be withheld. SB 61 offers greater financial protection to contractors and subcontractors by applying a five percent (5%) retention cap applicable to most private construction contracts. In particular, for contracts executed on or after January 1, 2026, owners, developers, direct contractors and subcontractors may withhold no more than five (5%) retention from progress payments, and the total amount of retention withheld may not exceed five (5%) of the total contract value. SB 61 also limits retention withheld from subcontractors by contractors and subcontractors to the same amount withheld from the contractor by the owner.
There are several notable exceptions built into SB 61.
- The law is prospective and does not apply to contracts executed before January 1, 2026.
- SB 61 does not apply to residential projects unless the project qualifies as “mixed-use” or is five stories or more. The law does not define “residential” or “mixed-use,” but given SB 61’s integration into mechanics lien law—which aims to protect contractors and subcontractors—it is likely that courts will interpret these terms broadly to fulfill the statute’s protective intent. Other statutes have defined “mixed-use” variously, such as projects where up to 50% of the square footage is for nonresidential use (Cal. Gov’t Code § 66200(f)) or where at least 75% is for residential use (Cal. Gov’t Code § 21159.28). In practice, courts may favor a broad definition of “mixed use”, i.e. a project combining residential and commercial/non-residential components. Because there is currently no statutory definition or dispositive case law, owners, general contractors, and subcontractors should exercise caution and treat any project that includes both residential and commercial/non-residential uses as mixed-use, and therefore subject to the five percent (5%) retention cap under SB 61.
- SB 61 does not apply where a direct contractor or subcontractor requires a subcontractor to provide payment and performance bonds and the subcontractor fails to provide a bond issued by an admitted insurer, provided notice of the bond requirement was given in writing to the subcontractor before or at the time of bidding.
Importantly, SB 61 reinforces existing prompt payment laws and mandates that courts award reasonable attorney’s fees to the prevailing party in enforcement actions. While SB 61 does not alter statutory payment deadlines, it works hand-in-hand with prompt payment statutes to encourage faster, more reliable disbursement of funds throughout private construction projects.
Compliance Implications
The implementation of SB 61 marks a significant shift in risk allocation and cash management for owners, developers, contractors, and subcontractors in California. Beginning January 1, 2026, parties entering new private works contracts should review and update their standard contract templates to incorporate the five percent (5%) cap and ensure compliance with SB 61’s requirements. Owners and contractors must develop strategies for compliance by aligning retention language and procedures across payment tiers and by ensuring that retention imposed down the subcontractor chain does not exceed contractual limits. Careful documentation is necessary for projects requiring performance and payment bonds, particularly if relying on the statute’s exceptions. As California joins over 20 other states with similar retention laws, owners and contractors should be aware of these changes and carefully assess how the new requirements may affect contract administration, payment practices, and project financial management within the construction industry.