Ask any general contractor why their bank account looks fine on paper but empty in real life, and the answer is usually the same word: retainage. For decades, private construction contracts have let owners and prime contractors hold back 5% to 10% of every progress payment until a project wraps — money that a subcontractor or GC has already spent on labor, materials, and equipment to earn. In an industry running on 2% to 8% profit margins, that withheld cash isn't a rounding error. It's the difference between making payroll and passing on the next job.
Two of the largest construction markets in the country just decided that's changed. California's SB 61 caps private-project retention at 5% starting January 1, 2026. New York went further in December 2025, closing the loophole contractors used to write around its own 5% cap. If you do private construction work in either state — or you're a bookkeeper, accountant, or lender serving contractors who do — these laws change how much cash flows through a project, and when.
What Actually Changed
California: SB 61 caps retention at 5%, no exceptions by contract language
Governor Newsom signed SB 61 in July 2025, creating a new section of the Civil Code that applies to private construction contracts entered into on or after January 1, 2026. The rule is simple on its face:
- Retention withheld from any single progress payment cannot exceed 5%.
- Total retention over the life of the contract cannot exceed 5% of the overall contract price.
That's a real cut from the 10% that has been standard practice on many private jobs for years, and it brings private contracts in line with the 5% retention rule that's applied to California public works projects for over a decade.
There are two carve-outs worth knowing:
- Small residential projects — buildings of four stories or fewer that are residential-only are exempt.
- Bond disputes — if a contractor or subcontractor requests performance and payment bonds in writing and the other party fails to provide them, the retention limit doesn't apply in that specific circumstance.
Contracts signed before January 1, 2026 aren't retroactively affected — the cap only bites on new agreements. If you're negotiating a contract that will straddle the new year, the signature date is what matters, not the start date of work.
New York: from "5% by default" to "5% and you can't contract around it"
New York's retainage story is a good lesson in how loopholes get closed one legislative session at a time. In 2023, New York passed a 5% retainage cap under its Prompt Payment Act (amending General Business Law § 756-c) for private contracts of $150,000 or more. But owners and general contractors kept finding a way around it: another section of the same law, § 756-a, historically allowed contract terms to override the Prompt Payment Act's protections — so a sufficiently one-sided contract could still demand 10% retainage and call it "agreed upon."
On December 19, 2025, Governor Hochul signed S5655 to shut that door. Any provision in a covered private contract that requires retainage above 5% is now void — not just discouraged, void. The cap applies to the total contract sum rather than being calculated payment-by-payment, and it took effect immediately for contracts entered into on or after December 19, 2025.
The practical result: if you're a New York subcontractor being asked to sign a contract with a 10% retainage clause on a $150,000+ private job, that clause is unenforceable regardless of what you agreed to. Worth knowing before you assume you're stuck with it.
Why This Matters More Than It Sounds
Retainage caps sound like a paperwork detail until you look at what withheld cash actually does to a contracting business. A few numbers worth sitting with:
- Working capital as a share of revenue for small contractors nearly doubled in less than a decade — from 8.3% in 2016 to 17.8% in 2025 — as tighter lending standards forced contractors to self-fund more of their own project cash flow.
- In a 2026 industry survey, 90% of senior construction decision-makers said they'd passed on a profitable project because of cash flow timing — and 43% said they'd done it more than once. Retainage withholding is one of the biggest single levers on that timing.
- Subcontractors who finish their scope early in a project — electrical rough-in, framing, foundation work — often wait the longest for their retainage release, financing months of someone else's project timeline with their own capital.
Cutting the standard from 10% to 5% doesn't eliminate that squeeze, but on a $500,000 subcontract it's the difference between $50,000 and $25,000 sitting in someone else's bank account until closeout. For a business with thin margins, that's real, spendable working capital freed up months earlier.
What Contractors and Bookkeepers Should Actually Do
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Check the signature date, not the project date. In California, a contract signed December 30, 2025 for work starting in March 2026 is still governed by the old rules. Review contracts currently in negotiation and, where you have leverage, push to finalize (or delay) signing to land on the favorable side of the cutoff.
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Audit your standard contract templates now. If your boilerplate still specifies 10% retention, it's not just outdated — in New York, it may be legally unenforceable for covered contracts, and in California, it's a compliance problem waiting to surface on your next private deal. Get templates updated before your next bid, not after a client flags it.
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Track retainage as its own line item, not buried in accounts receivable. Retainage held by a customer is a real asset — you've earned it, you just don't have it yet — and it behaves differently from ordinary AR (it typically releases in a lump sum at substantial completion or final acceptance, not on a 30-day cycle). Mixing it into general receivables makes it hard to see how much cash is actually parked waiting on a closeout milestone, which is exactly the visibility you need when deciding whether you can take on the next job.
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Re-run your cash flow projections with the new caps. If your financial model still assumes 10% retention on projects starting in 2026, you're underestimating available working capital. That matters for bidding, for payroll planning, and for conversations with your bank or bonding company.
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Know the exceptions before you assume the cap protects you. California's small-residential and bond-request carve-outs, and New York's $150,000 contract-value threshold, mean not every project is covered. Don't assume the cap applies without checking the specifics of the deal.
Retainage Is a Bookkeeping Problem Before It's a Legal One
The legal cap tells you the maximum a client can withhold. Whether that cap actually helps your cash position depends on whether your books track retainage clearly enough to act on it — knowing exactly how much is held per project, per client, and when it's contractually due to release. A general ledger that lumps retainage into "Accounts Receivable" makes that invisible; a chart of accounts with a dedicated retainage receivable account per project makes it a number you can actually manage.
That's the kind of clarity plain-text accounting is built for. Beancount.io keeps your ledger in version-controlled, human-readable text, so setting up a project-specific retainage receivable account — and tracking exactly when each holdback is scheduled to release — is a deliberate part of your chart of accounts, not an afterthought buried in a software vendor's default categories. Get started for free and see why contractors and finance teams who want full visibility into where their working capital sits are moving to plain-text accounting.