BLOW TO CONSTRUCTION RETENTIONS (October 2025)

One of the protections in the construction contract tool box, for owners contracting with contractors and contractors contracting with sub-contractors, is the payment retention by which a portion (typically 10 percent) of each progress payment is held back until the project is completed.  The retention incentivizes contractors to complete the project, including punch-list items, as the retention is not paid until final completion is achieved.  The Legislature has now statutorily limited the amount of the retention to 5 percent, half of the customary amount, for new contracts starting January 1, 2026.  If the retention amount in the owner’s contract is lower than 5 percent, contracts between contractors (e.g. direct contractor with sub-contractor and sub-contractor with next tier sub-contractor) cannot exceed the retention percentage specified in the owner’s contract.

There are a couple of exceptions.  The retention limit does not apply to residential projects that are not mixed-use and do not exceed four stories.  It also does not apply to contracts between contractors if written notice is given, before or when the bid is requested, that a faithful performance and payment bond is required, and the subcontractor fails to furnish a performance and payment bond issued by an admitted surety insurer.