California’s New Rules for Private Construction Contracts Take Effect Jan. 1, 2026

Beginning Jan. 1, 2026, new amendments to the California Civil Code will significantly affect most private construction projects (excluding certain smaller residential projects under four stories). Two statutes—Civil Code sections 8811 and 8850—impose non-waivable requirements and render noncompliant contract provisions unenforceable. Owners, contractors and subcontractors should review and update their contract forms now to avoid meaningful financial and procedural exposure.

Together, these laws reflect California’s push toward prompt payment and more regimented dispute resolution on private projects.

Civil Code Section 8811: New Limits on Retention

Section 8811 fundamentally limits how retention may be withheld on private construction projects. It applies to most private construction contracts, including owner-contractor and subcontract agreements, entered into on or after Jan. 1, 2026.

Key Points:

Retention is capped at 5% of any progress payment.

• Total retention over the life of the contract may not exceed 5% of the contract price.
• Retention withheld downstream may not exceed the retention withheld upstream (mandatory flow-down).
• Noncompliant retention provisions are void and unenforceable.
• The prevailing party may recover reasonable attorneys’ fees.
• The cap does not apply if a subcontractor fails to provide a required performance or payment bond after notice.

Civil Code Section 8850: Mandatory Claims and Payment Procedures

Section 8850 establishes a statutory framework for claims, responses and payment timing that cannot be waived by contract. It applies to most private construction contracts entered into on or after Jan. 1, 2026.

Key Points:

• Claims must be submitted with reasonable documentation via registered or certified mail.
• Owners must respond within 30 days, identifying disputed and undisputed portions.
• Undisputed amounts must be paid within 60 days of the response.
• If disputes remain, the parties must participate in mandatory mediation, with costs shared equally.
• Contractors may suspend work (after notice and statutory deadlines) if payment is withheld or the owner refuses to engage.
• Pre-claim waivers are void.
• Unpaid undisputed amounts accrue interest at 2% per month (24% annually), even during dispute resolution if deadlines are missed.

Practical Takeaways

These statutes materially shift risk on private construction projects. Failure to comply can result in interest exposure, work stoppages and increased litigation risk, with little room to contract around the rules.

Before Jan. 1, 2026, project participants should:

• Update contract templates to comply with the new retention and claims requirements.
• Train project and accounting teams on statutory timelines and escalation procedures.
• Review bonding requirements to understand when retention exceptions may apply.

This document is intended to provide you with general information regarding new California construction laws. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.