California retainage law: a plain-English guide for contractors

What is retainage in construction?

Retainage (California statutes call it retention) is the part of each progress payment the owner holds back until the work is finished. The general contractor usually passes the same percentage down to its subcontractors, so everyone in the chain has money held back.

"5% retainage" means that on a $200,000 pay application, $10,000 is withheld and $190,000 is paid. Over a long job the held amount adds up: on a $4 million subcontract at 5%, $200,000 is sitting with someone else by the end of the work. On your books it's a retainage receivable. On the GC's or owner's books it's retainage payable.

Retainage exists to give the owner leverage to get the work finished and to protect against unpaid subcontractors and suppliers filing liens. It also means contractors finance part of the project with their own earned money, often for a year or more.

California retainage cap: 5% on private and public work

Since January 1, 2026, private jobs have a cap. Under Civil Code §8811, added by Senate Bill 61 (2025), retention on a private work of improvement can't exceed 5 percent of any payment. Total retention withheld can never exceed 5 percent of the contract price.

• Every tier. The cap applies owner to direct contractor, direct contractor to sub, and sub to sub-tier.
• No higher than the prime. A contractor can't hold a higher percentage from its subs than the owner holds under the prime contract. If the owner agrees to 3 percent, the subs get 3 percent too.
• New contracts only. It covers private contracts entered on or after January 1, 2026. Older contracts keep whatever retention terms they have.
• Bond exception. A contractor that gives a sub written notice, before or when bids are requested, that a performance and payment bond is required can hold more than 5 percent from a sub that then doesn't furnish a bond from an admitted surety. This exception doesn't reach the owner's contract with the direct contractor.
• Residential exception. The cap doesn't apply to a residential project that is not mixed-use and is four stories or less. The statute doesn't define those terms, so check with counsel on borderline projects.
• Attorney's fees. In a suit to enforce the cap, the court must award reasonable attorney's fees to the winner.

Public work has had a 5 percent cap since 2012 under Public Contract Code §7201, with its own exceptions. See Public projects below.

How long can retainage be held in California?

Who pays whom: Deadline

Private owner to direct contractor: Within 45 days after completion of the work of improvement (Civil Code §8812)

Private direct contractor to subcontractor: Each sub's share within 10 days after the contractor receives all or part of the retention (Civil Code §8814)

Public entity to original contractor: Within 60 days after completion of the work of improvement (PCC §7107)

Public original contractor to subcontractor: Each sub's share within 7 days after the contractor receives all or part of the retention (PCC §7107)

On private work, "completion" has a set meaning under Civil Code §8180. It happens at the first of these: actual completion, occupation or use by the owner with labor stopped, 60 days in a row with no labor, or a recorded notice of cessation after 30 days with no labor. If part of the project will be owned by a public entity, the owner can tie release of that part's retention to the public entity's acceptance.

Disputes don't freeze everything. On private work, if there's a good faith dispute, the owner can hold back no more than 150 percent of the disputed amount from final payment, and a direct contractor can hold back no more than 150 percent of the estimated disputed amount from a sub (Civil Code §8812, §8814). Once you give notice that disputed work is finished, the owner or GC has 10 days to accept or reject it, and 10 days after accepting it to pay the retention tied to that work (Civil Code §8816).

Interest and late payment in California

Late retention is expensive. On private work, an owner or direct contractor that misses a retention deadline owes a penalty of 2 percent per month on the amount wrongfully withheld, in place of ordinary interest, and the winner of a collection suit gets costs and attorney's fees (Civil Code §8818). On $100,000 of late retention that's $2,000 a month. These rules can't be waived by contract (Civil Code §8820). Public work carries the same 2 percent per month charge under PCC §7107.

Progress payments have their own clocks. A private owner pays the direct contractor within 30 days after notice demanding payment (Civil Code §8800). On private and most public work, a prime contractor or sub pays its subs within 7 days after receiving each progress payment, unless they agree otherwise in writing, and late amounts carry 2 percent per month (Business and Professions Code §7108.5). Both rules let a payer hold back up to 150 percent of an amount in good faith dispute.

What California's private works rules don't do is require that retention sit in a separate or interest-bearing account. The money involved is real. $500,000 of retainage held for 18 months earns about $28,500 at 3.7% compounded monthly. On private jobs, that interest usually stays with whoever holds the money. On public jobs, the contractor can claim it under PCC §22300 (see below).

Retainage that earns interest on California projects

California caps retention at 5 percent but doesn't say who keeps the interest on private jobs. Retain-Edge is built to change that: retainage held in a segregated, interest-bearing account at an FDIC-insured partner bank, a balance for every contractor, and the interest paid to the GCs and subcontractors who earned it. Retain-Edge never holds, lends or invests the funds, and is now enrolling pilot projects.

Get early accessCalculate your interest

Public projects in California

Under PCC §7201, retention on public works contracts entered on or after January 1, 2012 can't exceed 5 percent of any payment or 5 percent of the contract price in total. It covers the state, the UC and CSU systems, cities and counties (including charter cities and counties), districts, public authorities and similar public bodies, at every tier. There are two ways around it:

• Unbonded subs. A contractor that gives written notice before bids that a performance and payment bond is required can hold more than 5 percent from a sub that can't or won't furnish one.
• Substantially complex projects. A state agency or local governing body can set a higher percentage, but only on a project-by-project finding made before bid that the project is substantially complex. The bid documents must explain the basis and state the actual retention amount. Local agencies must approve the finding at a properly noticed public hearing.

