SB 61 adds Civil Code §8811 to cap retention withholdings on private works contracts entered on or after January 1, 2026. The bill limits any retention withheld by an owner from a direct contractor, by the direct contractor from any subcontractor, and by a subcontractor from any subcontractor below it to 5% of the payment and caps total retention proceeds at 5% of the contract price.
It also ties subcontract retention percentages to the owner–direct contractor contract and creates two carve-outs: a bond-related exception and an exclusion for small residential projects.
The statute alters a long-standing industry tool used to secure performance. For owners and primes that rely on retention as leverage, the cap will force either greater use of performance/payment bonds or new contract terms; for downstream contractors and suppliers it improves near‑term liquidity.
The bill also mandates fee‑shifting to the prevailing party in enforcement actions, increasing the stakes of disputes over retention practices and contract language.
At a Glance
What It Does
SB 61 prohibits retention withholdings exceeding 5% of any payment on private works contracts entered on or after January 1, 2026, and prevents aggregate retention proceeds from exceeding 5% of the contract price. It requires that subcontract retention percentages cannot exceed the percentage in the owner–direct contractor contract and includes exceptions for bond failures and small residential projects. Courts must award reasonable attorney’s fees to the prevailing party in enforcement actions.
Who It Affects
Direct contractors, subcontractors at all tiers, owners of private works, surety companies that issue performance and payment bonds, and contract administrators responsible for drafting and enforcing retention clauses. Lenders and project finance teams that underwrite construction risk will also see downstream effects.
Why It Matters
The cap materially changes how parties secure performance and manage cash flow: it reduces holdbacks available to owners and primes while pushing them toward bonding or alternative security. The fee‑shifting provision makes enforcement commercially consequential and likely to increase litigation and settlement leverage for prevailing parties.
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What This Bill Actually Does
SB 61 applies to private work of improvement contracts entered on or after January 1, 2026. At its core the law places a hard cap on retainage: no single retention withheld at any step in the payment chain—owner to direct contractor, direct contractor to subcontractor, or subcontractor to lower‑tier subcontractor—may exceed 5% of that payment.
The law also says the total of retention proceeds withheld on a contract cannot exceed 5% of the contract price, which limits cumulative holdbacks that can otherwise pile up through multiple tiers.
The bill ensures vertical consistency by requiring that retention percentages in contracts lower in the chain cannot exceed the percentage negotiated between the owner and the direct contractor. Practically, that means if an owner-direct contract sets retention at 3%, downstream parties cannot lawfully withhold 5% from a subcontractor; the subcontract percentage is capped at the owner‑direct percentage.
That alignment is intended to prevent mismatch and unexpected cash‑flow squeezes at lower tiers.There are two notable exceptions. First, the cap does not apply to a direct contractor or subcontractor if the prime (or a subcontractor) has given written notice, before or at the time bids are requested, that a faithful performance and payment bond will be required and a subcontractor subsequently fails to supply a performance and payment bond issued by an admitted surety insurer.
In plain terms: if you put subs on notice they must be bonded and a sub fails to produce an acceptable bond, the cap does not protect that subcontractor. Second, the cap does not apply on residential projects that are not mixed‑use and do not exceed four stories; small residential work is carved out entirely.Enforcement carries cost consequences: the statute requires courts to award reasonable attorney’s fees to the prevailing party in any enforcement action.
That fee‑shifting makes litigation a more attractive path for parties seeking to enforce or challenge retention practices and will likely change settlement dynamics. To comply, parties must revisit contract language, update notice processes for bond requirements, verify admitted surety status, and adjust accounting practices that calculate retainage and final releases.
The Five Things You Need to Know
Effective date and scope: Section 8811 applies to private work of improvement contracts entered on or after January 1, 2026.
5% cap: No retention withheld by owner→direct contractor, direct contractor→subcontractor, or subcontractor→sub‑subcontractor may exceed 5% of the payment, and total retention proceeds may not exceed 5% of the contract price.
Chain alignment: Retention withheld by any subcontractor cannot exceed the retention percentage specified in the contract between the owner and the direct contractor.
Bond exception: The 5% cap does not apply to a prime or subcontractor if the prime gave written notice at or before bid request that a performance and payment bond is required and a subcontractor fails to furnish a bond issued by an admitted surety insurer.
Residential carve‑out and fee shifting: The cap does not apply to non‑mixed‑use residential projects four stories or fewer, and courts must award reasonable attorney’s fees to the prevailing party in enforcement actions.
