New California Law Limits Retention on Private Construction Projects to 5%

New California Law Limits Retention on Private Construction Projects to 5%

On July 14, 2025, Governor Gavin Newsom signed into law Senate Bill 61, which establishes a 5% cap on the amount of retention that can be withheld on private construction projects in California, with certain limited exceptions. Senate Bill 61 is a major change for the California construction industry that brings retention limits on private projects in line with limits that have been in place on public works projects since 2012. Civil Code section 8811 (the new California Civil Code section created by Senate Bill 61) takes effect on January 1, 2026 and will apply to contracts entered into on or after that date.

Key Provisions of Civil Code section 8811

• Effective Date. Civil Code section 8811 is applicable to contracts relating to private works of improvement entered into on or after January 1, 2026. Note that section 8811 does not apply retroactively, so contracts executed prior to January 1, 2026 will not be subject to the new retention cap.
• Applies to All Tiers. Civil Code section 8811 applies to owners, prime contractors, and subcontractors of any tier.
• 5% Retention Cap. The maximum amount of retention that may be withheld from any progress payment on a private works project may not exceed 5% of such progress payment. Further, the total retention proceeds withheld under any private works contract may not exceed 5% of the contract price.
• Retention Percentage Flow-Down Requirement. The percentage of retention withheld under any subcontract (including sub-subcontracts) on a private works project may not exceed the percentage of retention withheld under the applicable prime contract between the owner and prime contractor. Thus, prime contractors and subcontractors must flow down any negotiated reductions in retention below the 5% cap in the prime contract to all subcontracts thereunder.

Limited Exceptions to Private Works Retention Cap

• Residential Construction Exception. The 5% cap on retention under Civil Code section 8811 does not apply to residential construction projects as long as the projects are (1) not mixed-use, and (2) four stories or less. Notably, neither “mixed-use” nor “residential” are expressly defined in section 8811, so there is potential uncertainty about what types of projects are included within this exception, particularly at the margins.
• Subcontractor Performance and Payment Bond Exception. The 5% cap on retention under Civil Code section 8811 does not apply to subcontracts where (1) the prime contractor or subcontractor (as applicable) notifies bidders when or before bids are requested that performance and payment bonds are required, and (2) the successful subcontractor or sub-subcontractor subsequently fails to furnish such performance and payment bonds. Notably, this exception does not apply to prime contracts with the owner, regardless of whether bonds are required from the prime contractor.

Enforcement

• Non-Waivable. Parties cannot waive the provisions of Civil Code section 8811 due to Civil Code section 8820, which deems the contractual waiver of any provisions of the private works retention statutes (including the new section 8811) to be against public policy.
• Attorneys’ Fees. The prevailing party in any action to enforce Civil Code section 8811 is entitled to a mandatory award of its reasonable attorneys’ fees.

Next Steps

• Developers and contractors should review their existing contracts to determine how this new law may impact planned projects and contractual relationships, in particular with respect to (1) projects where one or more of the project agreements (e.g., the prime contract) are executed before January 1, 2026, but others (e.g., trade subcontracts) may not be entered into until after January 1, 2026, and (2) existing master agreements in place that may involve work orders issued after January 1, 2026.
• Developers and contractors should revise their California private works contract and subcontract forms to ensure they comply with the new law and the 5% retention cap going into effect on January 1, 2026.
• Developers and contractors would be prudent to consult their construction counsel and insurance brokers for alternative forms of securing project performance – historically a key rationale for retention. Payment and performance bonds, default insurance, and retention bonds being utilized in other states are a few of the evolving options in this new frontier for the industry.