New California Law Caps Retention at 5% on Private Works Projects Effective on January 1, 2026 | California Construction Law Blog

I usually wait until the end of the year to write about new construction laws. But a friend (thanks Marty!) recently reached out about a bill signed by Governor Newsom earlier this month that I thought was important enough to write about now so that you know what’s coming down the pike. The bill, Senate Bill No. 61, adds a new Civil Code section 8811 that caps retention at 5% on private works projects and generally tracks the 5% cap on public works projects.

At only 250 words, it’s a rather concise law, but there’s some ambiguities as I’ll discuss. Here’s the full text of Civil Code section 8811:

The Basics

Here’s what’s relatively straightforward:

• Effective Date: Applies to contracts entered into on or after January 1, 2026.
• Retention Cap: Retention on private works projects is capped at 5%. This includes retention held by:
  • Owners from direct contractors;
  • Direct contractors from subcontractors; and
  • Subcontractors from lower-tiered subcontractors.
  • If the owner’s contract with the direct contractor includes less than 5% retention, the same lower rate must flow down to lower-tier contracts.
• Attorneys’ Fees: A violation under the section includes a mandatory award of reasonable attorneys’ fees to the prevailing party.

Now the Complications

Here’s what is less than straightforward:

• Private Residential Mixed Use + Four Story Rule: The 5% retention cap does not apply to residential private works projects unless the project is both:
  • Mixed use; and
  • More than four stories.

NOTE 1: I had to read the bill several times and I’m still not sure if I got it right because it includes a double, actually a triple, negative. It states that the 5% cap on retention “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.” Let me know if you read it differently than I do.

NOTE 2: The term “mixed-use” isn’t defined in the statute. While it’s pretty clear that an apartment buildings with ground floor retail is “mixed-use,” it can get gray pretty fast. What about a low-income counseling center within an affordable housing project? Or a sundry store serving apartment tenants? Or community laundry facilities within an apartment building?

• Payment and Performance Bond Exception: The 5% cap on retention also does not apply if:
  • A direct contractor or subcontractor provides written notice, before or at the time of bid, that payment and performance bonds are required; and
  • The subcontractor fails to furnish a payment and performance bond from a surety company admitted to do business in the State of California.

NOTE 3: On private projects, there is often no formal “bid” process. Owners and contractors often work with familiar contractors, hand over plans, and ask for a proposal – No RFP, no bid package. So, the requirement to give notice before or at the time of bid may not fit the reality of many projects.

NOTE 4: If you include a 5% retention cap in a contract, how do you raise it if a subcontractor fails to provide a payment and performance bond? A possible work around is to include a provision that provides that retention is 5%, but increases to say 10% if required bonds are not furnished. But if required bonds aren’t furnished, isn’t it simply that the subcontractor is in breach of the contract?

NOTE 5: I’m not sure why retention is being tied to payment and performance bonds. There is, of course, overlap between the two but it’s more like a Venn diagram than a true overlap. Retention, like a performance bond, helps to ensure full performance of work – since retention would not be released until performance is completed – but it is also intended to help ensure timely performance and performance that it workmanlike, not simply complete. However, a payment bond helps to ensure payment to subcontractors and suppliers, something that retention is not necessarily intended to address.

NOTE 6: A minor quibble, but the new law says that retention over 5% is allowed if a subcontractor fails to provide both a payment and performance bond. What if a subcontractor fails to provide a payment bond or a performance bond, but not both which I know is unlikely, can retention be increased over 5%?

Final Thoughts

This is a significant change for private works projects in California and generally tracks the 5% cap that applies to public works projects. Let me know how you read the bill. Civil Code section 8811 takes effect January 1, 2026. And with its built-in attorneys’ fees provision, misstep could be costly.