New California Law Caps Construction Contract Retention at 5% on Private Projects
California construction contracts on private work projects routinely include the right of the paying party to withhold a percentage of the amount otherwise due during the construction of a project. Until now, this “retention” withholding on private projects has been customarily set at 10%, and not subject to any statutory cap.
Recently enacted SB 61, which was supported by several contractor groups and generally unopposed, creates the following non-waivable limitations on retention withheld on private projects, for construction contracts entered on or after January 1, 2026:
- Retention withheld by an owner or contractor (of any tier) shall not exceed 5% percent of (i) any single payment otherwise due, or (ii) the total contract price.
- Retention withheld by a contractor from a subcontractor, or, by a subcontractor from a lower tiered subcontractor, shall not exceed the retention percentage in the contract between the owner and contractor.
Exceptions: The requirements in (1) and (2) above do not apply to:
- A contractor that includes in its bid request, a requirement that the bidding party provide performance and payment bonds, where such bidding party then fails to furnish such bonds by an admitted surety insurer.
- An owner or contractor on a residential project, if the project is not mixed-use and does not exceed four stories.
Note: In an action to enforce this new law, a court shall award reasonable attorneys’ fees to the prevailing party.
Practical Tip: You already need to consider these requirements for contracts you will be signing in 2025. While a contract between an owner and contractor enter in 2025 is not subject to the new law, the subcontracts entered by the owner’s contractor will be, if those subcontracts are signed in 2026. This creates a potential misalignment of retention requirements in owner-contractor agreements and contractor-subcontractor agreements.
As you can see, SB 61 is already impacting private projects in California. If you have questions regarding SB 61, please do not hesitate to reach out to Tyler Dockins or any of Cox Castle’s construction experts.
