2026 Legal Updates Reshaping California’s Private Construction Sector

Author, Josh Hill, Account Executive, Rancho Mesa Insurance Services, Inc.

California’s private construction industry has entered 2026 with two major legal changes that will significantly impact how contractors and subcontractors manage cash flow, negotiate contracts, and process change order work. Beginning January 1, 2026, California Senate Bill 61 Private works of improvement: retention payments (SB 61) and Senate Bill 440 Private Works Change Order Fair Payment Act (SB 440) took effect, reshaping longstanding practices around retention and change order payments. These laws apply only to new private works contracts signed on or after that date, leaving existing agreements untouched.

These updates aim to correct chronic pain points for contractors who have long shouldered the financial burden of excessive retention and slow moving change order approvals.

A New Era for Retention: SB 61 Sets a 5% Cap

For decades, retention practices in California’s private works sector varied widely, with some upstream parties imposing retention rates higher than those seen in public projects. SB 61 changes that landscape by capping retention at 5%, aligning private contracting with the standards already established for public works.

This shift is intended to create more predictable cash flow throughout the contracting chain. Contractors and subcontractors may need to revise their contract templates and ensure that the new cap flows consistently through all tiers of subcontracts. The responsibility now falls on every party to verify that contract language mirrors the law, preventing scenarios where a subcontractor is held to a higher retention percentage simply because an outdated template was used.

The statute also carries financial consequences for disputes where a prevailing party seeking to enforce the retention cap may recover reasonable attorney’s fees.

There are, however, some exceptions to the new law. Purely residential projects of four stories or fewer are excluded unless it is part of a mixed use development. Additionally, if a higher tier contractor gives written notice before bidding that payment and performance bonds are required and the subcontractor chooses not to furnish them the retention cap does not apply.

SB 440: Bringing Fairness and Timeliness to Change Order Payments

Equally impactful is SB 440, which tackles one of the industry’s most persistent friction points, the slow approval and payment of extra work. Many contractors have grown accustomed to performing additional work promptly while waiting weeks or months for owners to process and compensate approved change orders.

SB 440 introduces firm deadlines designed to eliminate that delay. Once a contractor or subcontractor submits a change order claim via registered or certified mail, the project owner has 30 days to issue a written response identifying approved and disputed items. Any undisputed portion must be paid within 60 days of that response.

Failure to respond triggers a powerful remedy where the contractor or subcontractor may have the right to suspend work without penalty.

The intent behind SB 440 is straightforward accelerate reviews, encourage timely resolution of disagreements, reduce the financial strain created by float funding extra work, and ultimately keep projects on schedule. By establishing clear accountability, the law aims to ensure that contractors are no longer forced to operate as involuntary lenders on privately funded construction projects.

January 1st, 2026 and Beyond

Owners, contractors, and subcontractors should update their internal processes to comply with SB 41 and SB 61. Contract language, administrative workflows, and change order procedures should be reviewed to ensure they align with the new requirements. Subcontractors, in particular, should make it routine practice to obtain and review the prime contract to verify proper flow down provisions for both retention and change order rules. Understanding these new laws and adjusting practices accordingly will help protect your margins, avoid disputes, and ensure compliance as the industry transitions into this new regulatory landscape.

Rancho Mesa is happy to assist with any questions you may have regarding SB 41 and SB 61. Please direct your questions to me at jhill@ranchomesa.com or (619) 798-2819.