California has enacted Senate Bill 61 (“SB-61”), a significant piece of legislation that directly impacts owners and developers of private construction projects in the state. Signed into law on July 24, 2025, SB-61 establishes a mandatory cap on retention payments for most private construction projects, limiting retention to 5%. This new requirement is effective for contracts executed on or after January 1, 2026, and will materially influence the structure and administration of construction contracts in California.
Retention is the portion of earned payment withheld by owners to help ensure satisfactory completion of work. While public construction projects in California have long been subject to a 5% cap, private construction projects have not been strictly governed. SB-61 now aligns the 5% cap between public and private contracts.
The Cap & Exceptions
The upshot of SB-61 is that owners, developers, and “direct contractors” (i.e., the contractor with a direct contractual relationship with the project owner or developer) will now be prohibited from withholding more than 5% retention from progress payments – and no more than 5% of the total contract value – on most private construction contracts. Here are some key exceptions to this rule:
- SB-61 only applies to contracts executed on or after January 1, 2026. The law does not apply retroactively, meaning existing contracts will not be subject to the cap.
- SB-61 includes carveouts for some types of projects such as (i) certain residential developments and (ii) those where the total price is under $500,000.
- SB-61 will not apply between a contractor and a subcontractor if the subcontractor is required to provide the contractor with payment and performance bonds but fails to do so.
Policy & Impact
SB-61 is intended to promote fairness and equity in the construction payment process. Advocates of the bill, including contractor associations and equity-focused organizations, argue that excessive retention disproportionately affects small and minority-owned subcontractors, who often face cash flow challenges and limited access to capital. By capping retention, the law aims to improve liquidity for contractors and subcontractors, reduce payment disputes, and foster a more inclusive construction industry. Owners may now need to require additional performance security to match the level of security previously attained through a higher retainage.
In addition to the retention cap, SB-61 reinforces existing prompt payment laws and encourages more timely disbursement of funds throughout the construction chain. While the law does not alter statutory payment deadlines, it complements broader efforts in California to streamline payment practices and reduce delays that can hinder project progress.
Preparation for Compliance
Owners and developers doing business in California should begin preparing now for the January 2026 implementation of SB-61:
- Review & Update Contracts: Revise standard form/template contract language to incorporate the 5% retention cap and align with the new legal requirements.
- Seek Legal Guidance: Consult legal counsel to assess how the new law impacts existing contractual obligations, bonding requirements, and risk management strategies.
- Top-Down Collaboration: Engage with contractors early in the project planning phase to establish clear expectations around payment schedules, retention terms, and cash flow.
- Evaluate Risk Areas: Identify potential pressure points as between owner and contractor as well as between owner and the state to mitigate issues before they arise.