Section-by-Section Breakdown
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Applicability date and scope
This paragraph limits the statute to private‑work contracts entered on or after January 1, 2026. It therefore does not retroactively alter retainage provisions in existing contracts and applies only to private works (the statute does not reach public works procurement under state public‑works law). Practitioners must track contract effective dates to determine which projects fall under the new rule.
5% retention cap and total cap on retention proceeds
Subparagraph (A) caps any retention withheld at 5% of the payment at each step in the payment chain. Subparagraph (B) adds a separate constraint that aggregate retention proceeds on a contract cannot exceed 5% of the contract price, which prevents cumulative layerings of smaller retainages adding up to more than the owner agreed to pay. Subparagraph (C) ties downstream retention percentages to the owner–direct contractor percentage—downstream parties cannot lawfully exceed the owner‑direct percentage when withholding retention.
Bond exception (notice + admitted surety requirement)
If a direct contractor or subcontractor gives written notice before or at the time bids are requested that a faithful performance and payment bond will be required and a subcontractor later fails to furnish a performance and payment bond from an admitted surety insurer, then the 5% cap in paragraph (1) does not apply to that direct contractor or subcontractor. In practice this creates an alternative security path: primes can require bonding and, if subs fail to comply, are not constrained by the 5% cap—effectively restoring broader withholding power in those circumstances. The statute raises practical questions about timing of the notice and the definition and verification of an "admitted surety insurer."
Residential project exemption
Paragraph (1) does not apply on residential projects that are not mixed‑use and do not exceed four stories. The exemption preserves existing retention practices for much of the homebuilding sector, leaving typical single‑family and low‑rise multifamily residential projects outside the cap. Developers and small builders in that segment will see no statutory change to retainage through this bill.
Fee‑shifting for enforcement
The court must award reasonable attorney’s fees to the prevailing party in any action to enforce the section. This fee‑shifting provision changes litigation economics: it increases the leverage of parties who are likely to prevail and raises the cost of defending marginal claims. Expect more contested suits and settlement pressure where retention calculations are close or contract language is ambiguous.
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Who Benefits
- Small and lower‑tier subcontractors and suppliers — The 5% cap preserves near‑term cash flow by limiting holdbacks at each payment step and preventing cumulative retainage from exceeding 5% of the contract price.
- Downstream subcontractors in long chains — The rule tying downstream retention to the owner–direct percentage reduces surprise withholding at lower tiers and makes cash‑flow forecasting more reliable for firms farther from the prime contract.
- Contract administrators and compliance teams — A clear statutory cap simplifies bookkeeping and auditing for retainage amounts (once forms and systems are updated), reducing disputes over arbitrary or inconsistent withholdings.
Who Bears the Cost
- Owners and developers — The cap reduces a traditional source of security for correcting defective work or paying contingency items, likely forcing owners to shift to bonded security or stricter contract remedies.
- Direct contractors and primes who rely on retainage as risk mitigation — They may need to require performance/payment bonds, increase other contractual protections, or accept greater exposure to subcontractor defaults.
- Surety insurers and bonding market — If owners and primes increase bonding as a substitute for higher retainage, sureties will face greater demand and underwriting risk; small subcontractors unable to obtain bonds could be excluded from work or priced higher.
Key Issues
The Core Tension
The law balances two legitimate aims—protecting subcontractors’ cash flow by limiting retainage and preserving owners’ security to ensure completion and remedy defective work—by capping retainage but preserving a bond‑based escape hatch and exempting small residential projects; the tension is whether the statute shifts too much performance risk onto owners and the bonding market in the name of liquidity, or conversely whether it finally curbs an industry practice that unduly strains small contractors.
The statute addresses a central pain point—downstream cash‑flow pressure from layered retainage—by imposing a bright‑line cap. But implementation will surface several practical frictions.
First, calculating what counts as a "payment" for purposes of the 5% cap and what constitutes the "total retention proceeds" raises accounting and timing questions: is the cap measured against each progress payment, the scheduled installment, or the contract's final payment? Systems and payment applications will need updating to reflect the statutory calculation.
Second, the bond exception creates both a compliance pathway and an enforcement headache. The exception hinges on a timely written notice and a bond issued by an "admitted surety insurer," which invites disputes over whether notice was sufficient, whether a submitted bond meets the admissibility standard, and whether a subcontractor's failure to furnish a bond was excused.
That ambiguity, coupled with mandatory fee‑shifting, could produce litigation over technicalities rather than substantive performance issues. Finally, the residential carve‑out and the chain‑alignment rule introduce uneven treatment across projects and tiers: the policy protects small residential builders but leaves many mid‑rise and mixed‑use projects subject to the cap, creating planning complexity for developers that build across project types.
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