Senator Cortese's proposal to reform retention payment practices in California's construction industry establishes new limits on the amount that can be withheld from contractors and subcontractors during private improvement projects. The measure caps retention payments at 5% of each payment and 5% of the total contract price, applying these limits to payments withheld by owners, direct contractors, and subcontractors.

The legislation requires that retention percentages in subcontractor agreements remain consistent with those specified in the primary contract between the owner and direct contractor. However, the retention limits do not apply in cases where contractors or subcontractors provide advance written notice requiring performance and payment bonds, and a subcontractor subsequently fails to furnish these bonds from an admitted surety insurer.

These new requirements would take effect for private work improvement contracts executed on or after January 1, 2026, operating alongside existing law that requires owners to release retention payments to contractors within 45 days of project completion. The measure maintains current regulatory structures while adding specific parameters for retention practices across the construction payment chain.