Effective August 12, 2026, Colorado’s new retainage bond law (HB26-1311) will significantly change payment dynamics on private construction projects. The law allows contractors on projects exceeding $150,000 to tender a retainage bond in place of cash retainage and requires property owners to accept any bond meeting the statutory standards. This change carries important implications for lenders, property owners, developers, contractors, and subcontractors – all of whom should review their construction documentation, agreements, and procedures. Below is a breakdown of the new law’s requirements, what it means for your organization, and steps you can take now to prepare.
Background
HB26-1311 represents the latest reform to Colorado’s payment and retainage framework in C.R.S. § 38-46-101, et seq. In 2021, the state enacted legislation capping retainage withholdings at 5% of the contract price. With competitive bidding and slim profit margins, contractors have often relied on loans or lines of credit to cover expenses until final payment is released.
Even with the 5% ceiling, property owners and developers can withhold millions on larger projects through the retainage mechanism. HB26-1311 allows contractors to eliminate retainage withholding at their option by tendering a retainage bond, while still providing owners with security through surety bond coverage.
Changes to the Payment Process
Under the new law, tendering a retainage bond is optional for contractors. However, when a general contractor tenders a qualifying retainage bond in lieu of retainage, the property owner must accept it and release the retainage covered by the bond. The general contractor must then accept qualifying like bonds from all subcontractors and release the retainage those bonds cover. For projects exceeding $150,000 where the general contractor has tendered a qualifying bond, general contractors must accept like bonds from downstream subcontractors and suppliers regardless of the subcontract value. These bond acceptance requirements do not apply to contracts for individual single-family homes, multi-family dwellings of four units or fewer, or property owned by a public entity (including contracts resulting from public-private partnerships).
To qualify, a bond must secure both (1) faithful and complete contract performance and (2) full payment to all subcontractors, suppliers, and laborers. Property owners and principal contractors may require the surety to carry a minimum A.M. Best rating, but that minimum cannot exceed “A-.” The surety must also be licensed to issue bonds in Colorado. If a contractor must obtain a bond to secure the release of funds for a subcontractor who has tendered a bond, the contractor may deduct the proportional bond premium from that subcontractor’s final payment. Importantly, the law does not affect an upstream party’s ability to withhold funds or deduct from any payment for backcharges or other amounts authorized by contract.
Considerations
Property owners, developers, lenders, and contractors will need to adjust their contracts and processes to comply with HB26-1311 and to understand the implications of shifting from traditional retainage to bond-based security. The law does not affect existing contracts, but any contract entered into after August 12, 2026, must account for the possibility that a contractor may tender a retainage bond in lieu of cash retainage.
The law leaves several enforcement mechanisms unaddressed, including the claims process and cure procedures. Interparty agreements will need to fill these gaps. Until courts have an opportunity to interpret the statute, questions remain about implementation and whether parties can waive or contract around the right to substitute a retainage bond for traditional retainage.
For questions about HB26-1311, please contact a member of the Davis Graham Real Estate Group.