California has enacted a major change regarding retention withheld from payments on private construction projects. Senate Bill 61, which adds Section 8811 to the Civil Code, provides:
- 5% Cap: retention is limited to five percent (5%).
- All tiers: The 5% cap applies to payments from an owner, from a general contractor, or from a subcontractor to a lower subcontractor (of any tier).
- Effective date: The law applies to all contracts “relating to a private work of improvement” that are “entered into on or after January 1, 2026.” In the case of master agreements, that means that project specific task or work orders entered into on or after January 1, 2026, will be subject to the cap.
There are two exceptions:
- Certain purely residential projects: The new law does not apply to a “residential project if the project is not mixed-use and does not exceed four stories.”
- Subcontracts: If the prime contract has a retention percentage rate lower than 5%, the retention percentage in first tier and all lower tier subcontracts cannot exceed the rate in the prime contract.
- However, this additional limitation on subcontract retention will not apply if “the general contractor or subcontractor who is soliciting bids gives notice that faithful performance and payment bond shall be required, and the subcontractor from which retention is being withheld subsequently fails to furnish a performance and payment bond issued by an admitted surety insurer.[1] The notice must be in writing and given “before, or at, the time that the bid is requested”[2]
Public projects have had similar limits on retention for a number of years. Beginning in 1999, Public Contract Code section 7200 has limited retention withheld from subcontractors to the same percentage withheld by the owner, subject to certain exceptions.
Effective January 2012, Public Contract Code section 7201 has limited retention on public projects to five percent unless the project owner has “made a finding prior to the bid that the project is substantially complex and therefore requires a higher retention amount than 5 percent and” the owner includes in its “bid documents details explaining the basis for the finding and the actual retention amount.”
Caltrans a number of years ago eliminated retention on federally funded transportation projects to comply with requirements of 49 CFR § 26.29, the federal regulations for disadvantaged business enterprises. In 2020, the Legislature enacted Public Contract Code section 7202 to codify Caltrans elimination of retention on transportation projects.
[1] An admitted surety is a “corporate insurer or a reciprocal or interinsurance exchange to which the Insurance Commissioner has issued a certificate of authority to transact surety insurance in this state.” Civ. Proc. Code § 995.120.
[2] Under Part 6 of Division 1 of the Civil Code, in which the new law is codified, “notice” is defined in a way that the Legislature probably did not intend to apply. Civil Code Sections 8106 and 8110 require that notice be given by certified mail/return receipt or registered mail, by personal delivery, or by service in the same manner as service of process in a lawsuit. Further, under Civil Code Section 8102, a notice must contain: “(1) the name and address of the owner or reputed owner. (2) The name and address of the direct contractor. (3) The name and address of the construction lender, if any. (4) A description of the site sufficient for identification, including the street address of the site, if any. If a sufficient legal description of the site is given, the effectiveness of the notice is not affected by the fact that the street address is erroneous or is omitted. (5) The name, address, and relationship to the parties of the person giving the notice.