Poerio Inc. | Regulations | Contracts
If you own or develop commercial property, there’s a contract term you should understand: retention. Also called retainage, it’s the percentage of each payment that’s withheld during construction and released at or near project completion. Recently, several states have passed laws capping how much retention owners can hold, and it’s changing how construction contracts work.
What Is Retention?
Retention is a standard practice in construction contracts. When a contractor submits a monthly payment application, the owner typically holds back a percentage — historically 10% — as a form of security. The idea is to ensure the contractor finishes the work and addresses any deficiencies before receiving full payment.
While the concept makes sense, high retention rates can create cash flow challenges for contractors and subcontractors, particularly on longer projects. A 10% holdback on a multi-million-dollar project ties up a lot of money.
What’s Changing
A growing number of states are enacting legislation to cap retention. California, for example, passed SB 61, which establishes a mandatory 5% cap on retention for most private construction contracts entered into on or after January 1, 2026. Other states have enacted or are considering similar legislation.
The trend is clearly toward lower retention rates and, in some cases, requirements to release retention more promptly once work reaches substantial completion.
Why This Matters to You
As a property owner, you might initially see lower retention as a disadvantage — less leverage to ensure the contractor finishes properly. In practice, though, reasonable retention rates tend to produce better outcomes. Contractors and subcontractors who aren’t cash-strapped are more likely to staff your project properly and address issues promptly.
The key is to work with a contractor you trust. When you have confidence in your contractor’s integrity and track record, retention becomes less about leverage and more about standard contract administration.
Our Take
At Poerio, we’ve always believed that fair contract terms produce the best projects. We support reasonable retention rates because they help us keep our subcontractors paid, motivated, and focused on delivering quality work. If you have questions about how retention works on your project and what the current standards are in your jurisdiction, we’re happy to walk you through it.
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