Effective January 1, 2026, California’s SB 61 adds Civil Code section 8811, establishing a mandatory 5% cap on retention for most private construction contracts. The law aligns private works with the 5% public works standard that has been in place since 2012. Retention percentages must flow down consistently through all tiers of subcontracting, the cap cannot be waived by contract, and the prevailing party in any enforcement action may recover attorney fees. Small residential projects (non-mixed-use, four stories or fewer) are exempt. Contractors, subcontractors, and owners must update their contract templates before the effective date.
What Does SB 61 Do to California Construction Retention?
SB 61 adds a new section — Civil Code section 8811 — to California law. Under this new statute, retention withheld from progress payments on most private construction contracts is capped at 5% of the payment amount. Total retention withheld over the life of a contract cannot exceed 5% of the total contract price.
This represents a significant reduction from industry norms. Until now, California regulated retention amounts only for public works contracts. Many private construction contracts have historically withheld 10% retention — a practice that is now illegal for contracts entered into on or after January 1, 2026.
The law was signed by Governor Newsom on July 14, 2025, as Chapter 49 of the Statutes of 2025, and received strong support from contractors and construction industry groups across the state.
What Was the Old Rule for Private Construction Retention?
Before SB 61, California law imposed no specific limit on retention for private construction projects. The situation looked like this:
| Feature | Before SB 61 | After SB 61 (Jan. 1, 2026) |
| Private Works Retention Limit | No statutory cap; 10% was common industry practice | 5% maximum per payment and total contract |
| Public Works Retention Limit | 5% (since 2012, per PCC § 7201) | 5% (unchanged) |
| Flow-Down Requirement | Not mandated by statute | Subcontract retention cannot exceed prime contract percentage |
| Waiver | Could be negotiated by contract | Cannot be waived — any waiver is void |
| Attorney Fees | Only if provided by contract | Prevailing party may recover reasonable attorney fees |
California first capped public works retention at 10% in 1993, then lowered it to 5% in 2011 (effective 2012) under Public Contract Code section 7201. SB 61 now extends this same standard to private works.
What Are the Key Provisions of SB 61?
How Much Retention Can Be Withheld?
Section 8811 imposes three specific limits on retention:
- Per-payment limit: Retention withheld from any single progress payment by an owner, contractor, or subcontractor may not exceed 5% of that payment.
- Total contract limit: The total retention proceeds withheld over the life of the contract may not exceed 5% of the contract price.
- Flow-down requirement: In subcontracts at any tier, the retention percentage withheld cannot exceed the percentage specified in the contract between the owner and the direct contractor.
Practical example: If the owner’s contract with the general contractor specifies 3% retention, the general contractor’s contracts with subcontractors cannot exceed 3% retention — even though the statutory cap is 5%. The flow-down provision means the lowest rate in the contract chain governs all downstream contracts.
Can the 5% Cap Be Waived?
No. Section 8811’s requirements cannot be waived, even by mutual agreement of the parties. Any contract provision attempting to waive or circumvent the 5% cap is void and unenforceable. This is a critical distinction from many other construction contract provisions, which can be modified by agreement.
What Is the Enforcement Mechanism?
SB 61 includes an attorneys’ fee provision: a court must award reasonable attorney fees to the prevailing party in any action to enforce Section 8811. This is significant because it provides a financial incentive to enforce the law — even if the underlying contract does not contain a prevailing party attorney fees clause. It also means that owners or contractors who withhold more than 5% face not only repayment of the excess retention but also the other side’s legal fees.
What Projects Are Exempt from SB 61?
SB 61 includes two narrow exceptions:
Exception 1: Small Residential Projects
The 5% retention cap does not apply to residential projects that are: (a) not mixed-use, and (b) four stories or fewer in height. A typical single-family home, duplex, or small apartment building would be exempt. However, a five-story residential building or any mixed-use project (such as ground-floor retail with apartments above) would be subject to SB 61.
