California Retainage
Rules & FAQs

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California Retainage FAQs

An Overview of California Retainage Rules

California's Retainage Rules


  • Private Jobs
  • Public Jobs
Retainage No Limit Icon
No Retainage Limits

California does not restrict the retainage that can be withheld from a contractor on commercial or residential jobs. It is customary to withhold between 0%-10% as retainage.


Payment Period 45 Days Icon
45 Day Pay Period

Retainage withheld from a direct contractor must be released by 45 days from the “date of completion.” Amounts withheld by the direct contractor from a subcontractor or supplier must be released within 10 days of the contractor's receipt of any retention payment.


YES
PROCESS
There is a Process to Recover

Yes, notice must be given in writing, and timelines apply to the release of retention on approved work.


No Escrow Icon
Not Held In Escrow

In California, contractors and owners do not need to hold retainage funds in a separate escrow account.

Retainage 5% Icon
5 Percent

Prior to completion and acceptance of the project, retainage may not exceed 5%. After 95% of the work is complete, withheld funds may be reduced to 125% of the estimated value of the unfinished work.


Payment Period 60 Days Icon
60 Day Pay Period

Within 60 days of completion of the work of improvement, the retention withheld by the public entity shall be released. Contractor must release the subcontractor's share of retainage to each subcontractor within 7 days of receiving all or any portion of retainage. Public entity or contractor may continue to withhold retainage if good faith dispute exists (up to 150% of dispute).


YES
PROCESS
There is a Process to Recover

Yes. Retainge claims must be arbitrated unless otherwise agreed by contract. Arbitration must be initated within 90 days.

In general, retainage serves two general purposes in a construction contract:

  1. To provide an incentive to the contractor or subcontractor to complete the project
  2. To give the owner some protection against problems like liens, contractual defaults, delays, and more

In most states, laws exist to regulate how the parties use the retainage concept, mostly protecting some parties against abuse of the tool from others.

Retainage limits & payment deadlines

On private construction projects, like residential or commercial jobs, California law doesn’t set a limit on the amount of retainage that can be withheld in a contract. However, they do set a deadline for withheld funds to be returned. California property owners must release retainage to the general contractor within 45 days of completion of the work. The GC must pay retained amounts to their subs and suppliers within 10 days of receipt of retainage from the owner.

On public construction projects in California, like state or municipal jobs, retained funds are limited to 5% or less prior to completion and acceptance of the project. After 95% of the work is complete, withheld funds may be reduced to 125% of the estimated value of the unfinished work.

Within 60 days of completion of the work, the public entity in charge of the project must release retention to the general contractor within 60 days. The GC must release the respective share of retainage to each subcontractor within 7 days of receiving all or any portion of retainage. If a good faith dispute exists, the public agency or contractor may continue to withhold up to 150% of the value of the disputed work.

To learn more, read the California Guide to Retainage on Public & Private Projects.

FAQs about California Retainage Requirements

Does California limit the amount of retainage that can be withheld from a contractor?

California does not specifically limit the amount of retainage that can be withheld on private construction projects. However, in the event of a good faith dispute, the property owner or contractor is allowed to retain 150% of the amount subject to the dispute.

On public jobs, California law caps retainage at 5% prior to completion and acceptance of the project. After 95% of the work is complete, withheld funds may be reduced to at least 125% of the estimated value of the unfinished work. If the work is determined to be complex, the director of the department can require a higher percentage of retainage.

To learn more, read the Guide to Retention on California Construction Projects.

How long can a party withhold retainage in California?

On private jobs, all amount of withheld retainage must be released by 45 days from the “date of completion.” If a direct contractor has withheld a retention from one or more subcontractors, the contractor must pay subcontractor’s shares of the payment within 10 days of receiving all or part of a retention payment.

However, the Court of Appeals heard a case in which a subcontractor essentially signed a contract that gave up their right to recover retainage after they failed to complete the job.

According to California’s prompt payment statutes, retainage and final payments are due on public jobs within 60 days of the project’s completion as a whole.

Does California require retainage to be deposited in a special account?

