Your inbox has likely been full of messages in the past few weeks informing you that California Senate Bill 61 (Cortese) was recently signed into law by the Governor of California on July 14, 2025, which limits the amount of retention that can be withheld on private works of improvement to five percent (5%). You also have likely read that this is a significant change in the California law affecting many contractors doing business in this State. However, none of these communications likely explain the specific changes that are taking place, the specific types of private works projects to which the new requirement applies, or how the new changes can be addressed once the law takes effect as of January 1, 2026.
Background:
California Senate Bill 61, signed into law on July 14, 2025, introduces changes to the California Civil Code by adding section 8811 to cap retention payments on private works projects at five (5%) for contracts entered into on or after January 1, 2026. More specifically, the new Civil Code § 8811 will state as follows:
8811.
(a) This section is applicable to a contract relating to a private work of improvement entered into on or after January 1, 2026.
(b)
(1) (A) A retention payment withheld from a payment by an owner from the direct contractor, by the direct contractor from any subcontractor, and by a subcontractor from any subcontractor thereunder, for a private work of improvement, shall not exceed 5 percent of the payment.
(B) In no event shall the total retention proceeds withheld exceed 5 percent of the contract price.
(C) In a contract between the direct contractor and a subcontractor, and in a contract between a subcontractor and any subcontractor thereunder, the percentage of the retention payment withheld shall not exceed the percentage specified in the contract between the owner and the Direct contractor.
(2) Paragraph (1) does not apply to a direct contractor or subcontractor if the direct contractor or subcontractor provides written notice to a subcontractor before, or at, the time that the bid is requested that a faithful performance and payment bond shall be required, and a subcontractor subsequently fails to furnish to the direct contractor or subcontractor a performance and payment bond issued by an admitted surety insurer.
(3) Paragraph (1) does not apply to an owner, direct contractor, or subcontractor on a residential project if the project is not mixed-use and does not exceed four stories.
(c) In any action to enforce the provisions of this section, a court shall award reasonable attorney’s fees to the prevailing party.
This is a significant change affecting many in California’s construction industry as the new legal mandate will bring the requirements for many private works projects in line with the effective cap already in place for public works projects across the State of California. The Bill’s passage also brings the State of California in line with more than twenty other states that have already adopted a predictable 5% cap for private projects.
While many are lauding this new change as a positive impact to the commercial construction industry, project owners and contractors at every tier must be aware of the specific changes that are taking place to ensure that their construction contracts and payment schedules are in compliance prior to the new law taking effect.
Key Provisions of New Civil Code § 8811:
Application of Civil Code section 8811 is Limited to Certain Types of Private Works of Improvement.
Contractors must be aware that the new section 8811 does not take a blanket approach to capping retention at five percent (5%) for any project that simply constitutes a “private work of improvement” versus one that constitutes a “public work of improvement.” Instead, the new statute and its exceptions seem to apply only to private projects deemed to be commercial works of improvement (i.e. non-residential) or mixed-use projects that involve residential construction of more than 4 stories in height. (See 8811(b)(3).) Stated differently, the project at issue must be one that does not involve a public entity or one that does not involve purely residential construction four stories or less in height.
The Mandates of the New Statute Apply to All New Construction Contracts of Every Tier.
The new statute also mandates that its requirements be addressed by project owners and contractors at every tier, including subcontractors. (See 8811 (b)(1)(A).) This means that those contracting for construction on qualified private works projects can only withhold a maximum rate of five percent (5%) from their contracts with other subcontractors and suppliers. It is also important to note that the percentage of withheld retention cannot exceed 5% of the overall contract balance in every construction contract entered into, nor may it exceed the retention withholding percentage set forth in the owner-direct contractor agreement (i.e. prime contract) governing each project. (See 8811 (b)(1)(A)-(C).)
Additional Retention Can Be Withheld if Contractor Fails to Procure Payment and Performance Bonds.
Section 8811(b)(2) further allows contractors and subcontractors to withhold retention from progress payments in an amount greater than 5% if the contract solicitation documents give notice that the hired contractor or subcontractor is required to post a payment and performance bond, with the contractor and/or subcontractor failing to provide such bonds.
This makes practical sense as the non-presence of a payment and performance bond for a given contractor’s scope of work can lead to more risk being taken on by the project owner, prime contractor, and/or other trades, requiring more retention to be withheld as security to guarantee a given contractor’s performance. It also presents a situation where contracting parties may be agreeing to a higher retention withholding amount in lieu of obtaining a payment and performance bond at the time of contracting, similar to the ten percent withholding currently seen in most construction contracts.
Either way, contractors should be aware of this distinction when updating their construction contracts prior to the changes which take effect on January 1, 2026 as their ability to procure bonds could impact the amount of retention that is withheld from their contract balance for a given project until its completion.
Attorney Fee Provision Added:
The last notable item stemming from the new law is the avenue to seek attorney’s fees if forced to bring an action over improper withholding of retention due to the language present in 8811(c). The ability to seek attorney’s fees for a noncompliant contract is a very powerful tool if utilized in the proper circumstances. All project owners and contractors should be aware of this remedy and use it as a motivation to update their contracts for compliance prior to the new law taking effect in order to avoid issues arising later down the road once project closeouts occur.
Conclusion.
The new Civil Code section 8811 is a positive development for many contractors in the State of California as it will likely allow for greater cash flow for many in relation to qualified private works of improvement. However, it is crucial for developers and contractors to understand the nuances associated with the new law so that the necessary changes to qualifying contracts are made prior to the new law taking effect.
Article written by Garret M. Mandel, Esq. of Porter Law Group, Inc. Mr. Mandel can be reached via phone at (916)381-7868. Visit the firm’s website at www.porterlaw.com. The information contained in this article is not intended to be, nor is the information, legal advice. ©2025.
