Commencing January 1, 2026, retention – money withheld as security against incomplete or defective work – on most private construction projects in California will be capped at 5%. This change, enacted through Senate Bill 61 and sponsored by the National Electrical Contractors Association, brings private construction projects in line with the long-standing retention limits that have applied to public works projects. California, like twenty-two other states, now caps retention payments on private projects. This change has led to improved cash flow for contractors and subcontractors.

The new law applies to all private projects, including: (1) construction, alternation, repair, demolition, removal, building, wharf, bridge, ditch, flume, aqueduct, well, tunnel, fence, machinery, railroad, or road; (2) landscaping; and (3) filling, leveling, or grading of real property. Contracts between private owners and direct contractors must cap retention at 5% of each progress payment. Retention must also be capped at 5% of the total cost of the private project. The law requires a flow down of this provision from a prime contract to subcontractors. The 5% retention only applies to subcontractors that furnish a performance and payment bond issued by a reliable surety.

As with most laws, certain exclusions do apply, so direct contractors beware. The law excludes an owner, direct contractor, or subcontractor on a residential project from the 5% retention cap, if the project is not mixed-use (commercial) and does not exceed four stories. The law also does not apply to lenders of a construction loan. Therefore, private residential projects are unaffected by the new law.

There are some additional requirements: An owner must release the retention funds to a direct contractor within 45 days of completion of a private project. In contrast, retention from a public works project is released upon a public agency’s acceptance.

A direct contractor must pay its subcontractors within ten (10) days after receiving all or part of a retention payment from an owner. In the event of a dispute between a direct contractor and a subcontractor, 150% of the retention payment may be withheld, which is in parity with public works projects. However, there must be a bona fide good faith dispute, with proper notice of the dispute to the affected party.

There are repercussions for noncompliance. Penalties of 2% per month on an amount wrongfully withheld can be assessed if an owner or direct contractor unjustifiably withholds payment. If a lawsuit is filed, the prevailing party is entitled to legal costs (such as expert witness fees) and reasonable attorney’s fees.

The new retention cap is significant because it improves cash flow for contractors and subcontractors on private projects. This decreases contractors’ reliance on expensive credit lines, which alleviates financial pressure and enables competitive bidding on future projects.  It also provides fairness and predictability by standardizing retention policies across both public and private sectors and creates a level playing field.

The future of incentivizing project completion, focusing on quality assurance, correcting defects, increasing financial security, managing risk, and reducing costly litigation is brighter with the advent of Senate Bill 61, bringing long overdue parity to private projects.

 

Dunn DeSantis Walt & Kendrick provides a broad spectrum of legal services to businesses of all sizes, from small, local start-ups and non-profits to large, national companies. DDWK’s real estate development and construction practice includes representing all segments of the development and construction industries on both private and public projects. 

You can find additional information and resources related to helping business owners and their businesses on the DDWK website.