California changed its private-project retainage rules this year. For contracts entered into on or after Jan. 1, 2026, Senate Bill 61 generally limits retention to 5%. The change affects payment terms and workflows from the owner-contractor agreement through lower-tier subcontracts.
SB 61 Limits Retainage on Private Works
SB 61 was passed in 2025 and took effect as Civil Code section 8811 on Jan. 1, 2026. It applies to private works of improvement entered into on or after that date. The statute limits retainage to 5% of each payment and 5% of the contract price.
Lower-tier retainage also can’t exceed the percentage set in the owner-contractor agreement. That rule matters when a prime contract uses less than 5%. A contractor or subcontractor cannot automatically withhold the full statutory maximum downstream when the upstream percentage is lower.
Does the 5% Cap Apply to Every Project?
No. The law doesn’t apply to a residential project that’s not mixed-use and does not exceed four stories. It also provides an exception for situations where performance and payment bonds were requested but not provided.
If the new retainage limit is violated and a party files suit to enforce it, the court must award reasonable attorney fees to the prevailing party. That fee provision gives owners, contractors, and subcontractors a practical reason to confirm the correct percentage before withholding retainage.
Key Takeaway: What To Update in Your Contract and Payment Workflow
The first step is to align contract language and project workflows with the new statutory requirements, if applicable. California private-project teams should review:
- Retainage percentages in prime contracts and subcontracts
- Payment application terms and schedules of values
- Bond requirements and bid-stage notices
- Accounting controls for total retainage across the contract price
In addition, payment forms and schedules of values should reflect the applicable percentage, and project accounting systems should match those documents.
Owners should create a claim calendar that reaches legal, finance, and project personnel as soon as a qualifying demand arrives. Contractors should preserve mailing records, account for disputed and undisputed amounts, and track the two-step work suspension notice. Subcontractors should understand and mirror the upstream process so pass-through claims and retention requirements don’t create avoidable gaps.
Keep Retainage Terms Coordinated
Retainage is only one part of payment administration. AIA Contract Documents (ACD) forms can help keep the contract sum, completed work, change orders, prior payments, and current retainage in one consistent record. Review the payment application process before the next billing cycle and obtain project-specific legal guidance when coverage or an exception is uncertain.