This is not specified in the California retainage statute for private projects.

For public projects, securities may be substituted, and a contractor may request that payments be made into an escrow account. In this case, the contractor is entitled to receive all interest accrued.

To learn more, read the Guide to Retention on California Construction Projects.

How can I make a claim to recover retainage in California?

Typically, if retainage is held late, it can be recovered by filing a California mechanics lien (on a private project) or a bond claim (on a public job).

A claim for retainage in general can also be made according to California’s Prompt Payment Act. This process typically is a court process, and requires a

Concerning disputed work on residential or commercial jobs, a contractor must give their hiring party notice that work in dispute has been completed in accordance with the contract. The owner or direct contractor shall, within 10 days, give notice advising the notifying party of the acceptance or rejection of the disputed work. Within 10 days of acceptance, the retention relating to the disputed work must be paid.

Any claim brought forward concerning a public contract must be arbitrated unless waiver of arbitration is specified in the contract.

Is a notice required to recover retainage in California?

Notice must be in writing, which includes printing and typewriting. For more, read our guide to writing an effective demand letter.

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California Retainage Statutes

Getting informed about prompt payment laws is important. An examination of California’s retainage laws, the rules and regulations related to the amount and timing of allowable retained payments, is important to know your rights and responsibilities as a party on a construction project. California’s specific laws can be found in: Cal. Civ. Code §§ 8812, Cal. Pub. Cont. Code § 10261 and Cal. Pub. Cont. Code § 10263, and are reproduced below. Read on for the California retainage statutes.

Retainage Statute on Private Projects

§ 8812: Retention Payment

a) If an owner withholds a retention from a direct contractor, the owner shall, within 45 days after completion of the work of improvement, pay the retention to the contractor.

(b) If part of a work of improvement ultimately will become the property of a public entity, the owner may condition payment of a retention allocable to that part on acceptance of the part by the public entity.

(c) If there is a good faith dispute between the owner and direct contractor as to a retention payment due, the owner may withhold from final payment an amount not in excess of 150 percent of the disputed amount.

Retainage Statute on Public Projects

§ 10261: Payments upon contracts; progress payments; withholding percentage of contract price; warrants; electronic transfer; complex projects requiring higher retention amount

(a) Payments upon contracts shall be made as the department prescribes upon estimates made and approved by the department, but progress payments shall not be made in excess of 100 percent of the percentage of actual work completed plus a like percentage of the value of material delivered on the ground or stored subject to or under the control of the state, and unused, except as otherwise provided in this section. The department shall withhold not more than 5 percent of the contract price until final completion and acceptance of the project. However, at any time after 95 percent of the work has been completed, the department may reduce the funds withheld to an amount not less than 125 percent of the estimated value of the work yet to be completed, as determined by the department, if the reduction has been approved, in writing, by the surety on the performance bond and by the surety on the payment bond. The Controller shall draw his or her warrants upon estimates so made and approved by the department and the Treasurer shall pay them. The funds may be released by electronic transfer if that procedure is requested by the contractor, in writing, and if the department has, in place at the time of the request, the mechanism for the transfer.

(b) (1) Notwithstanding subdivision (a), when the director of the department has made a finding prior to the bid that a specified project is substantially complex and therefore requires a higher retention amount than 5 percent, and the department includes in the bid documents details explaining the basis for the finding and the actual retention amount, then payments upon contracts by the department shall be made as the department prescribes upon estimates made and approved by the department. However, progress payments shall not be made in excess of 95 percent of the percentage of actual work completed, plus a like percentage of the value of material delivered on the ground or stored, subject to, or under the control of the state, and unused, except as otherwise provided in this section. At any time after 95 percent of the work has been completed, the department may reduce the funds withheld to an amount not less than 125 percent of the estimated value of the work yet to be completed, as determined by the department, if the reduction has been approved, in writing, by the surety on the performance bond and by the surety on the payment bond. The Controller shall draw his or her warrants upon estimates so made and approved by the department and the Treasurer shall pay them with funds appropriated therefor. The funds may be released by electronic transfer if that procedure is requested by the contractor, in writing, and if the department has, in place at the time of the request, the mechanism for the transfer.
(2) Any finding by the director of a department that a project is substantially complex shall include a description of the specific project and why it is a unique project that is not regularly, customarily, or routinely performed by the agency or licensed contractors.

