SB 440 and SB 61: New California Construction Payment Laws Reshape Cash Flow for Pacific Beach Contractors in 2026

If your Pacific Beach contractor hasn't mentioned SB 440 or SB 61 in recent conversations about your remodeling project or ADU, they may not fully understand how these landmark laws—effective January 1, 2026—fundamentally changed payment terms, legal obligations, and cash flow dynamics for every private construction project in California.

Just two days into 2026, California construction law has undergone its most significant transformation in decades. Two new statutes now govern how contractors get paid, how change orders are processed, and how much money can be withheld during construction. For homeowners planning kitchen remodels in La Jolla, ADU builds in Mission Beach, or home additions in Bird Rock, these laws create new protections and clearer timelines. For contractors like Pacific Beach Builder, they represent both opportunity and compliance responsibility.

This comprehensive guide explains exactly what changed on January 1st, how SB 440 and SB 61 affect your construction project, and why choosing a contractor who understands these new requirements protects both your timeline and your budget.

What Are SB 440 and SB 61? California's Construction Payment Revolution

California Governor Gavin Newsom signed two transformative construction bills into law in 2024 and 2025, both taking effect January 1, 2026:

Senate Bill 440: Private Works Change Order Fair Payment Act

Signed in September 2024 and codified at California Civil Code sections 8850-8859, SB 440 creates California's first mandatory statewide process for handling change orders and extra work disputes on private construction projects. The law was authored by Senator Rosilicie Ochoa Bogh, who described it as establishing "fair payment timelines that protect contractors while maintaining accountability."

According to construction payment experts at Levelset, SB 440 applies to all private construction contracts entered into on or after January 1, 2026, with one key exemption: purely residential projects (not mixed-use) that are four stories or fewer in height.

Critical SB 440 requirements include:

• 30-day owner response deadline: When a contractor submits a claim for additional compensation or time extension, the property owner must meet and confer within 30 days, then provide written identification of disputed and undisputed portions within 10 days after that meeting
• 60-day payment window: Undisputed amounts must be paid within 60 days after the owner's written statement
• 2% monthly interest penalty: If undisputed amounts aren't paid within the 60-day window, they accrue interest at 2% per month—that's a steep 24% annual rate
• Non-waivable protections: Parties cannot waive these requirements in their contracts, though they may add additional procedures that don't conflict with SB 440's timelines
• Work stoppage rights: Contractors may suspend work without penalty if owners fail to comply with required timelines or refuse mediation

The law sunsets on January 1, 2030, unless extended by the legislature—giving California a four-year trial period to assess its impact on construction disputes and payment practices.

Senate Bill 61: 5% Retention Cap for Private Construction

Signed by Governor Newsom on July 24, 2025, SB 61 establishes a mandatory cap on retention payments at California Civil Code section 8811. Senator Dave Cortese, the bill's author, called it a "big win for small business minority contractors and subcontractors" in his official statement.

Retention (also called "retainage") is money withheld from progress payments during construction to ensure contractors complete all work and fix any defects. For decades, private construction projects in California commonly withheld 10% retention—doubling the 5% cap that has long applied to public works projects. SB 61 finally aligns private and public sector standards.

Key SB 61 provisions:

• 5% maximum per payment: No more than 5% may be withheld from any individual progress payment
• 5% maximum total retention: Total retention across the entire project cannot exceed 5% of the contract price
• Flow-down requirement: General contractors cannot withhold more retention from subcontractors than the owner withholds from them
• All-tier application: The 5% cap applies to owners, prime contractors, and subcontractors of any tier
• Non-waivable: Like SB 440, these protections cannot be waived in construction contracts

The same residential exemption applies: purely residential (non-mixed-use) projects of four stories or fewer are not subject to the 5% cap. According to Hanson Bridgett law firm's analysis, this means most single-family homes, duplexes, and low-rise apartment buildings fall outside SB 61's scope—but mixed-use developments and commercial projects are covered.

What About Performance Bonds?

SB 61 includes one additional exemption: the 5% cap does not apply when the direct contractor or subcontractor, with advanced written notice, requires a performance and payment bond and the other party fails to provide it. This protects contractors' ability to require bonds on high-risk projects while still benefiting from improved retention terms when bonds are provided.

The Three Game-Changing Timelines: What Actually Changed January 1st

For Pacific Beach homeowners planning construction projects in 2026, understanding these three new mandatory timelines is essential:

Timeline #1: The 30-Day Change Order Response (SB 440)

Before SB 440, California had no statewide rules governing how quickly owners had to respond to contractor claims for additional work. This created uncertainty, delayed payments, and sometimes led to disputes that could drag on for months.

Now, when your contractor discovers unexpected conditions—dry rot in your La Jolla home's framing, unanticipated plumbing issues in your Pacific Beach kitchen remodel, structural issues in your Bird Rock home addition, or required foundation work for your Mission Beach ADU—and submits a change order claim, the clock starts ticking:

Day 1-30: The property owner (you) must meet and confer with the contractor to discuss the claim. According to Gibbs Giden law firm, this "meet and confer" requirement encourages good-faith negotiation rather than adversarial positioning.

