California Expands 5 Percent Retainage Cap to Private Construction Projects

Recent updates to California law impose new limitations on retainage for private construction projects. Under the updated California Prompt Payment Act, retainage on private works is now capped at 5 percent of the contract price.¹

This statutory cap carries meaningful enforcement mechanisms. If an owner or contractor withholds retainage in excess of the permitted amount or otherwise fails to make timely payment of retainage, the withholding party may be subject to:

• a 2 percent per month penalty on the improperly withheld amount<²
• liability for attorneys' fees and costs of the prevailing party in any enforcement action³

Importantly, the statute expressly provides that the 5 percent retainage cap cannot be waived by contract.⁴ Any contractual provision allowing for retainage in excess of 5 percent is unenforceable, regardless of the parties' agreement.

Exceptions to the 5 Percent Retainage Cap

The statute includes limited exceptions to the 5 percent retainage limitation in specific circumstances:

• Bond Exception. The cap does not apply where a direct contractor or subcontractor provides advance written notice (at or before the time of bid) that a performance and payment bond will be required and the subcontractor thereafter fails to furnish the required bond issued by an admitted surety.⁵ In that scenario, higher retainage may be withheld.
• Residential Project Exception. The 5 percent cap does not apply to certain residential projects that are not mixed-use and do not exceed four stories.⁶ Parties involved in low-rise residential construction should evaluate whether this exemption applies before adjusting retainage provisions.

Flow-Down Limitation on Retainage

In addition to the new 5 percent statutory cap, the statute imposes a "flow-down" restriction on retainage between contractors of various tiers. Specifically, the percentage of retainage withheld by a direct contractor from a subcontractor (and by subcontractors from their lower tiers) may not exceed the percentage of retainage agreed to between the owner and direct contractor.⁷

California's updated retainage limitations reinforce consistency across contracting tiers and create additional risk for contractors whose upstream agreements set retainage at or below 5 percent, as downstream retainage must align with that percentage.

Practical Considerations

In light of these developments, contractual retainage should be set at 5 percent on California private construction projects unless an exception applies. Importantly, the updates apply only to contracts signed on or after January 1, 2026, meaning then-existing contracts with retainage greater than 5 percent do not require a modification.⁸ Maintaining retainage provisions above the statutory limit may expose parties to penalties and fee-shifting risk. Owners and contractors using form contracts and subcontracts should consider a review of their agreements to confirm compliance with the updated statutory requirements.

For questions about California's updated retainage requirements for private construction projects, please contact the authors or your Holland & Knight relationship attorney.

Notes

¹ Cal. Civ. Code. § 8811(b)(1)(B).

² Cal. Civ. Code. § 8818(a).

³ Cal. Civ. Code. § 8811(c).

⁴ Cal. Civ. Code. § 8820.

⁵ Cal. Civ. Code § 8811(b)(2).

⁶ Cal. Civ. Code § 8811(b)(3).

⁷ Cal. Civ. Code § 8811(b)(1)(C).

⁸ Cal. Civ. Code. §8811(a).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.