California Mandates Important New Rules for Private Construction Projects

Section 8850 

Section 8850 of the California Civil Code outlines specific procedures and timeframes for private construction project claims resolution procedures and payments. This new law will broadly apply to contracts for private construction projects executed on or after January 1, 2026, except residential projects and mixed-use projects under four stories. 

After being introduced in February 2025, Section 8850 breezed through the California Legislature and was signed by Governor Newsom on October 10, 2025.The new law is intended to provide for "prompt and fair" payment to contractors and subcontractors, reduce litigation costs, and "promote[] economic stability within the construction industry and ensure efficient project completion." Cal. Civ. Code § 8850(a). Whether Section 8850 will be successful in achieving those lofty goals or lead to further confusion and additional disputes remains to be seen.

Nuts and Bolts of Section 8850's Dispute Resolution Procedures and Timeframes.Under Section 8850, a claim is any contractor's (or subcontractor's, where authorized) "demand" for: (i) a time extension (including requests for relief from damages or penalties for delay); (ii) payment for work performed; or (iii) payment of an amount "disputed by the owner." Cal. Civ. Code § 8850(c)(1). The contractor must provide "reasonable documentation to support the claim" in the manner required by the statute. Cal. Civ. Code 8850(d). Within 30 days of receiving the claim, the owner must "reasonabl[y] review" the claim and provide a written response identifying the disputed and undisputed portions of the claim. Id. § 8850(d). The owner must pay any undisputed portion within 60 days of its response to the claim. Id.

If the owner disputes a claim or fails to timely respond, Section 8850's dispute resolution procedures are triggered. The contractor may demand an informal conference on the disputed claim and "the owner shall schedule" the conference within 30 days after that demand. Cal. Civ. Code § 8850(e). Within 10 business days after the informal conference, the owner must specify the remaining disputed and any undisputed portions of the claim. Id. Undisputed portions of the claim must be paid within 60 days after the owner statement. Id.

If disputed claims remain after the informal conference, they must be submitted to non-binding mediation. Cal. Civ. Code § 8850(f). Mediation costs are to be equally split. Id. The parties are to agree on a mediator within ten business days after the disputed portion of the claim has been identified in writing by owner. Id. However, the statute provides that the contractor gets the final say on picking the mediator if the parties do not agree within this timeframe. Id.

No time limit is provided for conducting and completing the mediation. If mediation fails, disputes are resolved in court or arbitration, depending on what is specified in the contract. Any amount found due or owed by the owner through that process (or subsequent agreement) "shall … be considered an undisputed amount for the purposes of any timelines." Id. § 8850(l). 

Contractors also shall present claims from subcontractors that lack privity with the owner. Cal. Civ. Code § 8850(j). Contractors must exercise good faith in fulfilling their obligations to the subcontractor under the statute's dispute resolution procedures. Id.

The Hammer for Owner's Failure to Comply or Failure to Timely Pay. There are a number of provisions in Section 8850 that operate as a swift and heavy hammer in the event of owner non-compliance.

First, if an owner fails to comply with the payment of amounts "due," contractors have the right to suspend work, without penalty, "until payment is received" if they follow specific notice procedures. Cal. Civ. Code§ 8850(k). The stop work notice procedures require the contractor to: (i) provide written notice that "payment is due" or the claim is "deemed denied" under the statute for failure to timely respond or failure to "meet the requirements" of Section 8850; and (ii) thirty (30) days after that notice, the contractor must provide a 10-days written notice of intent to stop work. Id. 

Notably, California's prompt payment statute already provides that a contractor may issue a stop work notice when not paid the amount due pursuant to contract but that the right to suspend work is limited to non-payment when "there is no dispute as to the satisfactory performance of the contractor … ." Cal. Civ. Code § 8832. By contrast, under Section 8850, the contractor's stop work right is not expressly limited to an owner's non-payment of undisputed amounts and interpretation of this term may well be debated, as discussed below. The right for the contractor to unilaterally suspend work also arises if the owner fails to comply with the required mediation process. Cal. Civ. Code § 8850(k)(1); id. § 8850(g). 

Second, contractors may be entitled to (and owners may be obligated to pay) potentially significant interest on unpaid claims due. "Undisputed amounts" not paid within 60 days bear interest at 2% per month (24% per year). Cal. Civ. Code § 8850(h). Moreover, depending on how the statute is interpreted, interest may be applied retroactively when a disputed claim is later found to have merit because interest "begin[s] from the date on which those amounts would have been due had they not been disputed." Id. § 8850(h)(2). This will create pressure on owners to pay amounts sooner rather then later or may motivate owners to make payment subject to a reservation of rights in the hope of avoiding potentially substantial interest payments on amounts determined to be due to the contractor.

