Change in Retention Cap for Private Projects in California

Starting on January 1, 2026, California will enforce a new law that limits retention in private construction contracts to 5%, aligning private projects (where retention is typically 10%) with public works retention rules (where retention is limited to 5%). This change in the law is set forth in amended Civil Code § 8811 and aims to modify payment practices and risk management in the construction industry. Below is a short summary of the new law.

• Mandatory 5% retention cap: The law caps retention withholding on progress payments and total contract retention at 5%, applying down the payment chain and rendering any higher retention clauses unenforceable. This applies to owners, direct contractors and subcontractors.
• Exceptions to the cap: The retention limit does not apply under the following circumstances: (i) if, prior to or at the time of bid submission, the direct contractor or subcontractor provides notice to the subcontractor that a performance and payment bond is a requirement of the contract and the subcontractor does not provide the bond. This exception does not extend to contracts between the owner and the direct contractor; or (ii) for residential projects that are not mixed-use and under four stories, though these terms are not explicitly defined in the statute.

Implications for Project Risk Management

Under construction contracts, this statutory change will impact how payment security and project risk is handled. With reduced retention, owners and developers may decide to adopt stricter performance monitoring and milestone-based payments, in addition to reassessing bonding and prequalification processes. The law also includes mandatory attorneys’ fees for successful enforcement, increasing legal risks for noncompliance.

The new law does not eliminate financial risk—rather, it shifts more risk from contractors and subcontractors to owners and developers. All parties—owners, developers, contractors and subcontractors—should review contract templates, master agreements and project administration processes to ensure compliance before the new law goes into effect in January 2026.

Manatt’s real estate team is available to assist in evaluating and updating your current contracts and practices to comply with the new law.