Retention is money withheld from progress payments until a project is substantially complete. Owners have traditionally used retention as leverage to ensure contractors finish the job, address punch-list items and correct deficiencies. In turn, general contractors often withhold the same percentage from subcontractors.
Before SB 61, a 10% retention was common across California private construction projects. Contractors and subcontractors often had to finance payroll, materials and overhead costs while waiting months to receive the final portion of their earned revenue.
Supporters of SB 61 argued that the old system placed too much financial strain on contractors and subcontractors, particularly smaller firms operating on tight margins. By reducing retention to 5%, the law is intended to improve cash flow throughout the construction chain while still giving owners financial protection.
The law applies to private nonresidential construction projects and mixed-use residential developments taller than four stories for contracts executed on or after Jan. 1, 2026. Residential projects and smaller mixed-use developments are generally exempt.
The new rules are straightforward:
- Owners cannot withhold over 5% when making progress payments to contractors.
- Contractors cannot withhold more than 5% from subcontractors.
- Total retention on the project cannot exceed 5% of the contract price.
- If the prime contract specifies retention below 5%, subcontract retention must match that lower percentage.
Courts are required to award attorney’s fees to the prevailing party in compliance disputes, and the statute cannot be waived through contract language.
For contractors, the biggest challenge may be managing the transition. Projects signed in 2025 may still operate under 10% retention terms, while subcontracts issued in 2026 may be limited to 5%. That can create temporary cash-flow gaps for general contractors caught between old and new rules.
What you can do
- Review and revise contract templates to account for the new requirements.
- Ensure subcontract retention mirrors primary contract requirements.
- Update accounting and billing procedures to track projects under different retention structures (if you still have projects signed in 2025).
- Communicate expectations clearly with subcontractors and suppliers.
- Reassess bonding requirements and risk-management practices.
Many industry observers expect the transition will become routine over time. States that previously adopted similar retention caps saw little disruption after implementation.