As of January 1, 2026, Senate Bill 61 took effect in California, adding Civil Code Section 8811 and limiting retention (also known as retainage—the portion of progress payments withheld by the owner until satisfactory completion of the work) to no more than 5% of each progress payment and 5% of the total contract price on most private construction projects. This represents a significant change from the longstanding practice that allowed associations and other private owners to withhold up to 10% of payments until project completion. The new cap, which aligns private works more closely with public works standards, applies to contracts for common area repairs, roofing, landscaping, or other improvements, improving cash flow for contractors but reducing the financial leverage associations have traditionally utilized to ensure timely completion and quality workmanship.
What Is Retention and Why Does It Matter for Associations?
Retention serves as a safeguard against defects, delays, or incomplete work by allowing the association (as project owner) to hold back a percentage of payments to the contractor. For associations, which often manage substantial projects involving common areas, this mechanism has helped protect community funds and standards.
Key Changes Under SB 61 (Civil Code § 8811)
- 5% Cap on Retention: Retention is limited to no more than 5% of each progress payment and 5% of the total contract price. This cap is mandatory and cannot be waived by agreement for applicable contracts.
- Flow-Down to Subcontracts: Subcontracts must follow the same or a lower retention rate as the prime contract with the association, ensuring uniformity throughout the project.
- Enforcement and Remedies: Violations may result in courts awarding reasonable attorneys’ fees to the prevailing party in disputes.
- Who the Cap Does Not Apply To: Low-rise residential-only projects (those that are four stories or fewer, excluding mixed-use developments). It also may not apply if a performance and payment bond is required in writing but not provided.
Many association-managed projects, particularly those involving multi-unit complexes or larger improvements to common areas, will fall under these rules as “private works of improvement.”
Implications for Associations
The reduced cap benefits contractors by allowing earlier access to funds but shifts more risk to associations. With less retention available as leverage, associations may need to strengthen other protections in contracts, such as inclusion of detailed provisions for defect correction, lien releases, and project milestones.
This change is part of broader efforts to promote fairness in private construction, but it requires careful contract review for any new work starting in 2026 or later.
As such, associations planning construction or repairs should consult legal counsel to ensure their contracts and project strategies adequately protect the community’s interests under the new statute.
New Developments from Fannie Mae and Freddie Mac
Recent updates from Fannie Mae and Freddie Mac may have significant implications for condominium communities, particularly when it comes to financing, insurance, and reserve funding. The changes include stricter project review requirements, increased reserve funding expectations, and more flexible insurance standards in response to today’s challenging insurance market. These updates are intended to improve long-term financial stability but may also impact how lenders evaluate condominium projects and buyer eligibility.
For a deeper dive into what these changes mean for associations, lenders, and homeowners, read the article published by CAI here.