Perspectives

New California Construction Laws are Coming-What to Know Before 2026

News WFJ Law Firm

At Wagner, Falconer and Judd, we spend a lot of time helping construction professionals navigate change. Two new California laws taking effect January 1, 2026 will significantly impact how private construction projects handle claims, payments, disputes, and retention.

If you own, manage, or work on private construction projects in California, now is the time to prepare.

Let’s break it down.

The Big Picture

What’s Changing?

Beginning January 1, 2026, most private construction contracts in California will be governed by two new laws:

Civil Code 8850- Creates mandatory claim, dispute resolution, and payment timelines

Civil Code 8811- Caps retention at 5% on most private projects

Why it matters:

These laws cannot be waived, override conflicting contract terms, and carry real financial consequences for noncompliance-especially for owners.

Section 8850: New Rules for Claims, Disputes, and Payment

Who does it apply to?

Most private construction projects in California executed on or after January 1, 2026, with limited exceptions (certain residential and small mixed-use projects).

What is a “claim” under the law?

A claim includes demands for:

  • Extra time (including delay relief)
  • Payment for work performed
  • Payment of amounts the owner disputes

Once a claim is submitted, the clock starts ticking.

The New Claim Timeline (Simplified)

  1. Contractor submits a claim with reasonable supporting documentation
  2. Owner has 30 days to review and respond in writing
    1. Must identify what is disputed and undisputed
  3. Undisputed amounts must be paid within 60 days of the owner’s response

If the owner disputes the claim or doesn’t respond on time, the law forces the net steps.

Required Dispute Resolution Steps

If a claim isn’t resolved:

  • Informal conference
    • Contractor can demand it
    • Owner must schedule it within 30 days
  • Mediation (non-binding)
    • Required if disputes remain
    • Costs split evenly
    • If parties can’t agree on a mediator, the contractor chooses

Only after mediation can the dispute move to arbitration or court (as the contract allows).

The “Hammer”: What Happens if Owners Don’t Comply

Section 8850 has teeth.

Contractors Can Suspend Work

If payment is due and not made-or if the owner fails to follow the dispute process-a contractor may suspend work without penalty, after giving proper notice.

This is broader than existing prompt-payment laws and may apply even when amounts are disputed.

Interest Adds Up Fast

  • Unpaid undisputed accounts accrue 2% annual interest per month (24% annually)
  • Interest may apply retroactively if a disputed claim is later found valid

On large claims, this exposure can be massive.

You Can’t Contract Around It

  • Any contract terms that conflict with Section 8850 are void
  • Parties may agree after a claim arises to skip mediation-but no in advance

What This Means in Practice

  • Owners will face strong pressure to respond quickly and pay sooner
  • Contractors gain leverage-but must follow notice requirements carefully
  • Subcontractor claims must be passed through in good faith

How courts interpret some of the provisions (especially interest and stop-work rights) remains an open question-but the risk is real.

 

Section 8811: A 5% Retention Cap on Private Projects

The Rule

For most private construction contracts entered into after January 1, 2026:

  • Retention at any tier cannot exceed 5%
  • Total retention over the life of the contract cannot exceed 5%

This applies to:

  • Owners–>Contractors
  • Contractors–> Subcontractors
  • Subcontractors–> lower-tier subs

Limited Exceptions

  • Certain residential projects (non-mixed use, under four stories)
  • Subcontractors who fail to provide a required bond after notice

Unlike public projects, there is no exception for complex projects. 

Enforcement

If someone violates Section 8811:

  • The prevailing party is entitled to reasonable attorney’s fees

That alone should get everyone’s attention.

How this Compares to Public Projects

Both laws borrow concepts from California’s public works statutes-but private projects now face:

  • Higher interest penalties
  • Fewer exceptions
  • Greater exposure for owners
  • Mandatory processes that can’t be waived in advance

In short: private projects are being regulated more like public ones-but with sharper consequences.

Action Steps:What You Should Do Now

For Owners

  • Review and revise contract templates for 2026
  • Train project managers on strict response and payment timelines
  • Budget for faster payments and potential interest exposure
  • Tighten internal claim review processes

For Contractors

  • Update claim procedures and documentation standards
  • Track deadlines carefully-missed steps can cost leverage
  • Understand your stop-work rights (and notice requirements)
  • Prepare to pass through subcontractor claims properly

For Subcontractors

  • Know your rights under the new payment timelines
  • Watch retention percentages closely
  • Communicate claims early and in writing
  • Coordinate with upstream contractors to ensure compliance

Final Takeaway

California’s new private construction laws are intended to promote timely payment and reduce disputes-but they also raise the stakes for everyone involved.

Contracts that don’t comply won’t be enforceable.

Teams that aren’t trained will be exposed.

Owners, in particular, face the greatests financial risk.

At Wagner, Falconer & Judd, we help construction professionals simplify complex rules, update contracts, and stay protected before problems arise. If your projects-or contracts-will extend into 2026, now is the time to prepare. 

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