2026 Levels the Playing Field for Retention and Extra Work Payments on Private Works Projects

The New Year brought us two new California laws that reshape how Subcontractors get paid and how change order/time-extension disputes get processed on private projects. In a nutshell: for private works subcontracts entered into after January 1, 2026, private owners and primes will have less flexibility to “contract around” payment timing and dispute procedures. Subs now have more statutory leverage, but your project team needs to understand these new safeguards and follow the required steps to take advantage of them.

The new laws are: Civil Code § 8811, which addresses retention payments, and Civil Code § 8850, known as the Private Works Change Order Fair Payment Act, which creates a structured process for handling extra work and time-extension claims on covered private works projects.

By design, these new laws look a lot like what some public-works contractors have benefited from under the Public Contract Code: a structured claims process that forces an owner to respond, identify disputed vs. undisputed amounts, and pay undisputed sums and a retention capped at 5%.

Public works contractors have enjoyed statutory guardrails like Public Contract Code § 9204 (mandatory claims process) and retention-related rules like Public Contract Code § 7201 (public entity retention generally capped at 5% of progress payment).

Let’s take a deeper dive into how these new laws affect Subcontractors, how they compare to similar laws for public works project. Plus, we’ll touch on some subcontract tips you can use immediately.

The 5% Private Retention Cap

What Changes for Private Projects?

For covered private contracts entered into on/after January 1, 2026, retention is capped at 5% of progress payments, and total retention withheld may not exceed 5% of the subcontract price. Importantly for subs, the statute also aims to prevent retention “games” between tiers, meaning your retention rate shouldn’t exceed what the owner holds from the prime contractor, which is also now capped at 5%.

There are a couple of exceptions to this cap – the new law does not apply to:

(a) “a direct contractor or subcontractor if the direct contractor or subcontractor provides written notice to a subcontractor before, or at, the time that the bid is requested that a faithful performance and payment bond shall be required, and a subcontractor subsequently fails to furnish to the direct contractor or subcontractor a performance and payment bond issued by an admitted surety insurer.”

(b) “an owner, direct contractor, or subcontractor on a residential project if the project is not mixed-use and does not exceed four stories.”

How Section 8811 Compares to Public Works

Since 2012, public owners (especially local agencies) have operated under a “5% retention” cap per Public Contract Code §7201 (unless the project has special characteristics such as being “substantially complex.”) 

Both laws contain “flow-down” style retention rules that include language that the retention withheld from Subs generally may not exceed what the Owner withholds from the Prime Contractor.

Subcontracting Tips:

Even though the new statutes prohibit the waving of these retention rules by contracts, it is sometimes hard to “teach” the prime contractor’s accounts payable team what the law requires when your subcontract doesn’t follow the law. So, when reviewing a subcontract, watch for, and edit, subcontract provisions that contain retention clauses greater than 5% or greater than what the owner is holding from the contractor under the prime contract.

The New Change Order / Claim Process

What Changes for Private Projects?

Historically, private change-order disputes were often governed by whatever the contract said—sometimes resulting in delayed decisions, withheld payment, and “we’ll sort it out at the end” dynamics.

The California Legislature has finally recognized these unfair tactics and, in enacting this new law, declared the following:

(1) It is in the best interests of the state and its citizens to ensure that all construction business performed on a private works project in the state that is complete and not in dispute is paid in full and in a timely manner.

(2) Delays in payment for works of improvement and site improvements impose significant financial hardships on contractors, particularly small businesses, disadvantaged business enterprises, and disabled veteran business enterprises.

(3) The lack of clear procedures for resolving disputes related to change orders often leads to costly litigation where a predetermined method could avoid such costs.

(4) Prompt and fair payment promotes economic stability within the construction industry and ensures efficient project completion.

So, starting January 1, 2026, Civil Code § 8850 introduced a statutory structure for handling certain change-order and time-extension claims on covered private projects, including required steps and timelines and a focus on paying undisputed amounts.

Even if your subcontract has a detailed claims clause, your contract language can’t safely ignore the statute on covered projects because § 8850 is designed to impose non-waivable procedural rules in many contexts.

How This Compares to Public Works

Since 2017, many public agencies have been subject to a mandatory claims resolution process under Public Contract Code § 9204, which requires the public entity to respond, identify what’s disputed vs. undisputed, and process payment of undisputed portions within a defined timeframe.

For example, PCC § 9204 provides that once the public entity issues its written statement identifying disputed/undisputed portions, payment due on an undisputed portion must be processed and made within 60 days.  Civil Code § 8850 has the same requirement with both laws imposing interest of 2% per month on undisputed amounts that are not timely paid.

This means that private projects have now moved toward a “process discipline” that public works contractors have relied on to prevent indefinite payment delays.

Subcontracting Tips:

Subcontractors will still see subcontract language in their private works subcontracts that, in practice, will undermine these protections unless the Sub is savvy on how these laws work.

Key risk clauses include:

• “No payment for extra work without a fully executed change order” with no statutory-friendly alternative path. You want language that dictates payment in a defined period of time once the extra work is performed when the paperwork lags the field.

  
  

• Short notice provisions are still enforceable and easy to miss (e.g., 24–48 hours) tied to waiver of all claims. Change the notice provisions to be based on business days, and add language such as: “Subcontractor’s failure to provide notice (or submit a claim) within the time required herein shall not act as a waiver of Subcontractor’s claim except to the extent such failure materially prejudices Contractor.” An example of what would “materially prejudice” a Contractor is if a Sub submits a late claim for an Owner-caused delay or change, and then the Owner has the right and does deny the Contractor’s claim because the Contractor’s notice or claim to the Owner was likewise late under the Prime Contract requirements.

  
  

• Broad waiver language in form pay applications (“waive all claims through date”). If you sign these routinely, you may undercut your ability to use the statutory process effectively.

  
  

Going Forward

For subcontractors, these laws aren’t just “legal updates”—they’re cash-flow tools. Retention at 10% on private work has long operated like an interest-free loan from subs to the project. A 5% cap (on covered projects) can materially improve working capital—especially for trades performing work early in the project with heavy material and labor costs.

Whether working on a private project or a public project, maximize your chance for success by giving timely notice of delays and extras and by aligning your internal documentation to strengthen your position  when making a claim. Focus on daily reports, T&M ticket process, RFI logs, change and directive logs, and schedule impacts.

The better you understand this new landscape for private projects, the more confidence you’ll have when it’s time to assert your rights!