No party can require another to waive §7201. Release follows PCC §7107: 60 days after completion to the original contractor and 7 days from there to subs, with 2 percent per month on late amounts, attorney's fees to the winner, and any waiver void. For public work, "completion" means the first of: occupation and beneficial use by the public entity with labor stopped, acceptance by the public entity, 100 days or more of stopped labor for reasons outside the contractor's control, or 30 days of stopped labor if the agency files a notice of cessation. The public entity can hold back up to 150 percent of a disputed amount from final payment.

Progress payments are due within 30 days after a proper, undisputed payment request, both for state agencies (PCC §10261.5) and for local agencies (PCC §20104.50). An improper request must be sent back within 7 days. Late payments carry interest at the legal rate in Code of Civil Procedure §685.010(a), currently 10 percent a year.

Substituting securities for retention on public work

PCC §22300 gives contractors on California public works a way to earn the interest on their own retention. Every invitation for bid and set of contract documents must allow it.

• Substitute securities. At the contractor's request and expense, the contractor can deposit securities equal to the amount withheld, either with the public agency or with a state or federally chartered bank in California acting as escrow agent, and get the cash retention released.
• Or have retention paid into escrow. As an alternative, the contractor can have the owner pay retention directly to the escrow agent, at the contractor's expense, and direct how it's invested.
• The contractor gets the interest. The contractor is the beneficial owner of substituted securities and receives the interest. At satisfactory completion, the contractor receives the securities, interest and payments held by the escrow agent.
• What counts as a security. Securities eligible under Government Code §16430, certificates of deposit, interest-bearing demand deposit accounts, standby letters of credit, or any other security the contractor and agency agree on.
• Subs share in it. A contractor that elects to receive interest must offer the same option to any sub that asks and performs more than 5 percent of the contractor's total bid. The sub gets the identical interest rate, less actual pro rata costs of administering it. No contractor can make a sub waive §22300.
• Fees. The contractor pays the escrow agent's fees.
• Federal exception. The option isn't required on contracts financed by the Farmers Home Administration under the Consolidated Farm and Rural Development Act where federal rules don't allow substitution.

The statute includes a standard escrow agreement form. Ask the agency for it early, because the paperwork takes time to set up.

How to get retainage released faster

1. Read the retention clause before you sign. Check the percentage against the 5 percent cap, whether release is by scope or only at final completion, and what documents release requires. On private subcontracts, the percentage can't be higher than the owner's.
2. Know when completion happens. On private work, completion can be triggered by actual completion, owner use with labor stopped, or a long work stoppage. On public work, acceptance is the usual trigger. Track the date so you know when the 45-day or 60-day clock starts.
3. Build the closeout package as you go. Collect warranties, O&M manuals, as-builts and certifications with your monthly pay apps instead of chasing them at the end.
4. Use PCC §22300 on public jobs. Ask to substitute securities or to have retention paid to an escrow agent so the interest comes to you. If you're a sub doing more than 5 percent of the bid, ask your GC to pass the option down.
5. Give notice on disputed work. On private jobs, once disputed work is done, give written notice under Civil Code §8816. That starts the 10-day clocks to accept and to pay.
6. Send a demand with the penalty. If retention is late, put the 2 percent per month penalty and attorney's fee exposure in writing. It often moves the payment.

California retainage FAQ

What is the maximum retainage in California?+

5 percent of each payment and 5 percent of the contract price in total. That applies to public works contracts entered on or after January 1, 2012 (PCC §7201) and to private contracts entered on or after January 1, 2026 (Civil Code §8811). Both have exceptions, such as subs who fail to furnish a required bond.

Does the 5% cap apply to residential projects in California?+

Not to a residential project that is not mixed-use and is four stories or less. Taller residential projects and mixed-use projects are covered. The statute doesn't define those terms, so check with counsel if your project is close to the line.

Does the private 5% cap apply to contracts signed before 2026?+

No. Civil Code §8811 applies to private contracts entered on or after January 1, 2026. Older contracts follow their own retention terms, though the release deadlines and 2 percent per month penalty still apply.

When must retainage be released on a private California job?+

The owner pays the direct contractor within 45 days after completion of the work of improvement. The direct contractor pays each sub its share within 10 days after receiving it (Civil Code §8812 and §8814).

When must retainage be released on a public California job?+

The public entity releases retention within 60 days after completion. The original contractor pays each sub its share within 7 days after receiving it (PCC §7107).

What is the penalty for late retainage in California?+

2 percent per month on the amount wrongfully withheld, in place of ordinary interest, plus attorney's fees for the winner of a collection suit. That's true on private work (Civil Code §8818) and public work (PCC §7107).

Can I earn interest on my retainage in California?+

On public works, yes. PCC §22300 lets the contractor substitute securities for retention or have retention paid to an escrow agent, and the contractor receives the interest. Subs performing more than 5 percent of the bid can ask for the same option. On private work, no statute gives the contractor the interest, so it depends on your contract.

Can a contract waive California's retention rules?+

No. The private retention rules can't be waived by contract (Civil Code §8820), a waiver of PCC §7107 is void, and no party can require another to waive PCC §7201 or §22300.

Retainage guides for other states

Connecticut5% cap · mandatory escrowFlorida5% public cap · 2%/mo lateGeorgia5% public cap · 10-day flow-downKentucky10%/5% caps · escrow at $2M+LouisianaEscrow at $50K+ · 10%/5% publicNew York5% cap · void above itNorth Carolina5% public cap · 50% stopOregon5% cap · retainage bondsTennessee5% cap · escrow at $500K+Texas10% reserve · public caps