(c) This section shall remain in effect only until January 1, 2018, and as of that date is repealed, unless a later enacted statute, that is enacted before January 1, 2018, deletes or extends that date.

§ 10263: Withheld payments; substitution of securities for moneys; escrow; interest

(a)Provisions shall be included in any invitation for bid and in any contract documents to permit the substitution of securities for any moneys withheld by a public agency to ensure performance under a contract. At the request and expense of the contractor, securities equivalent to the amount withheld shall be deposited with the State Treasurer or, a state or federally chartered bank in this state, as the escrow agent, who shall then pay the moneys to the contractor. Upon satisfactory completion of the contract, the securities shall be returned to the contractor.

(b)Alternatively, the contractor may request and the owner shall make payment of retentions earned directly to the escrow agent. The contractor may direct the investment of the payments into securities and the contractor shall receive the interest earned on the investments upon the same terms provided for in this section for securities deposited by the contractor. Upon satisfactory completion of the contract, the contractor shall receive from the escrow agent all securities, interest, and payments received by the escrow agent from the owner, pursuant to the terms of this section.

(c)Alternatively, and subject to the approval and at the sole discretion of the public agency, the payment of retentions earned may be deposited directly with a person licensed under Division 6 (commencing with Section 17000) of the Financial Code as the escrow agent. Upon written request of an escrow agent who has not been approved by the public agency under this subdivision, the public agency shall provide written notice to that escrow agent within 10 business days of receipt of the request indicating the reason or reasons for not approving that escrow agent. An escrow agent that has been disapproved by the public agency may not maintain any cause of action of any nature against the state or any public agency, officer, agent, or employee of any public agency, in connection with the disapproval of that escrow agent. The payments shall be deposited in a trust account with a federally chartered bank or savings association within 24 hours of receipt by the escrow agent. The contractor shall not place any retentions with the escrow agent in excess of the coverage provided to that escrow agent pursuant to subdivision (b) of Section 17314 of the Financial Code. In all respects not inconsistent with this subdivision, the remaining provisions of this section shall apply to escrow agents acting pursuant to this subdivision. In addition, an escrow agent subject to this subdivision shall maintain insurance to cover negligent acts and omissions of the escrow agent in connection with the handling of retentions under this section in an amount not less than one hundred thousand dollars ($100,000) per contract, executed by an admitted insurer and in a form satisfactory to the public agency.

(d)Securities eligible for investment under this section shall include those listed in Section 16430 of the Government Code, bank or savings and loan certificates of deposit, interest-bearing demand deposit accounts, standby letters of credit, or any other security mutually agreed to by the contractor and the public agency.

The contractor shall be the beneficial owner of any securities substituted for moneys withheld and shall receive any interest thereon.

Failure to include the provisions prescribed by this section in bid and contract documents shall void any provisions for performance retentions in a public agency contract.

(e) (1)Any contractor who elects to receive interest on moneys withheld in retention by a public agency shall, at the request of any subcontractor, make that option available to the subcontractor regarding any moneys withheld in retention by the contractor from the subcontractor. If the contractor elects to receive interest on any moneys withheld in retention by a public agency, then the subcontractor shall receive the identical rate of interest received by the contractor on any retention moneys withheld from the subcontractor by the contractor, less any actual pro rata costs associated with administering and calculating that interest. In the event that the interest rate is a fluctuating rate, the rate for the subcontractor shall be determined by calculating the interest rate paid during the time that retentions were withheld from the subcontractor. If the contractor elects to substitute securities in lieu of retention, then, by mutual consent of the contractor and subcontractor, the subcontractor may substitute securities in exchange for the release of moneys held in retention by the contractor.

(2)This subdivision shall apply only to those subcontractors performing more than five percent of the contractor’s total bid.

(3)No contractor shall require any subcontractor to waive any provision of this section.