Exception 2: Bond Failures
The retention cap does not apply when a contractor or subcontractor is required to furnish a performance and payment bond (with advance written notice at bidding) but fails to provide that bond. In that case, the party requiring the bond may withhold retention above the 5% cap.
Is SB 61 Retroactive?
No. SB 61 applies only to contracts for private works of improvement entered into on or after January 1, 2026. Contracts signed before that date are not affected, even if the project continues well into 2026 or beyond.
However: New task orders, change orders, or subsequent agreements executed after January 1, 2026 — even if they arise under an existing master agreement — may be subject to SB 61’s requirements. Contractors and owners should carefully evaluate whether post-2025 modifications create new contractual obligations under the statute.
What Practical Steps Should You Take Before January 1, 2026?
- Update all contract templates immediately. Review every standard contract, subcontract, and purchase order your company uses. Replace any retention provision that exceeds 5% with compliant language.
- Review existing subcontract boilerplate. Pay special attention to flow-down provisions — your subcontracts must match or stay below the retention percentage in the prime contract.
- Understand the flow-down requirement. If you are a general contractor and your owner’s contract specifies 4% retention, your subcontracts must specify 4% or less — not 5%.
- Evaluate your financial exposure. With retention cut from 10% to 5%, owners lose a significant financial cushion. Consider requiring performance and payment bonds from contractors and subcontractors to offset the reduced security.
- Train your project teams. Ensure project managers, accountants, and field staff understand the new limits and the consequences of exceeding them.
- Consult legal counsel. Have your construction attorney review your updated templates for compliance with both SB 61 and SB 440 (the new change order payment law).
How Does SB 61 Interact with SB 440 (Change Order Payment Rules)?
SB 61 and SB 440 both take effect on January 1, 2026, and together they represent a significant shift in payment protections for private construction in California. While SB 61 limits how much money can be held back from progress payments, SB 440 creates a structured process for resolving disputes about additional compensation and time extensions.
Contractors should view these laws as complementary: SB 61 addresses the amount of retention withheld, while SB 440 addresses the process for resolving payment disputes. Both include enforcement mechanisms — attorney fees under SB 61, and 2% monthly interest plus stop-work rights under SB 440.
For a detailed guide to SB 440, see our post: SB 440: New Change Order Payment Rules for California Construction in 2026.
Need help with your construction project? Schedule a consultation with Bay Legal’s construction law team. Call (650) 668-8000 or visit baylegal.com/practice-areas/construction-law/.
Frequently Asked Questions About SB 61
Q: What if my existing contract says 10% retention?
A: If the contract was entered into before January 1, 2026, the 10% retention provision remains valid for that contract. SB 61 is not retroactive. However, any new contracts, task orders, or subsequent agreements signed on or after January 1, 2026, must comply with the 5% cap.
Q: Does SB 61 apply to my single-family home construction project?
A: It depends on the project type. SB 61 exempts residential projects that are non-mixed-use and four stories or fewer. A standard single-family home or small apartment building would be exempt. Mixed-use projects and residential buildings over four stories are subject to the 5% cap.
Q: What happens if a contractor withholds more than 5% on a covered project?
A: The party whose retention was unlawfully withheld can file an action to enforce Section 8811. The court must award reasonable attorney fees to the prevailing party, meaning the party that withheld excess retention may be liable for both the overage and the opposing party’s legal costs.
Q: Does the flow-down requirement work both ways?
A: The flow-down provision prevents subcontract retention from exceeding the prime contract percentage. If the owner-contractor agreement specifies 3% retention, all downstream subcontracts are capped at 3%. The statutory maximum is 5%, but the flow-down can result in a lower effective cap.
Q: Will owners require more bonding to offset lower retention?
A: Likely yes. With retention cut to 5%, owners and general contractors lose a financial cushion they have historically relied on to address defective work or incomplete performance. Industry observers expect increased demand for performance and payment bonds, particularly on larger projects.
Disclaimer: This content is for informational purposes only and does not constitute legal advice. Results depend on the specific facts of each situation. No attorney-client relationship is created by reading this article. Contact Bay Legal, PC for advice on your specific situation.
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