Third, Section 8850 cannot be preemptively waived and any such attempted waivers are void. Cal. Civ. Code § 8850(m)(1). However, upon receipt of a claim, the parties may both agree to waive the informal conference and mediation provisions and proceed directly to arbitration or court. Id. § 8850(m)(2)(A).Covered private works construction contracts may also include their own "reasonable change order, claim, and dispute resolution procedures and requirements" but those terms must not conflict with or impair Section 8850's procedures and timeframes. Id. § 8850(m)(2)(B).

Comparison of Section 8850 to California's Statutory Scheme for Public Works. Section 8850's claim resolution and payment procedures for private works contracts contains many similarities to the procedures for public works contracts as set forth in Section 9024 of the California Public Contract Code. However, the laws also differ significantly on some details as summarized in the table below:

Open Issues

How Section 8850 will be interpreted and applied in practice remains to be seen, and there are some aspects of the law that could well lead to disputes and debate regarding their application. 

For example, owners and contractors will likely offer conflicting arguments for when Section 8850's hefty 2% per month interest should begin to accrue for non-payment of claim amounts that were initially disputed but later found to have merit. Section 8850(l)provides thatany "disputed amount" which the owner is "found to owe" "shall, from the date of the agreement or finding, be considered an undisputed amount for the purpose of timelines or processes established" under Section 8850. Cal. Civ. Code § 8850(l) (emphasis added). Section 8850(h)(2) provides that interest accrues "beginning from the date on which those amounts would have been due had they not been disputed." Section 8850 is worded differently than California's prompt payment statutes, which provide 2% interest on late payment on undisputed amounts. Cal. Civ. Code § 8800. Section 8850(h)(2) suggests that once a disputed amount is adjudicated in favor of a contractor, the 2% monthly interest applies as if the amount were not disputed but was unpaid by the owner. Arguably, the start date for interest would be when payment was due following the contractor's submission of the claim, which Section 8850(d) could be read to place at approximately 90 days after the contractor's initial claim submission. See Cal. Civ. Code 8850(d) (30 days for owner to respond to claim, and payment due on undisputed amounts within 60 days after owner's response). 

For instance, if a contractor makes a $200 million differing site condition or delay claim but only recovers $100 million after three years of litigation, the interest could be massive. If the litigation was after the project was complete, even though the specific amount is unliquidated, the contractor would be entitled to $66 million (.02 per month x 33 months x $100 million). Under ordinary prejudgment interest law, absent an exception, the contractor would generally not be entitled to any prejudgment interest of unliquidated claims. See Cal. Civ. Code § 3287. Such a result might be argued to contravene the purpose of Section 8850, which is to address payment for work that is "not in dispute." Cal. Civ. Code § 8850(a)(1). How the statute is construed and applied could have significant and potentially unintended consequences.

Another open issue for Section 8850 is whether and when a contractor may suspend work for an owner's non-payment of "disputed" amounts. The new law states that this right arises if "payment is due" but is arguably ambiguous as to when that occurs. Contractors may argue that work may be suspended where the owner fails to pay disputed claims that the contractor claims are owed given that the statute is not expressly limited to payment of "undisputed" amounts and the legislature deleted a reference to "undisputed amounts due" in prior iterations of the law concerning the right to suspend work. See SB 440, 2025–26 Reg. Sess. (Cal. 2025) (as amended in Assemb. June 23, 2025). An owner might argue that the removal of that clause did not change the meaning of this portion of the statute because a payment is not due if it is disputed.

Section 8811 

On July 14, 2025, California enacted Senate Bill No. 61, which will be codified as Section 8811 of the California Civil Code. The new law applies to most private construction contracts for large projects entered into on or after January 1, 2026. 

Nuts and Bolts of Section 8811's Retention Cap Rule. Section 8811 provides that retention amounts withheld at any tier—by owners from direct contractors, by direct contractors from subcontractors, and by subcontractors from lower-tier subcontractors—cannot exceed 5% of the payment due. Cal. Civ. Code § 8811(b). Additionally, the total retention withheld over the life of the contract cannot exceed 5% of the contract price. Id. 

There are, however, exceptions to the cap. First, the 5% cap does not apply on residential projects that are not mixed-use and do not exceed four stories in height. Second, the cap does not apply to subcontractor retention if a contractor provides notice before or at the time of bidding that a performance and payment bond is required, and the subcontractor fails to provide such a bond. There is not a parallel exception for the contractor's retention.

The Hammer for Violations. Section 8811 encourages strict compliance by mandating reasonable attorney's fee awards to the prevailing party in any action to enforce Section 8811's provisions. Cal. Civ. Code § 8811(c). 

Comparing Section 8811 with the Statute Applicable to Public Works. Since 2012, California's public contract code placed a 5% cap on retentions for public works contracts. See Cal. Pub. Cont. Code § 7201. That law has some important distinctions from Section 8811. For example, following compliance with the statute's procedures and notice, the public contract rule allows for higher retentions if "the project is substantially complex and therefore requires a higher retention amount than 5 percent . . . ." Id. § 7201(b)(3), (4). Section 8811 does not include a similar complex project exception. The public works statute also does not mandate an attorney's fee awards in successful enforcement actions.