California’s construction industry will undergo a significant change starting in 2026. On July 14, 2025, Governor Gavin Newsom signed Senate Bill 61 into law, creating a 5% cap on retention for private works of improvement. The new law aligns private projects with the retention limits established for public works since 2012. The new statute, Civil Code section 8811, takes effect January 1, 2026, and applies to contracts entered on or after that date.

This law has broad implications for developers, contractors, and subcontractors across all tiers. While intended to standardize payment practices, it includes specific exceptions and strict enforcement provisions that industry participants must navigate carefully.

What you need to know:

• Applies only to contracts signed on or after January 1, 2026.
• Caps retention at 5% of progress payments and total contract price.
• Requires lower retention percentages in prime contracts to flow down to subcontracts.
• Includes limited exceptions for certain residential projects and subcontractor bonding.
• It cannot be waived – violations may lead to adverse claims for attorneys’ fees.

Developers and contractors would be prudent to review contracts now, update forms, and consult their construction counsel and insurance brokers before the law takes effect.

Please read the full update for a deeper dive into Senate Bill 61 and its practical impact.