Two new California statutes taking effect January 1, 2026, will significantly change the way private construction projects are contracted, administered and paid:
- SB 61 establishes a new 5% maximum retention cap across all tiers of contracting for most private projects.
- SB 440, the Private Works Change Order Fair Payment Act, imposes a mandatory, time‑bound dispute resolution and payment framework for change order and time‑extension claims.
Both laws require immediate updates to standard contract forms, internal workflows and project management practices.
SB 61: The New 5% Retention Cap
SB 61 adds Civil Code section 8811 and imposes a strict 5% retention cap on all private works of improvement entered into on or after January 1, 2026. The cap must apply uniformly at every tier, preventing owners or general contractors from shifting liquidity burdens downstream. This represents a major shift away from the longstanding 10% industry norm.
Exceptions
There are two narrow exceptions:
- Missing Bonds: If a subcontractor is informed in writing before or at bid time that performance and payment bonds are required and subsequently fails to furnish those bonds, the retaining party may withhold up to 10%.
- Certain Residential Projects: SB 61 does not apply to non-mixed-use residential projects that do not exceed four stories.
Enforcement and Risk
Prevailing parties in actions enforcing the cap are entitled to attorney fees. This increases risk for parties who attempt to maintain 10% retention after 2025.
SB 440: Mandatory Change Order Claim Procedures
SB 440 creates a uniform claims resolution process for private projects. It is modeled on the public works claims statute, and aims to prevent delayed or partial payment of change order and time‑extension claims.
What Counts as a Claim
A “claim” is any written demand sent by registered or certified mail seeking:
- A time extension (including relief from owner‑assessed delay damages),
- Payment for approved changes in scope, or
- Payment of amounts disputed by the owner.
Owner Response Deadlines
- Owners must undertake a reasonable review and respond in writing within 30 days, identifying undisputed and disputed portions.
- Failure to respond constitutes a denial but is expressly not an adverse finding on the merits.
- Undisputed amounts must be paid within 60 days, with interest accruing at 2% per month on late payments.
Meet‑and‑Confer and Mediation
If disputes persist after the initial response:
- Contractor may request a meet‑and‑confer; owner must schedule within 30 days.
- Owner must issue a follow‑up written statement within 10 days.
- Remaining issues proceed to nonbinding mediation.
- Litigation or arbitration may occur only after mediation, unless the parties waive steps after a claim arises.
Stop‑Work Rights
If an owner fails to pay undisputed sums, a contractor or subcontractor may suspend performance without penalty after issuing a notice of amount due, waiting 30 days and then serving a 10‑day notice of intent to stop work.
Subcontractor Claims
Direct contractors must present subcontractor claims upon request, and cannot settle them without the subcontractor’s consent. Subcontractors retain all statutory rights, including mechanics’ liens and stop‑work rights.
Sunset Provision
The act is scheduled to sunset on January 1, 2030.
What This May Mean for You
SB 61 and SB 440 collectively overhaul the legal framework governing private‑sector payment practices in California. SB 61’s cap retention is intended to improve cash flow throughout the construction chain, while SB 440’s detailed claims resolution process is intended to accelerate dispute handling and reduce payment abuse in change order situations. Both laws include strong enforcement mechanisms and require significant updates to contracting practices before 2026.
Action Steps
To prepare for the new requirements taking effect on January 1, businesses should:
- Review all owner‑contractor agreements executed after January 1, 2026, with counsel to ensure compliance.
- Update subcontracts, including those issued under master service agreements, to reflect new retention limits and claims procedures.
- Train project managers and back‑office teams on new timelines, documentation requirements and stop‑work rights.
- Revise internal workflows for bidding, change order management and payment processing.
If you have questions about revising contracts, developing compliance procedures or implementing these reforms across your active and upcoming projects, please contact Richard McDonald, Jay Ross or Cory Mickels, or your regular Lathrop GPM attorney.