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California contractors, subcontractors, and owners should review their private works contracts now

Under SB 61, newly enacted Civil Code § 8811 applies to contracts for private works of improvement entered into on or after January 1, 2026. The statute creates a new retention cap for most private construction projects: retention withheld by an owner from a direct contractor, by a direct contractor from a subcontractor, or by a subcontractor from a lower-tier subcontractor may not exceed 5% of the payment. The total retention withheld also may not exceed 5% of the contract price.

This is a significant change because many private works contracts still use 10% retention. Those forms should be updated before being used on new projects.

A few key points:

1. The cap applies across the contracting chain.
Owners, direct contractors, subcontractors, and lower-tier subcontractors are all affected.

2. Subcontract retention cannot exceed the prime contract retention.
If the owner/direct contractor agreement requires less than 5% retention, that lower percentage must generally flow down to subcontracts.

3. There are exceptions.
The statute does not apply where a subcontractor fails to provide required performance and payment bonds after receiving proper written notice before or at the time bids are requested. It also does not apply to residential projects that are not mixed-use and do not exceed four stories.

4. Attorney’s fees matter.
In an action to enforce Civil Code § 8811, the prevailing party is entitled to recover reasonable attorney’s fees. That fee-shifting provision gives the statute real teeth.

Practical takeaway:
Owners and contractors should review their private works contract templates, subcontract forms, payment procedures, and retention clauses. A 10% retention clause that may have been standard in the past could create avoidable disputes on contracts entered into on or after January 1, 2026.