The tide continues to turn in contractors’ favor on practices relating to payments held back by construction project owners under retainage provisions in contracts. Following earlier-year leads of a few others, legislatures in three large states – California, New York, and Illinois – acted in 2025 to cap retainage on certain projects at far lower percentages, putting more earned money into contractors’ pockets earlier and possibly paving the way for more states to follow suit.

California’s SB 61 law, heavily lobbied for by the National Electrical Contractors Association, capped retainage on private construction project contracts entered into after Jan. 1, 2026 at 5%, half the 10% typically held back by owners until completion.

In New York, a new law bolsters one passed in 2023 that put a 5% retainage cap on private projects. Owners were reportedly exploiting loopholes to get around the law, prompting the legislature to pass one that expressly voids any contract (existing or new) with retainage exceeding 5%.

And in Illinois, legislators broadened earlier actions to reform retainage. The State Agency Retention Act, signed in August, limits retainage on agency projects to 10% for a contract’s first half; 5% at 50% completion; and no more than 5% thereafter. Similar restrictions on private construction projects have been in place since passage of a 2019 law and on local government projects since 2024.

Other states passed laws that took effect in 2025. Iowa cut its allowed retainage on public projects from 5% to 3%. And in Indiana, lawmakers cut retainage for certain state and local public works projects from 10% to 6% of the dollar value of all work satisfactorily completed until the public work is 50% complete; and from 5% to 3% of the dollar value of all work satisfactorily completed until the public work is substantially complete. It also removes the requirement of a minimum amount of retainage for certain state and local public works projects.

The new frontier in reforming retainage at the state level may lie in the private project realm. Many states have moved to restrictions of 5% tops on public projects, according to some tallies (see Retainage Laws in U.S. Construction Contracts), leaving only a few with a 10% maximum. On the private side, though, an undated status report showed a majority have no cap in place or permit a 10% ceiling. But Politico Group, a Sacramento lobbying firm that helped get the California bill passed, stated in a 2025 campaign memo (Politico Group, Inc. | 5% Retention - Newsom) that more than 20 states “already apply similar limits to private construction.”

The impetus for addressing retainage stems partly from the growing pressure many contractors face in staying solvent as projects progress. Inflation and higher interest rates are compounding cash flow challenges, leaving some struggling to sustain working capital to pay employees, purchase materials, cope with overhead pressures and transition to other jobs. An assurance of essentially more prompt payment as work is completed, with the standard promise of full payment at the project’s conclusion, amounts to a firmer lifeline for many contractors.

In California, the new law on private projects appears to be working as intended, with more money presumably beginning to flow into contractor coffers and no evidence of disputes or interpretation issues, says Robert E. Meadows, president of Morrow Meadows Corporation, a City of Industry, Calif.-based electrical contractor.

Meadows, who helped spearhead the effort to pass SB 61, sees the new provision as a long-overdue, common-sense change that will be especially helpful to small- and medium-sized contractors pressured by the reality of tight profit margins. Clearing maybe only 2% to 4% on a job in the state, he says, an average California electrical contractor that utilizes a line of credit (sometimes secured with a personal guarantee) to stay afloat ultimately pays for retention in the form of higher, more burdensome financing costs.

“Now they’re (the client) not keeping a full 10% of every billing, and that frees up a lot of previously retainable money you could be using for your operating or capital expenses,” Meadows says. “There’s a 50% reduction with the new law, and that’s a lot.”

Coming 15 years after the law that reduced public works retention in the state, last year’s legislation sailed through, Meadows says, the result of all parties seeing the benefit of putting all contractors on better financing footing. With improved cash flow from eminently fairer pay practices, more contractors might be able to stay in business and profitable at a time of growing construction demand. Yet pressures will still exist for some.

“The margins we make isn’t often worth the risk for some firms,” he says. “More subcontractors could start to pull back and only work with the very best customers. Others may ultimately wind down before they go to a second or third generation owner or end up in the hands of a private equity buyout.”