Retainage in 2026: Caps, Release Triggers, and the Reform Trend

Retainage (also called retention) is a percentage of each progress payment that the owner or contractor withholds until the work is complete. It gives the upstream party security for performance and a fund to complete or correct work if the contractor fails. Five or ten percent of every payment, held back across a multi-year project, can equal the contractor's entire profit margin.

Because the withheld money is earned — it is payment for work already performed and accepted — retainage is a pure cash-flow burden. The longer it is held, and the more of it is held, the more it strains a subcontractor whose own costs are due long before the retention is released.

The clear legislative direction is toward lower retention and earlier release. Among states that legislate retainage, the split is roughly between 5% and 10% caps, with a slightly larger number now imposing 5%. The most significant recent change is California's SB 61, effective January 1, 2026, which caps retention at 5% on private construction projects under Civil Code § 8811 — extending to private work the kind of limit that previously applied mainly to public jobs.

California also tightens the release timeline: retention withheld from a direct contractor must be released within 45 days of the date of completion, and amounts a direct contractor withholds from a subcontractor must be released within 10 days of the contractor's receipt of any retention payment. These release deadlines, backed by prompt-payment penalties, are as important as the cap itself.

Public-project rules vary widely. Texas, for example, prohibits a governmental entity on a public works contract under $5 million from withholding retainage exceeding 10% of the contract price, and bars a retainage rate above 10% on any line item. At the other end of the spectrum, New Mexico prohibits retainage on most publicly and privately funded projects altogether, paying contractors in full as work is completed.

The practical lesson is that 'standard' retainage is not a single national number. The applicable cap depends on the state, whether the project is public or private, and sometimes the contract value, so the review has to start from the governing jurisdiction.

Beyond the cap, the most valuable terms are the release triggers. Many statutes require reducing or releasing retention at substantial completion, at a defined percent-complete milestone (often 50%), or once the work is advanced enough that the security is no longer needed. A contract that holds full retention until final completion of the entire project, when a sub finished its scope a year earlier, is out of step with the trend and worth pushing on.

The strongest position for a subcontractor is release of retention on the sub's own completed and accepted scope, rather than waiting on trades and milestones it does not control. Where a full release is not achievable, a step-down — reducing the percentage at substantial completion — at least frees part of the earned money.

Confirm the retainage rate is within any applicable statutory cap and matches the rate the owner holds upstream — a sub should not bear 10% while the GC is subject to 5%. Check the release timeline against the prompt-payment statute, since late release of retention can trigger interest and fee penalties. And tie release to the sub's scope rather than the whole project wherever the leverage exists.

Retention is one of the few terms where the statute often does the heavy lifting; knowing the governing law lets the reviewer hold the contract to the standard the legislature already set.