Construction Payment Disputes in California

If you are unpaid on a California construction project, you probably have more than one remedy and less time than you think. A mechanics lien encumbers the property. A stop payment notice freezes the construction funds. A payment bond claim reaches the surety. Prompt payment statutes add penalties and attorney fees on top. All four are available at once, and every one of them runs on a deadline that ends the right when it passes. Bay Legal, P.C. represents contractors, subcontractors, suppliers, owners, and developers at every tier of the payment chain.

Definition: A construction payment dispute is a conflict over money owed for work performed on a project, resolved through contractual claims and California’s statutory payment remedies.

Which remedy applies to you depends on where you sit in the chain

Money moves downward — owner to direct contractor, direct contractor to subcontractors, subcontractors to suppliers — and your position determines what you can do about a stoppage.

The point most often missed: a subcontractor with no contract with the owner still holds rights directly against the owner’s property and against the construction funds. Those rights generally depend on having served a preliminary notice under Civil Code section 8200, which is why that notice matters far more than its routine appearance suggests.

What are California’s prompt payment deadlines and penalties?

Where a good faith dispute exists, an owner may withhold up to 150 percent of the disputed amount under section 8800 — but must pay the undisputed balance. Withholding the whole payment over a partial dispute is itself a violation. Full text: § 8812 · § 8814 · § 8818 · Bus. & Prof. Code § 7108.5.

How much retention can be withheld on a private project?

Five percent, as of January 1, 2026. Civil Code section 8811, enacted by Senate Bill 61, caps retention on most private construction projects at 5 percent of each progress payment, with total retention not exceeding 5 percent of the contract price. The cap is non-waivable and flows down through every tier, so a subcontract cannot carry a higher retention percentage than the prime contract. It aligns private work with the 5 percent limit long applied to public works under Public Contract Code section 7201.

This is a significant change. Before it, California had no statutory cap on private retention and 10 percent was the industry norm — meaning contracts signed under the old practice, and habits formed under it, are now out of step with the statute. An exception applies to residential projects that are not mixed-use and do not exceed four stories.

What is a stop payment notice, and when should you use one?

A stop payment notice freezes the money rather than the property. Governed by Civil Code section 8500 and following for private works, it is served on whoever holds the construction funds — the owner, or the construction lender where there is a loan — and obliges that party under section 8510 to withhold enough to cover the claim. A lender who fails to withhold after receiving a valid bonded notice becomes personally liable for the amount that should have been held.

Anyone entitled to record a mechanics lien may serve one, provided a valid preliminary notice was served first. There are two forms, and the choice is strategic:

When can you claim against a payment bond?

Where the owner recorded a payment bond before work commenced. Under Civil Code section 8600, if the owner records the direct contract together with a payment bond of not less than 50 percent of the contract price, the court may restrict mechanics lien enforcement to the amount the owner still owes the direct contractor and enter judgment against the contractor and surety for any deficiency. Bonds are common on larger commercial work and required on most public projects.

Two deadlines govern. A claimant who did not serve a preliminary notice may still enforce a bond claim by giving written notice to the surety and the bond principal within 15 days after a notice of completion is recorded, under section 8612. Suit must be filed no later than six months after completion of the work of improvement where the bond was recorded before work began, under section 8610. Both are strictly enforced.

Can you pursue more than one remedy at once?

Yes, and you usually should. Mechanics liens, stop payment notices, and payment bond claims are not mutually exclusive, and each targets a different asset — the property, the funds, and the surety. Pursuing all three that apply maximises leverage and protects against any single remedy proving hollow.

One interaction matters. A recorded payment bond can limit the ability to foreclose a mechanics lien against the owner’s property, redirecting recovery to the bond. And the lien itself, under Civil Code section 8400 and following, carries its own strict sequence: preliminary notice for anyone who is not a direct contractor, recording within the statutory window after completion, and a foreclosure action filed within 90 days of recording. Miss one and the lien is gone permanently, whatever the merits.

What defences can be raised against a payment claim?

Owners and general contractors withholding payment generally rely on one of five:

• Backcharges — deductions for the cost of correcting deficient work or completing unfinished work. The most common defence, and the most document-dependent.
• Defect offsets — a claim that repair costs reduce or exceed the balance owed. Usually needs expert support.
• Scope disputes — whether the work was inside the contract price or an extra warranting additional compensation.
• Failure of conditions precedent — late payment applications, missing lien waivers, or unmet contractual notice requirements.
• Licensing. Under Business and Professions Code section 7031, a contractor unlicensed at any point during performance cannot sue for compensation at all, and the owner may recover what was already paid. It is an absolute bar, not a discount.

Contract terms shape all of this: no-damage-for-delay clauses, change order notice requirements, and lien waiver provisions each affect what is recoverable. So does the pay-if-paid question below.

Are pay-if-paid clauses enforceable in California?

Generally not, and subcontractors should not assume otherwise from the contract’s wording. A pay-if-paid clause purports to make the owner’s payment a condition precedent to the subcontractor’s right to be paid at all, shifting the owner’s credit risk down the chain. California authority treats a true pay-if-paid clause as unenforceable, on the reasoning that it operates as an impermissible waiver of the subcontractor’s mechanics lien rights.

A pay-when-paid clause is different and generally enforceable. It sets the timing of payment by reference to the owner’s payment but does not extinguish the obligation, and courts will read an ambiguous clause as pay-when-paid rather than pay-if-paid. The practical guidance for a subcontractor is that an unpaid upstream contractor is rarely a complete answer to your claim — and the statutory remedies above run against the property and the funds regardless of what the subcontract says.

