California enacted a statutory cap limiting retainage on most private construction contracts to five percent. The rule applies to agreements executed after January 1, 2026 and restricts both the retainage withheld from each progress payment and the cumulative amount retained. The cap applies uniformly across contractual tiers, from owners to general contractors and subcontractors.

Retainage has long been used as a blunt risk-control tool. Reducing it to five percent materially improves contractor and subcontractor cash flow while forcing owners and lenders to rely more heavily on contract enforcement, inspections, and close-out discipline. Payment timing, draw coordination, and quality control mechanisms now carry more operational weight.

Expect widespread contract revisions in 2026, particularly in AIA and custom owner agreements. Lenders will tighten draw documentation and inspection standards. General contractors will increasingly substitute retainage leverage with punch-list gating, milestone releases, and enhanced close-out requirements to manage completion risk.

California’s five-percent retainage cap shifts financial risk management away from withheld cash and toward execution discipline. Contractors gain liquidity, while owners must strengthen oversight, inspections, and payment controls. Contracts signed after January 1, 2026 must reflect the new statutory ceiling.