It’s That Time of Year: Contract Review Time

My father used to make me wash the family cars every weekend . . . rain or shine. The nice thing about washing a car in the rain is that you don’t need to dry it. Once, while sudsing up one of the family cars in the rain I spotted a couple of Jehovah Witnesses making house calls along our street. As they approached our house, they looked at me, said something to one another, and decided membership probably wasn’t a good fit for our family. If my dad saw that he probably would have thought that was reason enough to have me wash the family cars in the rain. Obviously, I never mentioned it to him. 

This is all a rather nostalgic way of reminding myself to get off my duff. The holidays are over. There’s stuff needing doing. Whether you like it or not. Like updating my contracts. You might consider doing the same. A few suggestions:

Retention

For certain private works construction contracts entered into on or after January 1, 2026, retention is now capped at 5%, mirroring the 5% retention cap on state and local public works construction contracts. The 5% retention cap applies to contracts between owners and direct contractors, between direct contractors and subcontractors, and between subcontractors. So, basically, everyone up and down the construction change. 

However, a couple of caveats:

1. Four-Story, Mixed-Use Exception: This is a big one. The 5% retention cap only applies to residential mixed-use projects that exceed four stories.
2. Payment and Performance Bond Exception: The 5% retention cap does not apply to contracts between direct contractors and subcontractors and between subcontractors if the direct contractor or subcontractor provides written notice to the subcontractor “before, or at, the that the bid is requested that faithful performance and payment bond shall be required, and a subcontractor subsequently fails to furnish to the direct contractor or subcontractor a performance and payment bond issued by an admitted surety insurer.” I’m not exactly sure how this is supposed to work since most private works construction contracts are negotiated rather than secured by bid. However, I suppose a sophisticated direct contractor or subcontractor could include both a 5% retention cap provision as well as a payment and performance bond provision that provides that if the subcontractor fails to furnish a payment or performance bond that retention shall be increased to say 10%. 

Also, if you’re required to limit retention to 5% of amounts owed, but fail to do so, you can be sued a and the prevailing party would be entitled to recover their reasonable attorneys’ fees. This can also be a sneaky way of recovering attorneys’ fees if your contract does not provide for it.

Claims Resolution 

Private works construction contracts include a veritable menu of claims resolution provisions. Mediation. Litigation. Arbitration. Judicial reference. Dispute resolution boards. And everything in between. 

Now, there’s a statutory claims resolution procedure for certain private works projects – the Private Works Change Order Fair Payment Act – modeled after Public Contract Code section 9204 which applies to public works projects. For certain private works construction contracts entered into on or after January 1, 2026 the new statutory claims resolution process includes a four-step process. Importantly, the new statutory claims resolution process only applies to mixed-use projects that exceed four stories.

Step One: Owner Claim Review and Response 

Upon receipt of a claim, supported by reasonably documentation from a direct contractor, an owner has 30 days to review the claim and provide a written statement identifying what portion of the claim is disputed and what portion of the claim is undisputed. The 30 day deadline may be extended by mutual agreement in writing between the owner and direct contractor. Payment of any undisputed portion of a claim must be made within 60 days of the written statement or be subject to 2% interest per month. 

Step Two: Informal Meet and Confer Conference

If a direct contractor continues to dispute all or any portion of an owner’s written statement, or if an owner fails to provide a written statement by the deadlines above, the direct contractor may make a written demand for an informal meet and conference sent to the owner by registered or certified mail, return receipt requested.

Upon receipt of written demand for an informal meet and confer conference, the owner is required to schedule a meet and confer conference with the direct contractor within 30 days.

Within 10 business days following the informal meet and confer conference, if any claim or portion of a claim remains in dispute, the owner is required to provide a written statement identifying what portion of the claim remains in dispute and what portion of the claim is undisputed. Payment of any undisputed portion of a claim must be made within 60 days of the written statement or be subject to 2% interest per month.

A direct contractor and owner may by mutual agreement upon receipt of a claim to waive the informal meet and confer process and proceed directly to litigation or arbitration, as applicable.

Step Three: Mediation

If any portion of the claim remains disputed the parties are required to submit the claim to mediation with each party sharing costs equally. The direct contractor and owner are required to agree to a mediator within 10 business days after the disputed portion of a claim has been identified in writing.

If the parties cannot agree upon a mediator within the deadline above, the contractor may select the mediator to be used. If the owner refuses to mediate the direct contractor may suspend performance of work if:

1. The owner is informed by registered or certified mail, return receipt requested, that payment is due under the Private Works Change Order Fair Payment Act; or an owner fails to meet any of the deadlines or requirements under the Private works Change Order Fair Payment Act; AND
2. Thirty (30) days after the notice above is sent, the owner is informed by registered or certified mail, return receipt requested, with a 10-day written notice of intent to stop work. 

A direct contractor and owner may by mutual agreement upon receipt of a claim to waive the mediation requirement and proceed directly to litigation or arbitration, as applicable.

Step Four: Agreed-Upon Dispute Resolution Procedures

If mediation is unsuccessful, the claim or portions of a claim remaining in dispute are subject to the dispute resolution procedures agreed to in the written contract of the parties, of if no election exists, by litigation. Disputed amounts which are later found to be owed are subject to 2% interest per month beginning from the date on which those amount would have been due had they not been disputed. The 2% interest per month mirrors the 2% per month penalty found in many of the state’s prompt payment penalty statutes, but notably, without the good faith or bona fide dispute exception. I think some people are going to be caught by surprise by this.

Subcontractors

Subcontractors may request in writing, either on their own behalf or on behalf of a lower-tiered subcontractor, that the direct contractor present a claim for work performed by a subcontractor or a lower-tiered subcontractor. Subcontractors are required to furnish timely and reasonable documentation supporting their claims and to cooperate with the direct contractor in the informal conference, mediation, and agreed-upon dispute resolution procedures. Direct contractors are required to exercise good faith and may not settle a claim which the subcontractor does not agree in writing.

Direct contractors are required within 30 days of receipt of a request to confirm whether the direct contractor presented a claim and, if the direct contractor did not present the claim, provide the subcontractor with a statement of the reasons for not doing so.

Home Improvement Contracts

If you perform residential remodeling work, you’ll want to update your statutory home improvement contracts. Interestingly, the new law does not apply to new contracts entered into on or after January 1, 2026, but presumably to all home improvement contracts whenever entered, which seems a bit unfair.

Under the new law, direct contractors now need to include the following information in their statutory home improvements contracts:

1. Notice of Cancellation: Email Address and Telephone Number: The email address of the direct contractor where a Notice of Cancellation may benefit sent as well as a statement advising the buyer that: (1) a Notice of Cancellation may be sent to the mailing address or email address noted; and (2) a telephone number of the direct contractor to assist the buyer with locating and filling out a Notice of Cancellation.
2. Subcontractors: A statement following statutory-prescribed language regarding whether or not a subcontractor will be used on the project. If the box “yes” (a subcontractor will be used on the project) is checked, a disclaimer stating, “One or more subcontractors will be used on this project, and the contractor is aware that a list of subcontractors is required to be provided, upon request, along with the names, contact information, license number, and classification of those subcontractors.”