12.5 Payments: Progress Payments, Retention, and California Prompt Payment Law
Key Takeaways
- Under B&P § 7108.5 a prime contractor or subcontractor must pay each subcontractor within seven days after receiving a progress payment, and a violation carries a penalty of 2 percent of the amount due per month plus attorney's fees to the prevailing party.
- Effective January 1, 2026, Civil Code § 8811 added by SB 61 caps retention on private California construction contracts at 5 percent of the payment and 5 percent of the contract price, applying uniformly at every tier.
- On public works, Public Contract Code § 7201 caps retention at 5 percent and § 7107 requires the public entity to release retention within 60 days after the date of completion.
- Where there is a good faith dispute, a prime contractor or subcontractor may withhold no more than 150 percent of the disputed amount from a progress payment.
- On residential home improvement work the down payment cannot exceed 10 percent of the contract price or $1,000, whichever is less, and progress payments cannot exceed the value of work performed or materials delivered to the site.
Payments: Progress Payments, Retention, and California Prompt Payment Law
Quick Answer: California regulates construction payment at every tier. On residential work the deposit is capped at 10 percent of the contract price or $1,000, whichever is less, and progress payments may not exceed the value of work performed or material delivered. Once money moves, B&P § 7108.5 gives a prime 7 days from receipt of a progress payment to pay its subcontractors, with a 2 percent per month penalty and attorney's fees for violating it. Retention is now capped at 5 percent on both sides of the market: Public Contract Code § 7201 for public works, and — new for contracts entered into on or after January 1, 2026 — Civil Code § 8811, added by SB 61, for private works. Public retention is released within 60 days of completion under PCC § 7107. In a good faith dispute, no more than 150 percent of the disputed amount may be withheld.
1. Structuring the Payment Schedule
A payment schedule should track the value in place, so cash arrives roughly as cost goes out.
A typical residential reroof schedule:
| Milestone | Share |
|---|---|
| Deposit at signing | Lesser of 10% or $1,000 (statutory cap) |
| Tear-off complete and dry-in passed | 40% |
| Field covering complete | 35% |
| Final inspection signed and punch list complete | Balance |
Two hard residential rules:
- Down payment. Never demand or accept more than 10 percent of the contract price or $1,000, whichever is less. Exceeding it is a misdemeanor.
- Progress payments. They may not exceed the value of the work performed or the materials delivered to the job site, and the contract must state each payment in specific dollars and cents tied to a defined stage of work. Front-loading a payment schedule is a violation even if the homeowner agrees.
On commercial work, the payment application is normally a schedule-of-values billing supported by a percentage-complete certification, lien releases for the prior period, and a certified payroll where the job is public.
2. Retention
Retention is a percentage withheld from each payment and released after completion, held as security that the contractor will finish and correct defects.
| Project type | Cap | Release |
|---|---|---|
| Public works | 5 percent of the contract price (Public Contract Code § 7201) | Within 60 days after the date of completion (PCC § 7107); withholding beyond that carries 2 percent per month plus attorney's fees |
| Private works, contracts entered into on or after January 1, 2026 | 5 percent of each payment and of the contract price (Civil Code § 8811, added by SB 61) | Per the contract and the Civil Code prompt payment provisions |
SB 61 in brief. Signed July 14, 2025 and operative for contracts entered into on or after January 1, 2026, Civil Code § 8811 brings private construction into line with the public works cap that has applied since 2012, ending the long-standing 10 percent private norm. The cap applies uniformly at every tier, so an owner or general contractor cannot push a larger withholding downstream. The prevailing party in an action to enforce it recovers reasonable attorney's fees. Two carve-outs matter to roofers: the statute does not apply to non-mixed-use residential projects that do not exceed four stories, and where a subcontractor was told in writing before or at bid time that performance and payment bonds would be required and then failed to furnish them, the retaining party may withhold up to 10 percent.
Because the cap turns on the date the contract was entered into, a roofing contractor will be working under both regimes for some time. Check the contract date before assuming the 5 percent cap applies.
Retention is a working-capital commitment. Five percent of a $900,000 annual commercial volume is $45,000 permanently out in the field. Budget it as such (Section 9.1).
3. Prompt Payment Deadlines
| Payment flow | Deadline | Penalty |
|---|---|---|
| Prime or sub → subcontractor, progress payment (public or private) | 7 days after receipt (B&P § 7108.5) | 2 percent per month of the amount due, plus attorney's fees and costs to the prevailing party |
| Owner → direct contractor, private progress payment | Per Civil Code prompt payment provisions, commonly within 30 days of demand | 2 percent per month plus attorney's fees |
| Owner → direct contractor, private retention | Within 45 days after completion of the work of improvement | 2 percent per month plus attorney's fees |
| Direct contractor → subcontractor, retention | Within 10 days after receipt of retention from the owner | 2 percent per month plus attorney's fees |
| Public entity → contractor, retention | Within 60 days after the date of completion (PCC § 7107) | 2 percent per month plus attorney's fees |
The 2 percent per month is a penalty, not interest — it runs in addition to the amount owed, and the fee-shifting provision is what makes these claims worth bringing.
4. Good Faith Disputes and Lawful Withholding
Prompt payment law does not require paying disputed money. B&P § 7108.5 provides that where there is a good faith dispute over all or part of a progress payment, the paying party may withhold no more than 150 percent of the disputed amount.
Two failure modes:
- Withholding too much. Holding the entire $60,000 payment over a $5,000 punch item exceeds 150 percent of $5,000 and exposes the withholder to the penalty and attorney's fees.
- Calling a preference a dispute. A good faith dispute needs a documented basis — a defect, a non-conforming product, a failure to furnish releases. "Cash is tight this month" is not a dispute.
On public works, a public entity may withhold 150 percent of the value of disputed work from the final payment under PCC § 7107(c).
5. Payment and the Lien Clock
Payment administration and lien preservation are the same job. Serve the 20-day preliminary notice on schedule (Section 11.3). Calendar the lien recording deadline the day the work starts — 60 days for a direct contractor and 30 days for a subcontractor after a recorded Notice of Completion, or 90 days from completion if none is recorded. Calendar the 90-day foreclosure deadline the day the lien is recorded. On public works, the remedies are the payment bond and the public stop payment notice, because a lien cannot attach to public property.
Use the statutory releases correctly. Sign a conditional release when submitting a billing, and an unconditional release only after the payment has actually cleared the bank. An unconditional release signed against a check that later bounces has released the lien rights anyway.
6. Pay-If-Paid and Pay-When-Paid
A pay-when-paid clause addresses timing — the sub is paid within a reasonable time after the prime is paid — and is generally enforceable as a timing mechanism. A pay-if-paid clause tries to make the owner's payment a condition precedent, shifting the risk of owner insolvency onto the subcontractor. California courts have held that a pay-if-paid clause cannot be used to defeat a subcontractor's mechanics lien rights, which are constitutionally grounded and cannot be waived in advance. Read the clause before signing, and never rely on it as a reason to skip the preliminary notice.
A prime contractor receives a $180,000 progress payment from the owner on a commercial reroof. A roofing subcontractor is owed $52,000 of that payment, with no dispute. When must the prime pay, and what is the consequence of paying late?
A private commercial roofing subcontract for a six-story mixed-use building is entered into in March 2026 and the general contractor proposes 10 percent retention. What does California law now provide?
A general contractor identifies a $6,000 flashing defect and withholds the entire $48,000 progress payment owed to the roofing subcontractor. Is that lawful?