2026 California Construction Law Update: What Private Project Owners and Contractors Need to Know about SB 61 and SB 440

Overview

Two important changes in California law impacting private construction projects went into effect on January 1, 2026, applying to contracts entered into on or after January 1, 2026:

• SB 61: Extends the 5% retention cap that already exists for California public works to private works projects.
• SB 440: Establishes requirements for prompt resolution of claims for private works projects similar to those that already exist for California public works projects, makes late payments of amounts due under the statute subject to 2% monthly interest, and provides contractors a right to suspend work for the owner’s failure to promptly pay undisputed amounts or comply with the claims process.

SB 61 (Civ. Code § 8811): Limiting Retention on Private Projects

• Applicability: Applies to contracts for private projects entered into on or after January 1, 2026, subject to the exceptions noted below.
• Retention Limitations:
  • Limit on Payments: No more than 5% of a payment may be withheld as retention by an owner, contractor, or subcontractor.
  • Total Limit: The total retention withheld cannot exceed 5% of the total contract value.
  • Flow-Down: The retention percentage in a subcontract may not exceed the percentage specified in the prime contract.
• Exceptions – the 5% cap does not apply:
  1. If a subcontractor fails to provide a payment and performance bond after being notified in writing, before or at the time the bid is requested, that the bond is required.
  2. To non-mixed-use residential projects that are four stories or less.

Owners and contractors on private construction projects should ensure that their contracts and payment procedures are in compliance with Section 8811, as it cannot be waived, and in an action to enforce its provisions, the prevailing party is entitled to reasonable attorney’s fees.

SB 440 (Civ. Code §§ 8850-8851): The Private Works Change Order Fair Payment Act

Like the retention statute above, SB 440 applies only to private works contracts entered into on or after January 1, 2026.  It establishes extensive requirements governing the submittal, review, and resolution of “claims” on private construction projects, similar to the claims process that already applies to California public works projects under Public Contract Code Section 9204.  As it is intended to protect contractors, it creates a strong financial incentive for owners to timely pay undisputed amounts and comply with the new claims resolution process. Specifically, undisputed amounts bear interest at a rate of two percent (2%) per month if “not paid in a timely manner as required by this section,” and disputed amounts that are later determined to be owed bear interest “from the date on which those amounts would have been due had they not been disputed.” SB440 further protects contractors by creating a statutory right to suspend performance for nonpayment of undisputed amounts, or where a claim is deemed denied due to the owner’s failure to timely respond or comply with other requirements of the claims process.

Applicability: Applies to contracts for private projects entered into on or after January 1, 2026 (except for non-mixed-use residential projects that are four stories or less), and applies to any “claim” by a contractor (or a subcontractor, where permitted under SB 440) in connection to a work of improvement or site improvement. A “claim” is defined as a demand by a contractor (or a subcontractor, where authorized under SB 440), sent by registered mail or certified mail with return receipt requested, for one or more of the following:

• A time extension, including, without limitation, for relief from damages or penalties for delay assessed by an owner under contract for a work of improvement or site improvement.
• Payment by the owner of money or damages arising from work done by, or on behalf of, the contractor pursuant to the contract for a work of improvement or site improvement project and payment for which is not otherwise expressly provided or to which the claimant is not otherwise entitled.
• Payment of an amount that is disputed by the owner.

Claims Process: SB 440 specifies a three-stage claim resolution process to be followed once a claim is submitted:

1. Claim Submission and First Written Response

• Claims must be submitted to the owner by mail as noted above.
• The owner has 30 days from its receipt of a claim to provide a written response identifying the disputed and undisputed portions of the claim, and then has 60 days to pay the undisputed portion. When the claim is submitted, the parties may agree to extend the 30-day period, and/or to waive steps two and three below and proceed directly to arbitration or ligation.

2. Informal Conference and Second Written Response

• If the claimant disputes owner’s written response or if the owner fails to timely respond, the claimant may submit a written demand for an informal settlement conference.
• Within 30 days of its receipt of the demand, the owner must schedule the informal conference.
• Within 10 business days after the conference, the owner must again provide the claimant a written statement identifying the disputed and undisputed portions of the claim, and then has 60 days to pay the undisputed portion.

3. Mediation

• Any portion of the claim that is still in dispute must be submitted to nonbinding mediation, with the parties sharing the costs equally.
• Within 10 business days of the owner’s second written statement identifying the disputed part of the claim, the parties must mutually select a mediator, and if the parties cannot agree, the contractor may select the mediator. If the owner refuses mediation, the contractor may suspend the work (after satisfying statutory notice requirements).
• Any portion of the claim still in dispute after the mediation is to be resolved under the contractual dispute resolution procedures, or if there are none, by litigation.

Right to Suspend Performance

Contractors and subcontractors may suspend performance of their work until payment is received for undisputed claims or those as to which the owner violated the statutory process.

Note that this does not authorize suspension for any failure of payment, but where (a) payment is due under the statute (e.g., the owner fails to timely pay amounts identified as undisputed in its written statement), or (b) where a claim is deemed denied (e.g., the owner fails to timely respond to claim, or refuses mediation).

Subcontractor Claims

Subcontractors may request in writing that contractors present claims to the owner, but must submit to the contractor timely and reasonable supporting documentation. Within 30 days of receipt of the request, the contractor must notify the subcontractor in writing as to whether it presented the claim to the owner and, if it did not, provide the subcontractor with a statement of the reasons for not doing so.

If the contractor submits the claim to the owner, the subcontractor must cooperate with the contractor in the informal conference, mediation, and dispute resolution processes relating to the claim, and the contractor must “exercise good faith” in fulfilling their obligations on behalf of the subcontractor under SB 440 provisions regarding the three-stage dispute resolution process. Contractors may not settle any such claim without the subcontractor’s written approval.

Penalties for Noncompliance

Significantly, SB 440 requires payment of 2% interest per month on (1) undisputed amounts that are not timely paid; and (2) disputed amounts that are later found to be owed through contractual dispute resolution procedures, by final judgment or by operation of law, which accrues from the date the amounts “would have been due had they not been disputed.”

Note that in addition to amounts identified as undisputed in the owner’s written statement (issued following the initial submittal of the claim, or the informal conference), amounts are considered undisputed if “the owner, at any point, agrees to pay, or is found to owe through dispute resolution, by final judgment, or by operation of law” such amount.

Conclusion

SB 440 establishes a claims resolution process that subjects private construction project owners to potentially significant penalties for withholding payments. Contractors and subcontractors should take note of the claims submittal requirements (e.g., claims must be mailed) and deadlines, and should review the dispute resolution provisions of owner-provided contracts to check for compliance with SB 440. We recommend that owners and contractors confer with their counsel regarding revisions to their contract forms required for compliance with SB 440.