Who handles payment disputes at Bay Legal?

Payment work runs through the firm’s litigation group. Stephen Moses and Jason Rose both practise construction and real estate litigation. Kelsey J. Ibarrola handles construction matters including mechanics lien and arbitration work. Managing attorney Jayson R. Elliott and lead litigation attorney Evan Livingstone lead the group.

Scope. Bay Legal, P.C. handles payment disputes involving progress payments, retention, stop payment notices, payment bond claims, mechanics lien enforcement, prompt payment penalties, and breach of contract, for contractors, subcontractors, suppliers, owners, and developers at every tier. The practice covers private works. It does not cover public works payment disputes under the Public Contract Code, though referrals are available. The firm does not act as a collection agency, process routine lien releases, or prepare payment applications — its role begins when a dispute has arisen or is imminent.

Bay Legal, P.C. serves clients statewide from offices in Palo Alto and Los Angeles, including projects across San Francisco and the wider Bay Area.

Frequently Asked Questions

How long does an owner have to pay a progress payment in California?

Thirty days after receiving a proper demand, under Civil Code section 8800, unless the parties agreed otherwise in writing. Where a good faith dispute exists the owner may withhold up to 150 percent of the disputed amount but must pay the undisputed balance. Wrongful withholding carries a penalty of 2 percent per month in lieu of other interest. Public works follow different timelines.

What is the maximum retention on a private California project?

Five percent, as of January 1, 2026. Civil Code section 8811, enacted by Senate Bill 61, caps retention at 5 percent of each progress payment and 5 percent of the contract price overall. The cap is non-waivable and flows down every tier, so a subcontract cannot exceed the prime contract percentage. Residential projects that are not mixed-use and do not exceed four stories are excepted.

What is the difference between a bonded and an unbonded stop payment notice?

An unbonded notice under Civil Code section 8500 requires no bond and obliges the fund holder to withhold, but gives no priority if funds run short. A bonded notice under section 8530 requires a surety bond at 125 percent of the claim and in return gives priority, obliging the construction lender to withhold even where project funds cannot cover every claim.

Are pay-if-paid clauses enforceable in California?

Generally not. A true pay-if-paid clause makes the owner’s payment a condition of the subcontractor’s right to be paid at all, and California authority treats that as an unenforceable waiver of mechanics lien rights. Courts read ambiguous language as pay-when-paid, which sets timing without extinguishing the obligation and is generally enforceable.

Can I file a mechanics lien and a stop payment notice at the same time?

Yes. Liens, stop payment notices, and payment bond claims are not mutually exclusive, provided the preliminary notice and procedural requirements for each are met. Each targets a different asset — the property, the construction funds, and the surety — so pursuing all that apply maximises leverage and guards against one remedy proving insufficient.

When must retention be released on a private project?

The owner must release retention to the direct contractor within 45 days of completion under Civil Code section 8812, and the direct contractor must pass each subcontractor’s share on within 10 days of receiving it under section 8814. Late release triggers a penalty of 2 percent per month plus the prevailing party’s costs and fees under section 8818, regardless of contrary contract language.

What defences can an owner raise against a contractor’s payment claim?

Backcharges for correcting defective or incomplete work, defect-based offsets, scope disputes over whether work was an extra, failure to satisfy contractual conditions such as timely payment applications or lien waivers, and delay damages. An owner may also assert that the contractor was unlicensed during performance, which under Business and Professions Code section 7031 bars recovery entirely.

Related Questions

What is a preliminary 20-day notice, and do I have to serve one?

A notice served early in the project preserving lien, stop payment notice, and bond claim rights for anyone who is not a direct contractor. It is the cheapest document in construction and the one whose absence most often ends an otherwise good claim.

Does signing a lien waiver give up my payment rights?

It can. California uses statutory waiver forms distinguishing conditional from unconditional and progress from final. Signing an unconditional waiver before the payment actually clears is a common and expensive mistake.

What happens if the general contractor goes insolvent?

Your contractual claim may be worth little, which is precisely when the statutory remedies matter. A lien reaches the owner’s property and a stop payment notice reaches funds the owner or lender still holds, neither of which depends on the general contractor’s solvency.

Can I recover attorney fees in a payment dispute?

Sometimes. The retention penalty provisions in Civil Code section 8818 shift costs and reasonable fees to the prevailing party, and many construction contracts contain their own fee clauses. There is no general right to fees outside those.

How quickly should I act after a payment is missed?

Immediately, because the deadlines run from events rather than from when you decide to act — completion, recording, notice of completion. A month of polite follow-up can consume a remedy you did not know was expiring.

Talk to a California construction payment attorney

Payment remedies expire on statutory deadlines that keep running while negotiations continue. If an invoice is unpaid or retention is being withheld, an early call preserves options that a later one cannot. To discuss a payment dispute with a Bay Legal attorney, call the office nearest you or email intake.

Bay Legal, P.C. — serving California statewide

Northern California office

667 Lytton Ave Ste 3, Palo Alto, CA 94301

(650) 668-8000

Southern California office

3211 Cahuenga Blvd W Ste 212, Los Angeles, CA 90068

(213) 668-8000

Intake: intake@baylegal.com

Fax: (650) 963-0041

Website: https://baylegal.com