California passed Senate Bill 61 (SB 61), a new law intended to help ease financial risk for contractors and subcontractors on private construction projects. With the passage of SB 61, signed into law by Governor Gavin Newsom on July 14, 2025, retention practices for private construction projects will undergo a significant change. Effective January 1, 2026, SB 61 caps retention withholdings at 5% for private construction projects. This cap is designed to protect contractors and subcontractors by improving cash flow during the project.
What are Retention Payments?
Retention payments are a long-standing practice used on construction projects that allow owners (and upper-tier contractors) to withhold a percentage of payments due to the contractor (and subcontractors) until project completion. Historically owners hold up to 10% in retention from each payment due to the contractor and the contractor withholds the same percentage from its subcontractors. By withholding a portion of payment until project completion, owners have leverage to make sure contractors finish the work properly, on time, and address any deficiencies. However, contractors and subcontractors incur financial strain because they are forced to shoulder payroll, material costs, and overhead while waiting for the retention to be released by the owner.
Prior to the enactment of SB 61, parties in California were allowed to negotiate the amount of retention to withhold, often using 10% as the industry standard retention amount. California enacted SB 61 in an attempt to addresses the financial imbalance by reducing the retention cap to 5%, freeing up case for contractors and subcontractors. With the passage of SB 61, California is the latest state to join a growing movement to cap retention at 5% on construction projects.
Key Provisions of SB 61
- Retention Cap: No more than 5% of any progress payment may be withheld by owners, contractors, or subcontractors.
- Aggregate Limit: Total retention cannot exceed 5% of the contract price.
- Effective Date: The law is prospective and only applies to contracts executed on or after January 1, 2026.
- Exceptions:
- Residential projects are excluded unless they are mixed-use (both business and residential) or exceed four stories.
- Subcontractors who fail to provide required performance and payment bonds are not protected by the cap so long as notice of the bonding requirement was given to the contractor in writing before or at the time of bidding.
- Legal Enforcement: Courts must award reasonable attorney’s fees to the prevailing party in disputes over compliance.
Practical Considerations for Stakeholders
To ensure compliance and minimize disputes:
- Review Contracts: Update templates and agreements for projects starting after January 1, 2026.
- Plan for Transition: Adjust billing and cash flow strategies for projects spanning 2025–2026.
- Communicate Early: Establish clear expectations with subcontractors and suppliers.
- Bonding Requirements: Monitor bonding requirements and compliance to determine if any contractors or subcontractors fall within the exception to SB 61.