Day 31-40: Within 10 days after the meeting, you must provide written confirmation identifying which portions of the claim are disputed and which are undisputed. If you fail to provide this written statement within 10 days, the entire claim is presumed disputed.

Why this matters: The 30-day timeline creates predictability. Your contractor knows they'll get a response within 40 days maximum. You have a clear deadline to review claims and consult with experts if needed. And projects keep moving rather than stalling during payment disputes.

Timeline #2: The 60-Day Payment Window with Teeth (SB 440)

Once you've identified undisputed portions of a claim, those amounts must be paid within 60 days. This applies whether you're disputing 0%, 50%, or 90% of the claim—whatever portion is undisputed must be paid promptly.

But SB 440's real innovation is the consequence for late payment: 2% interest per month. That's not an annual rate—it's monthly. Compound that over a year and you're looking at approximately 26.8% annual interest (accounting for compounding).

Let's use a real-world example from Pacific Beach:

Scenario: Your contractor submits a $25,000 change order for unexpected electrical panel upgrades discovered during your home remodel. You meet within 30 days and determine that $18,000 is clearly justified (subpanel upgrade, new circuits, permit fees) while $7,000 is disputed (you question whether all the proposed outlets are necessary).

Under the old rules: You might have withheld the entire $25,000 pending resolution of the dispute, forcing the contractor to wait months for payment.

Under SB 440: You must pay the undisputed $18,000 within 60 days. If you pay on day 61, you owe an additional $360 (2% of $18,000). If you wait 90 days, you owe $1,080 in interest—and the contractor has grounds to suspend work after providing 10 days' written notice.

According to the Construction Owners Association of America, this steep interest penalty "incentivizes prompt payment of undisputed amounts while preserving parties' rights to dispute questionable charges."

Timeline #3: The 5% Retention Release (SB 61)

While SB 61 doesn't create a new "timeline" per se, it fundamentally changes the cash flow timeline throughout your project by cutting retention in half.

Here's how it works with a typical Pacific Beach ADU project:

Example ADU Project Costs (2026): Based on current San Diego ADU pricing, a 600-square-foot detached ADU in areas like Tourmaline Surfing Park or Bird Rock typically costs $240,000-$300,000. Let's use $270,000 for this example.

Progress Point	Work Completed	Payment Due	Old Retention (10%)	New Retention (5%)	Contractor Receives	Cash Flow Improvement
Foundation/Framing	30% ($81,000)	$81,000	-$8,100	-$4,050	$76,950	+$4,050
Rough-ins/Utilities	50% ($135,000)	$54,000	-$5,400	-$2,700	$51,300	+$2,700
Drywall/Finishes	80% ($216,000)	$81,000	-$8,100	-$4,050	$76,950	+$4,050
Project Completion	100% ($270,000)	$54,000	Return $27,000	Return $13,500	$67,500	+$13,500

Total cash flow improvement during construction: $13,500

That's $13,500 your contractor isn't borrowing against a line of credit, $13,500 they can use to pay subcontractors promptly (avoiding their own late fees), and $13,500 that improves their ability to maintain quality crews and keep your project on schedule.

According to O'Melveny law firm's analysis, "supporters say the bill will improve contractor cash flow, reduce dependence on lines of credit, and create consistent retention policies for both public and private projects, with the law expected especially to benefit small businesses and union contractors that have limited access to capital."

Conclusion: A New Era for California Construction Payments

SB 440 and SB 61 represent the most significant changes to California construction payment law in decades. For Pacific Beach contractors, they create opportunities to improve cash flow, differentiate from competitors, and build stronger client relationships through transparent, compliant processes. For homeowners planning remodels, additions, or ADUs, they establish clearer timelines, stronger protections, and fairer payment terms.

The laws' January 1, 2026 effective date means these changes are brand new—many contractors are still updating their contracts and procedures. As the industry adapts over the coming months, homeowners who understand these protections will be better positioned to select quality contractors, navigate change orders confidently, and keep projects on track.

Key takeaways for your 2026 construction project:

• 30-day response window: When change orders arise, you have clear deadlines to review, discuss, and respond
• 60-day payment requirement: Undisputed amounts must be paid within 60 days or accrue steep 2% monthly interest
• 5% retention maximum: On covered projects, no more than 5% can be withheld, improving contractor cash flow
• Non-waivable protections: These requirements cannot be contracted away—they apply regardless of what your contract says
• Subcontractor flow-down: Improved payment terms extend to subs at every tier, reducing delays

Whether you're a homeowner in La Jolla planning a kitchen remodel, a property developer in Mission Beach building a mixed-use project, or a contractor in Pacific Beach navigating these new requirements, understanding SB 440 and SB 61 is essential for successful 2026 construction projects.

Ready to Start Your Pacific Beach Construction Project with a Team That Understands the New Laws?

At Pacific Beach Builder, we've updated our contracts, trained our team, and established compliant procedures to ensure your 2026 project benefits from SB 440's streamlined change order process and SB 61's improved retention terms. We believe these laws create better outcomes for everyone—contractors, subcontractors, and homeowners alike.

Browse our construction insights blog for more expert guidance, or contact us today to discuss your remodeling project, ADU build, or custom construction needs. We'll walk you through exactly how these new payment protections work in practice and how they'll benefit your specific project timeline and budget.

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