Colorado’s New Retainage Law: What Construction Owners and Contractors Need to Know

Introduction

Colorado has updated its legislation regarding retainage on certain private construction projects. Here’s what you need to know.

Retainage has long been a familiar part of construction contracting. Owners commonly withhold a portion of a contractor’s payment—often called “retainage”—to provide financial protection if work is incomplete, defective, or if other obligations remain outstanding at the end of a project. Retainage can become a point of contention between owners, subcontractors, and contractors. But, Colorado has now given contractors another option.

House Bill 26-1311, the Retainage Surety Bond Construction Contracts law, was signed into law and became effective August 12, 2026, and applies to contracts created on or after that date.

What Does the New Retainage Law Do?

Previously under Colorado law, a private property owner generally may not retain more than 5% of a construction contract when the contract is at least $150,000.

The new law allows a contractor to provide a retainage surety bond instead of having retainage withheld. If the bond satisfies the statutory requirements, the property owner must accept it and may not withhold the retainage. The goal is to provide the owner with financial protection while allowing the contractor to maintain access to its cash during the project.

In practical terms, this creates a choice:

Traditional approach: The owner withholds a percentage of the contractor’s payments until the contractual conditions for releasing retainage are satisfied.

New approach: The contractor provides an appropriate surety bond, and the owner releases the amount that otherwise would have been held as retainage.

Why Does This Matter?

Retainage can represent a significant amount of money on a large construction project.

For example, on a $2 million project, 5% retainage could represent $100,000 that remains unpaid while the project progresses and until the owner releases final payment and all conditions are met. For contractors and subcontractors, having that money tied up can affect cash flow, payroll, material purchases, and the ability to finance other projects.

A retainage bond offers a potential alternative: rather than having the contractor's cash tied up, the bond provides security to the owner. That can be particularly meaningful for contractors managing multiple projects or projects with substantial material and labor costs.

What Does This Mean for Owners?

The new law does not eliminate retainage or require owners to give up financial protection. Instead, when a contractor submits a retainage bond that meets the statutory requirements, the owner must accept the bond in lieu of withholding retainage. Among other requirements, the statute addresses the surety's financial strength and permits an owner or contractor to require a minimum A.M. Best rating, provided the required rating does not exceed A-.

Owners should pay close attention to the bond itself and to the construction contract provisions addressing retainage. The practical takeaway is that retainage provisions should no longer be viewed simply as a question of how much money to withhold. The contract may need to address the procedures for evaluating and accepting a retainage bond.

What About Subcontractors?

The law also addresses the relationship between general contractors and subcontractors. A subcontractor may require the contractor to provide a retainage bond in lieu of withholding the subcontractor's portion of retainage. Conversely, a contractor may require the subcontractor to provide a similar bond.

Importantly, when an owner accepts a qualifying retainage bond from the contractor, the contractor must accept a qualifying bond from a subcontractor that submits one.

This creates a potentially important change throughout the payment chain. Contractors and subcontractors should review their agreements to make sure retainage provisions are consistent with the new law.

The Law Does Not Apply to Every Project

One important limitation is that these new provisions do not apply to contracts or subcontracts involving property owned by a public entity. The statutory exemption also includes contracts resulting from public-private partnerships.

Accordingly, parties should not assume that the new rules apply to every Colorado construction project. The type of project, ownership of the property, contract value, and date the contract was created all matter in evaluating whether these new rules apply to your project.

What Should Contractors and Subcontractors Do?

Contractors working on new Colorado private construction projects should consider taking several steps:

1. Review your standard contracts. Retainage provisions should be updated to address the new bonding option.

2. Talk with your surety. Contractors interested in using retainage bonds should understand the availability, cost, underwriting requirements, and terms before presenting a bond to an owner.

3. Review subcontract forms. Your agreements should address both traditional retainage and the possibility of a retainage bond.

4. Evaluate project cash flow. A retainage bond may provide a valuable alternative to having cash withheld throughout a project.

5. Document the process. Make sure requests for a retainage bond, bond acceptance, and release of retainage are handled consistently and in accordance with the contract and statute.

What Should Owners Do?

Owners should likewise review their construction documents and procedures.

In particular, owners should understand when a contractor is entitled to substitute a qualifying retainage bond for withheld funds and what documentation should be required to establish that the bond satisfies the statutory requirements.

Owners should also make sure their project-management teams understand the distinction between accepting a qualifying bond and simply agreeing to release retainage without adequate security.

Bottom Line

Colorado's new retainage law gives contractors and subcontractors a potentially valuable tool for improving project cash flow while preserving protection for property owners.

For contractors, the law may mean that less working capital is tied up in retainage. For owners, it means that retainage provisions and bond requirements deserve careful attention during contract negotiations.

Because the law applies to contracts created on or after August 12, 2026, now is a good time for Colorado construction participants to review their standard agreements and project procedures. Please contact Miller & Law, P.C. to discuss how this impacts your contracts and projects or if you would like to have us review and revise your contracts.

*This article is intended for informational purposes only and should not be construed as legal advice. Individuals involved should consult with legal professionals for specific guidance tailored to their circumstances. 

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