California’s New 5% Retention Law: What Changes in 2026

As we move through the first quarter of 2026, California’s new 5% retention cap on private construction contracts has officially taken effect. Effective as of January 1, 2026, all parties to private construction contracts entered into on or after that date are now operating under the requirements of California Civil Code Section 8811.

Why This Matters Now

Following our earlier alert on Senate Bill No. 61, signed by Governor Newsom in July 2025, the law is now a reality for every owner, general contractor, and subcontractor entering into private construction agreements in California. The 5% cap applies at every level of the contracting chain, from owner to direct contractor, from direct contractor to subcontractor, and from first-tier subcontractors to lower-tiered subcontractors. Any retention below 5% negotiated between an owner and a direct contractor must also be passed down the contracting chain accordingly. In summary, no tier in the contracting chain can withhold more than 5% of progress payments, and total retention on a project cannot exceed 5% of the contract price.

Importantly, this is not a provision that can be contracted away. California Civil Code Section 8820 renders any waiver of Section 8811 against public policy, and violations carry mandatory prevailing party attorneys' fees.

Conclusion

Section 8811 represents a significant development for private construction projects in California, and owners and financing parties should begin planning for its impact. The attorneys in our construction practice group offer experienced guidance on contracting strategies to help owners navigate this shift.

For further insights on the law, including its implications and exceptions, please see our prior alert on Section 8811, linked here.