For most private construction contracts executed on or after January 1, 2026, advance payment withholding must be capped at five percent or less under a new law that takes effect on the first of the year in California. This requirement applies to the retention that an owner withholds from the direct contractor, the direct contractor withholds from a subcontractor, and a subcontractor withholds from a subordinate subcontractor.
California Governor Gavin Newsom approved California Senate Bill 61 (SB 61) on July 14, 2025. The bill adds Section 8811 to the California Civil Code, which limits the amount of deductible that may be retained on private construction contracts. The law provides limited exemptions for certain residential projects and subcontractors that do not meet bond requirements.
What is changing?
Existing California law does not limit the amount of deductible that may be retained on private improvement work, and a 10 percent withholding is common practice. However, since 2012, California has generally imposed a five percent cap on public projects under Section 7201 of the Public Contracts Code. (Public projects deemed “significantly complex” may have a higher percentage withheld and the California Department of Transportation is prohibited from withholding any Retention of advance payments for transport projects.)
SB 61 now generally adjusts retention practices for both public and private construction projects by limiting retention to five percent for private projects as well. The new law also brings California into line with a number of other states that have enacted similar laws. For example, in 2023, both New York and Washington passed laws limiting deductibles on private construction projects to five percent.
Specifically, SB 61 limits the deductible to five percent of each individual payment and also limits the total deductible to no more than five percent of the total contract price. The new law provides for reasonable attorneys' fees for the prevailing party in any action to enforce its provisions.
Is my contract covered?
The new cap applies to all construction contracts entered into for private improvement works, subject to the exceptions set out below. Agreements between prime contractors and subcontractors and between subcontractors and sub-subcontractors must reflect the retention provisions of the agreement between the owner and the prime contractor.
SB 61 provides two exceptions to the retention limit. The first exception applies to subcontractors who do not provide the required performance and payment guarantees. In particular, the five percent cap will not apply to downstream contracts if (i) the Contractor, at or before the time of solicitation of the quotation, notifies a subcontractor (or the subcontractor to a lower tier subcontractor) in writing that the contract requires performance and payment bonds, and (ii) the subcontractor does not subsequently provide performance and payment bonds issued by an approved surety insurer.
The second exception applies to smaller residential projects. This means that the five percent cap does not apply to contracts for purely residential projects as long as the building has four floors or less. If the project is mixed-use, has more than four floors, or both, the five percent cap still applies. (An example of a mixed-use project would be one that includes commercial space on the ground floor and residential units above.)
Conclusions
Owners and contractors should update their contract templates this year to ensure compliance before SB 61 takes effect. Inaction could prove costly – SB 61 specifically requires a court to award reasonable attorneys' fees to the prevailing party in any action to enforce its provisions. Updating the forms now is a sensible risk management step to avoid potential disputes and ensure future projects comply with the new retention limits.
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