California’s New Retention Law: What Multi-Family Developers and Contractors Need to Know

Effective January 1, 2026, California Civil Code section 8811 fundamentally changes retention practices on private construction projects. For the first time, California law imposes a statutory cap on retention—while carving out a significant exception for certain multi-family residential developments.

The General Rule: 5% Cap on Private Projects

Section 8811 limits retention on private works of improvement to 5% of each payment, with total retention also capped at 5% of the contract price. This limitation applies at every level of the contracting chain and prevents higher retention percentages from being imposed on subcontractors than those applied to the prime contractor.

This represents a major shift from prior practice. Before section 8811, California had no statutory limits on retention for private projects, and 10% retainage was common.

The Residential Project Exception

The 5% cap does not apply to a residential project that is not mixed-use and does not exceed four stories. If both conditions are met, there is no statutory maximum retention, and parties may negotiate retention terms freely.

If a project includes commercial uses or exceeds four stories, the exception does not apply, and the 5% cap governs.

Impact on Multi-Family Housing

For multi-family developments, the distinction is critical. Purely residential projects of four stories or less are exempt from the retention cap, while mixed-use or taller developments are subject to the 5% limit. The law preserves flexibility for smaller residential projects while imposing uniform limits on larger or more complex developments.

Performance Bond Exception

Section 8811 also allows higher retention where a subcontractor fails to provide a required performance and payment bond after receiving advance written notice that bonding would be required.

Enforcement and Attorney’s Fees

The statute includes a mandatory attorney’s fee award for the prevailing party in any action to enforce its provisions, giving the retention limits real teeth.

Key Takeaway

Civil Code section 8811 marks a significant change in California construction law. For multi-family projects, whether retention is capped at 5% will often turn on two questions: is the project mixed-use, and does it exceed four stories? Answering those questions early is essential to structuring compliant contracts once the law takes effect in 2026.