By Casey Cline, MBA | Managing Director & Fractional CFO, Cline Consulting Solutions
Expertise: Middle-Market Corporate Finance, M&A Due Diligence, Job Costing Frameworks, and Industrial Operational Scaling.

A📜 What Happened?

Governor Gavin Newsom signed California Senate Bill 61 (SB 61) into law, placing a statewide cap on retention payments in private construction contracts.

This new legislation aligns private-sector retainage rules with the 5% standard already in place for public works—providing a more equitable, cash flow–friendly environment for contractors, subcontractors, and small businesses across the state.

🔍 What SB 61 Does

Effective for contracts entered into on or after January 1, 2026

• Caps retention at 5% of each payment and no more than 5% of total contract value.

• Requires consistency across tiers — retention withheld from subcontractors can’t exceed what’s withheld from the contractor.

• Invalidates higher retainage terms in contracts — such provisions are now unenforceable.

• Includes key exemptions:

  • Subcontractors who don’t furnish requested performance/payment bonds.

  • Residential buildings under 4 stories (not mixed-use).

• Allows legal enforcement — prevailing parties in retention disputes can recover reasonable attorney’s fees.

💡 Why This Matters

California’s previous 10% retention rule on private projects was a serious cash strain—especially for small, minority, and emerging contractors. SB 61 brings much-needed relief:

✅ Improved cash flow
✅ Less reliance on costly financing
✅ Faster payments for labor and materials
✅ More predictable project funding and bidding

🗣️ Voices of Support

“SB 61 levels the playing field and reduces financial barriers for small contractors.”
— Senator Dave Cortese

“Without this reform, we’re forced to use expensive credit to finance our own work. SB 61 helps us stay competitive.”
— Rob Meadows, President, Morrow-Meadows Corporation

“This is a game-changer for subcontractors in California.”
— Eddie Bernacchi, NECA Legislative Advocate

🧭 What to Do Next

If you’re an owner, developer, or contractor working in California:

• Review your contract templates for compliance.

• Update your retention language before Jan 1, 2026.

• Educate your project teams and subcontractors about the upcoming changes.

📞 Need Help Preparing?

We help construction firms, real estate developers, and subcontractors navigate California’s evolving contract and compliance landscape. If you have questions about how SB 61 affects your business,  let’s discuss how we can help assist you.