California SB 61: Preparing for the New 5% Retention Cap in 2026 

California Senate Bill 61 (SB 61) goes into effect on January 1, reducing the maximum allowable retention on most private commercial projects to 5%. Although the change ultimately benefits the industry, it also creates a brief period where contracts, billing practices, and project timelines may be affected in ways owners don’t typically expect. 

While the transition is manageable, early awareness is key. A few specific scenarios may introduce avoidable complexity if not addressed ahead of time, particularly on projects spanning 2025 and 2026. Knowing what to look for now ensures owners stay ahead of the changes rather than reacting to them mid-project. 

What does California SB 61 Change in commercial construction? 

Retention refers to the small percentage owners withhold from each contractor payment until the project is fully complete. It acts as a safeguard to ensure the project is completed, and close-out tasks are finished. Reducing that percentage means the general contractor and the subcontractors receive more of their earned money earlier, ultimately improving their cash flow. 

Specifically, under SB 61 (subject to certain exceptions): 

• Owners may not hold more than 5% retention from general contractors. 

• General contractors may not hold more than 5% from subcontractors. 

• Any work order issued on or after January 1, 2026 must follow the 5% rule, even if the existing MSA references older terms.  

In Washington state, where similar rules were implemented in 2023, the transition created far less disruption than anticipated.  

“It was a non-event,” said Seattle-based Project Executive Andy Harmer. “Owners understood this legislation provides accelerated cash flow for contractors and subcontractors, while still providing good financial leverage.” He also noted that after implementation, “subs haven’t ‘let their foot off the gas’. It hasn’t affected performance.”  

Key Changes due to California SB 61 

While Washington’s experience provides positive insight into the lower retention rate transition, the shift requires awareness and communication in a few key areas. As California enters its transition year, several practical steps should be of focus. 

The 2025 Contract / 2026 Subcontract Gap 

One of the biggest logistical transitions involves projects contracted in 2025 using 10% retention with subcontracts issued in 2026 at 5%. As a result, general contractors may have to self-fund that difference, introducing avoidable pressure on project cash flow and billing. 

“If the owner contract is issued prior to year-end, it has the potential to affect general contractors cash flow,” said Adam Chelini, Senior Vice President of Operations at Skyline Construction. This reinforces the need for owners and general contractors to revisit contracts now, before billing begins under the new rules. 

More Administrative Complexity During the Transition Year 

Because some projects will still operate under 10% retention while new ones follow 5%, tracking projects in each bucket is of the utmost importance. “Companies’ accounts payable departments will need to recognize a year of different retention payouts,” said Principal Craig Jones, “so ensuring the correct retention is implemented is vital to being fully compliant.” 

Subcontractor Awareness and Billing Alignment 

While many trade associations have publicized the change, Project Executive Steve Arnold has found that this news isn’t necessarily top-of-mind for all. “Making sure subcontractors are on board is key,” he said, “and clear communication will be essential to avoid misaligned expectations or billing delays.” 

Potential Benefits of SB 61 

Clearer Closeout Expectations 

With a smaller financial holdback, owners may request more definition in contract requirements. “Master Service Agreements may add more specifics about project completion and requirements for final payment,” said Steve. “This could lead to more structured closeout processes and fewer ambiguities.” 

Improved Subcontractor Cash Flow 

Because retention limits how much subcontractors are paid during the project, even small reductions can significantly improve subcontractor financial health. Subcontractors float a lot of the project costs. Lowering retention under SB 61 allows subcontractors to access more of their earned revenue sooner, reducing reliance on lines of credit and easing the strain of funding labor and material intensive scopes. 

Reliability and Relationship-Based Partnering 

Since retention is no longer a large motivator at the end of the project, strong relationships and trust play an even bigger role. “If a sub were to walk away from a job prior to its completion, they’d never work for us again,” said Craig. “However, because of our thorough vetting process and long-established relationships, I don’t foresee this happening.” 

Steve reinforced that the shift may highlight the importance of qualifications-based selection. “In hard-bid situations, the lowest bid isn’t always the most reliable,” he said. 

These dynamics may help owners think more strategically about partnering with financially stable general contractors and dependable trade partners

How Is Skyline Preparing Clients and Partners for SB 61? 

Early communication. We’ve been reaching out to owners, subcontractors, and design partners to ensure they are aware and informed of the impending SB 61 implementation. 

Contract and work-order updates. We are reviewing in-flight 2025 projects, updating templates, and aligning all 2026 work orders with SB 61. 

Internal coordination and AP readiness. Our accounting systems are configured to handle mixed retention structures during the transition year. 

Subcontractor education. We are rolling out a year-end trade partner summit to reinforce updated billing expectations and avoid early confusion. 

Navigating SB 61 With Clarity 

SB 61 introduces meaningful changes to how retention and cash flow function on California projects. While there are clear advantages for subcontractors, the transition requires owners and contractors to plan carefully around contract language, financial exposure, and billing processes. 

Skyline will continue to support clients, subcontractors, and project teams through the transition with guidance, communication, and best practices tailored to each project’s needs. 

Key Takeaways 

• SB 61 reduces retention to 5% on all 2026 work orders, which may impact how projects are financed, billed, and closed out. 

• Projects spanning 2025–2026 carry the highest risk: a 10% owner contract paired with 5% subcontractor retention can create a cash-flow gap that may affect project funding and billing cadence. 

• Mixed retention requirements in 2026 increase administrative risk, making accurate tracking essential to avoid compliance issues or payment delays. 

• Subcontractor readiness varies, which can lead to misaligned invoices or slowed progress if expectations aren’t aligned early. 

• With proactive planning, owners can avoid these risks and benefit from clearer closeout expectations and stronger subcontractor cash flow.