Retention payments are a longstanding practice in construction contracts, serving as a form of financial security for project owners to ensure proper and timely completion of work. It is typical for Owners in private work contracts to withhold up to ten percent (10%) from each payment owed to contractors and subcontractors. While this practice was intended to guarantee quality and incentivize completion, it often resulted in considerable financial stress for contractors and subcontractors, particularly in an industry characterized by slim profit margins and steady ongoing obligations for payroll, benefits, and material costs. Recognizing these challenges, California legislators introduced and recently passed Senate Bill 61 (“SB 61”) to update retention laws for private construction projects, with the stated goal of fostering greater fairness and financial stability across the construction industry.

SB 61’s Modifications to Retention Rules
Under existing California law, parties contracting for private works of improvement are allowed to negotiate the percentage retention to be withheld. SB 61 offers greater financial protection to contractors and subcontractors by applying a five percent (5%) retention cap applicable to most private construction contracts. In particular, for contracts executed on or after January 1, 2026, owners, developers, direct contractors and subcontractors may withhold no more than five (5%) retention from progress payments, and the total amount of retention withheld may not exceed five (5%) of the total contract value. SB 61 also limits retention withheld from subcontractors by contractors and subcontractors to the same amount withheld from the contractor by the owner.

Reprinted courtesy of Erinn Contreras, Sheppard Mullin and Julia Anderson, Sheppard Mullin

Ms. Contreras may be contacted at econtreras@sheppardmullin.com
Ms. Anderson may be contacted at juanderson@sheppardmullin.com