The New 5% Reality: Why SB 61 Increases Risk for Property Owners and How to Protect Your Project with Performance Bonds

The New 5% Reality: Why SB 61 Increases Risk for Property Owners and How to Protect Your Project with Performance Bonds

For decades, the “10% retention” was the gold standard in California construction. It was the financial carrot and stick that gave property owners leverage, ensuring that contractors finished every last punch-list item and corrected every defect before walking away with their final check.

However, as of January 1, 2026, the landscape of private construction has shifted. Under Senate Bill 61 (SB 61), now codified in California Civil Code § 8811, the rules of the game have changed. For owners of luxury homes and commercial buildings, this “2026 Shift” represents a significant reduction in financial leverage.

Understanding the 5% Retention Cap

The core of SB 61 is simple but impactful: owners can no longer withhold the standard 10% from contractors. * The Cap: Retention is now strictly capped at 5% of each progress payment.

• Total Limit: The total amount of retention withheld over the life of the project cannot exceed 5% of the total contract price.

• The Flow-Down: This cap flows down the entire chain. If an owner holds 5% from a general contractor, that GC cannot hold more than 5% from their subcontractors.

• Non-Waivable: You cannot “contract around” this. Any provision in a contract signed after January 1, 2026, that attempts to withhold more than 5% is unenforceable.

Important Note: SB 61 does include a “Residential Exception” for non-mixed-use projects that are four stories or less. However, for luxury high-rises, mixed-use developments, and all commercial projects, the 5% cap is the new law of the land.

The Increased Risk for Property Owners

The logic behind SB 61 was to improve cash flow for contractors and small businesses. While noble in intent, it leaves owners—particularly those managing complex luxury builds or commercial assets—vulnerable.

With only 5% of the contract value held back, the “cost of walking away” for a contractor becomes lower. If a significant construction defect is discovered near the end of the project, that 5% may not be enough to cover the costs of hiring a new team to remediate the issue.

How to Protect Your Project: The Rise of Performance Bonds

Because you have less cash in hand to guarantee performance, the Performance Bond has transitioned from a “nice-to-have” to a “must-have” for private owners in 2026.

A Performance Bond is a three-party guarantee where a surety company ensures the project will be completed according to the contract. If the contractor defaults or leaves behind significant defects, the surety is on the hook to find a replacement or pay out the bond amount.

The “Bond Exception” in SB 61: Interestingly, the law provides a loophole: the 5% cap does not apply if a contractor is required to provide a performance and payment bond but fails to do so. By demanding these bonds upfront, owners create a secondary layer of security that offsets the loss of the traditional 10% retention.

How The Naumann Law Firm Can Help

Navigating a construction project in this new regulatory environment requires more than just a good architect; it requires a proactive legal strategy. At The Naumann Law Firm, we serve as high-level consultants and advocates for owners facing the “5% Reality.”

1. Contract Consulting and Risk Mitigation

We assist owners and developers in revising their 2026 contracts to ensure they are compliant with SB 61 while maximizing other forms of leverage, such as:

• Implementing strict milestone-based payment schedules.

• Drafting robust bonding requirements.

• Strengthening warranty and “step-in” rights.

2. Construction Defect Litigation

Should a defect arise—be it water intrusion, structural failure, or soil issues—the reduced retention means you need to move faster. Our firm specializes in:

• Early Identification: Utilizing destructive testing and forensic experts to find defects before the final 5% is released.

• Surety Claims: If a contractor fails to perform, we handle the complex process of filing claims against performance bonds.

• Complex Litigation: With over 40 years of experience, we have recovered hundreds of millions of dollars for owners against some of the largest builders in California.

Don’t Wait Until the Final Walkthrough

The “2026 Shift” means your window of leverage has been cut in half. Protecting your investment starts before the first shovel hits the ground.

Are you planning a new commercial project or luxury build in San Diego? Contact The Naumann Law Firm today at (844) 492-7474 for a consultation on how to structure your agreements under the new SB 61 requirements. Our California Construction Defect Lawyers are here standing by.