Two new California laws took effect on January 1, 2026 that will impact how payment retention and construction disputes are handled on private projects. California Senate Bill 61 limits how much retention can be withheld on private works contracts, while California Senate Bill 440 introduces a structured process aimed at resolving certain construction claims before they escalate into litigation.
These changes affect the entire construction chain: owners, general contractors, and subcontractors and may require updates to construction contracts and project management practices.
Retention on Private Construction Projects is Now Limited to 5%
Beginning in 2026, retention withheld from progress payments on most new private construction projects will generally be capped at 5% for contracts entered into on or after January 1, 2026, marking the end of the previous standard 10%.
Retention is commonly used in construction projects to ensure work is completed properly before full payment is made. Under the new law, however, the amount that can be withheld is now significantly restricted.
The Retention Cap Applies Throughout the Construction Chain
The new retention limit applies to all levels of a construction project, including:
This means that retention generally cannot exceed 5% at any level of the contracting chain.
Lower Retention Rates Must Flow Down to Subcontractors
If the contract between the owner and the general contractor sets a retention rate lower than 5%, that lower rate must also apply to all downstream subcontractors.
For example, if the owner withholds only 3% retention, the general contractor cannot withhold 5% from subcontractors. The same lower percentage must apply throughout the project.
Exceptions to the Retention Cap
There are limited situations where the 5% retention cap does not apply. First, the law does not apply to certain residential projects that are not mixed-use and do not exceed four stories. So, contracts to build a typical, single-family residence, for example, would be exempt.
Second, the cap may not apply if a subcontractor fails to provide a required payment and performance bond after receiving written notice that the bond is required.
Retention Requirements Cannot Be Waived by Contract
The retention cap established by SB 61 cannot be waived or modified through contract provisions. If a dispute arises regarding the statute, the prevailing party in litigation may recover reasonable attorneys’ fees, which increases the importance of ensuring contracts comply with the law.
New Claims Resolution Process for Private Construction Disputes
In addition to the retention changes, California Civil Code Section 8850 creates a new statutory claims resolution process for private construction projects. This process, established through SB 440, applies to contracts entered into between January 1, 2026 and January 1, 2030.
The goal of the law is to encourage early communication and resolution of disputes involving payment adjustments or time extensions before they escalate into formal litigation.
A Structured Process for Resolving Construction Claims
The statute introduces a structured framework for handling claims by contractors (and subcontractors) for time extensions and payment disputes..
In general, the process requires the parties to:
Subcontractors May Request That Claims Be Presented to Owners
The statute also provides a mechanism allowing subcontractors to pursue claims through the general contractor.
A subcontractor may request that the general contractor submit a claim to the owner on the subcontractor’s behalf. The general contractor must act in good faith in handling the request and cannot settle the claim without the subcontractor’s written approval.
With these laws already in effect in 2026, construction industry participants should review their contracts and project procedures to ensure compliance.
Owners, contractors, and subcontractors may want to:
Taking proactive steps now can help project participants avoid disputes and ensure compliance with California’s evolving construction laws.