(f)The Legislature hereby finds and declares that the provisions of this section are of statewide concern and are necessary to encourage full participation by contractors and subcontractors in public contract procedures.

(g)An escrow agreement used pursuant to this section shall be null, void, and unenforceable unless it is substantially similar to the following form:

                         ESCROW AGREEMENT FOR
SECURITY DEPOSITS IN LIEU OF RETENTION

This Escrow Agreement is made and entered into by and be­tween

 

 

whose address is
hereinafter called “owner,”


whose address is
hereinafter called “contractor,”

and
whose address is
hereinafter called “escrow agent.”

For the consideration hereinafter set forth, the owner, contractor, and escrow agent agree as follows:

(1)Pursuant to Section 10263 of the Public Contract Code of the State of California, the contractor has the option to deposit securities with the escrow agent as a substitute for retention earnings required to be withheld by the owner pursuant to the construction contract entered into between the owner and contractor for ____ in the amount of ____ dated ____ (hereafter referred to as the “contract”). Alternatively, on written request of the contractor, the owner shall make payments of the retention earnings directly to the escrow agent. When the contractor deposits the securities as a substitute for the contract earnings, the escrow agent shall notify the owner within 10 days of the deposit. The market value of the securities at the time of the substitution shall be at least equal to the cash amount then required to be withheld as retention under the terms of the contract between the owner and contractor. Securities shall be held in the name of the ____, and shall designate the contractor as the beneficial owner.

(2)The owner shall make progress payments to the contractor for those funds which otherwise would be withheld from progress payments pursuant to the contract provision, provided that the escrow agent holds securities in the form and amount specified above.

(3)When the owner makes payment of retentions earned directly to the escrow agent, the escrow agent shall hold them for the benefit of the contractor until such time as the escrow created under this contract is terminated. The contractor may direct the investment of the payments into securities. All terms and conditions of this agreement and the rights and responsibilities of the parties shall be equally applicable and binding when the owner pays the escrow agent directly.

(4)The contractor shall be responsible for paying all fees for the expenses incurred by the escrow agent in administering the escrow account. These expenses and payment terms shall be determined by the contractor and escrow agent.

(5)The interest earned on the securities or the money market accounts held in escrow and all interest earned on the interest shall be for the sole account of contractor and shall be subject to withdrawal by contractor at any time and from time to time without notice to the owner.

(6)The contractor shall have the right to withdraw all or any part of the principal in the escrow account only by written notice to the escrow agent accompanied by written authorization from the owner to the escrow agent that the owner consents to the withdrawal of the amount sought to be withdrawn by contractor.

(7)The owner shall have a right to draw upon the securities in the event of default by the contractor. Upon seven days’ written notice to the escrow agent from the owner of the default, the escrow agent shall immediately convert the securities to cash and shall distribute the cash as instructed by the owner.

(8)Upon receipt of written notification from the owner certifying that the contract is final and complete, and that the contractor has complied with all requirements and procedures applicable to the contract, the escrow agent shall release to the contractor all securities and interest on deposit less escrow fees and charges of the escrow account. The escrow shall be closed immediately upon disbursement of all moneys and securities on deposit and payments of fees and charges.

(9)The escrow agent shall rely on the written notifications from the owner and the contractor pursuant to Sections (1) to (8), inclusive, of this agreement and the owner and contractor shall hold the escrow agent harmless from the escrow agent’s release, conversion, and disbursement of the securities and interest as set forth above.

(10)The names of the persons who are authorized to give written notice or to receive written notice on behalf of the owner and on behalf of the contractor in connection with the foregoing, and exemplars of their respective signatures are as follows:

On behalf of the owner:

On behalf of the contractor:


Title


Title


Name


Name


Signature


Signature


Address


Address

On behalf of the escrow agent:


Title


Name


Signature


Address

At the time the escrow account is opened, the owner and
contractor shall deliver to the escrow agent a fully executed
counterpart of this Agreement.
IN WITNESS WHEREOF, the parties have executed this
Agreement by their proper officers on the date first set forth above.

Owner

Contractor


Title


Title


Name


Name


Signature


Signature

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