California’s 2026 Legal Update for Construction: What Contractors and Vendors Should Change Now

California’s 2026 legislative cycle brings a mix of contract, licensing and workplace compliance changes that directly affect construction companies and the subcontractors, staffing partners, and vendors who support them. Whether you are an owner, prime contractor, specialty trade, material supplier or professional services vendor, these laws create new pressure points in your contracts, your back-office practices and your risk allocation.

Below are several of the most construction-relevant changes taking effect in 2026, with practical steps to help you reduce disputes, improve cash flow and avoid enforcement actions.

Private Project Retention Is Capped at 5%

(It Must Flow Down)

One of the most significant construction-specific changes is SB 61, which establishes a mandatory 5% cap on retention for most private construction contracts entered into on or after January 1, 2026. The cap applies to progress-payment retention and total retention, and the retention percentage must be applied consistently through all tiers of subcontracting.

Why it matters: Many companies have relied on 10% retention as a cash-management tool and leverage point. In 2026, over-withholding creates immediate contract-compliance issues and can invite claims and project friction.

Action items (prime contractors and owners):

• Update templates now: prime contracts, subcontracts and exhibits should all reflect the cap (and a consistent flow-down).

• Train project administrators: retention practices often become inconsistent in the field due to legacy habits.

• Tighten change order processes: if retention is not your leverage point, documentation discipline becomes even more important.

Action items (subs and vendors):

• Review payment provisions carefully, especially any “retention-like” holdbacks labeled as “administrative fees,” “closeout reserves” or “warranty reserves.” If it functions like retention, it may still be challenged.

• Align lien and notice strategies to the revised cash-flow reality.

CSLB Enforcement Gets Sharper: Wage Judgments,

Workers’ Comp, and Bigger Penalties

The Contractors State License Board flagged several new laws starting in 2026 that increase compliance expectations and enforcement risk:

• AB 1002 authorizes the Attorney General and CSLB to bring civil actions affecting a contractor’s license for failure to pay workers or comply with wage judgments/court orders.

• SB 291 significantly increases penalties for workers’ compensation insurance violations and adds reporting/verification measures.

• SB 779 increases minimum civil penalties for certain violations beginning July 1, 2026, including higher minimum fines for unlicensed activity, with CPI adjustments over time.

Why it matters: Licensing exposure is not just a “prime contractor” problem anymore. In practice, enforcement actions can disrupt projects, trigger default claims and create reputational risk across a vendor network.

Action items (construction companies):

• Add payroll and compliance representations to subcontractor onboarding (then actually verify them).

• Audit workers’ comp documentation and exemption classifications.

• Implement a formal escalation path for wage disputes before they become judgments.

 Action items (vendors and subs):

• If you are working under another company’s license umbrella (or close to the line of what requires licensure), re-check your scope and classification.

• Keep your workers’ comp documentation current and easily retrievable. Slow responses to compliance requests can become project-stopping events.

Home Improvement Contract Rules: Email

Cancellation and Sub Disclosure

For those operating in the home improvement channel (including many specialty trades), the CSLB notes two particularly practical changes:

• AB 1327 requires home improvement contracts to include an email address, and buyers must be able to cancel via email; contracts must also include a phone number to help buyers locate and complete the Notice of Cancellation.

• SB 517 requires contractors using subcontractors on home improvement projects to disclose subcontractor information upon request, including name, contact info, license number, and classification. 

Why it matters: These are the kinds of technical requirements that drive consumer complaints when a deal goes sideways. They also give plaintiffs’ counsel easy “hook” allegations in disputes.

Action items:

• Update your home improvement contract forms and cancellation workflows.

• Ensure customer-facing staff know how to respond to subcontractor disclosure requests quickly and accurately.

Employment Law Pressure Points: Pay

Equity and Wage-Related Exposure

Construction companies are already used to navigating prevailing wage, classification and complex pay practices. Two 2026 changes reinforce why internal wage discipline matters:

• SB 642 updates California’s pay equity law (Labor Code 1197.5) and clarifies protected comparisons (including pay disparity based on “another sex”).

• Statewide minimum wage increases to $16.90/hour as of January 1, 2026, with corresponding impacts on exempt salary thresholds. 

• Separate from CSLB-specific measures, California also highlights new worker protections taking effect January 1, 2026. 

Why it matters: Pay equity and wage disputes can turn into agency investigations, civil claims and (under the CSLB/AG trend) potential licensing implications when judgments are not addressed. 

Action items:

• Conduct a pay practice checkup (especially for roles with similar work across projects and regions).

• Confirm your exempt classifications remain valid under the updated wage/salary floor.

• Ensure vendors supplying labor (staffing firms, subs) understand your site rules and timekeeping expectations. Be aware that shared projects often create shared evidence.

  
  

Increased Civil Exposure for Workplace

Sexual Assault “Cover-Ups”

California’s statewide 2026 rollouts include AB 250, which temporarily revives the statute of limitations for adult survivors of workplace-related sexual assault cover-ups, allowing civil claims during a defined window (January 1, 2026 - December 21, 2027). 

Why it matters in construction: Multi-employer jobsites, rotating crews and “everyone knows everyone” vendor relationships can create environments where complaints are mishandled, minimized or informally “dealt with.”  AB 250 increases the risk that older events resurface with litigation especially where documentation is weak.

 Action items:

• Re-evaluate reporting channels: make sure workers (including vendor employees on your site) know how to report issues safely.

• Document responses: the fastest way a serious complaint becomes a major lawsuit is poor documentation and inconsistent action.

• Align vendor expectations: require staffing partners and subcontractors to maintain compliant training and investigation practices.

Bottom Line: Update Your Contracting and Compliance

Playbook for 2026

Most construction disputes are still about money, time and paperwork, but 2026 laws change the rules around retention, increase CSLB enforcement leverage and elevate workplace exposure in ways that ripple through the entire vendor ecosystem.

  If your 2026 goal is fewer disputes and faster payment, focus on three themes:

1.     Modernize contract templates (especially retention and home

improvement forms);

2.     Improve compliance verification across subcontractors and labor

suppliers; and,

3. Strengthen workplace culture and reporting so issues are handled early,

consistently and defensibly.