On May 7, 2026, Governor Jared Polis signed House Bill 26-1311 (HB 26-1311) into law. Unless a referendum petition is filed, the new law is scheduled to take effect on August 12, 2026, and will apply to contracts created on or after that date. The law amends Colorado's existing retainage statutes to allow contractors and subcontractors on qualifying private construction projects to provide a retainage surety bond instead of having retainage withheld from payments.
The new law makes several key changes to construction contracts in Colorado:
- Retainage Bond¹ Option: Under HB 26-1311, a contractor or subcontractor may tender a retainage bond issued by an insurer licensed in Colorado in an amount not to exceed 5% of the money earned. If the offered bond meets statutory requirements, the property owner, contractor, or subcontractor must accept the bond and release the retainage covered by it. This acceptance obligation applies at each tier unconditionally; it is not contingent on whether any party upstream has offered or accepted a bond.
- Bond Requirements: To qualify, the bond must guarantee both (1) the contractor’s or subcontractor’s faithful performance of its contractual obligations and (2) payment of all amounts owed to laborers, suppliers, and subcontractors under the applicable contract. The upstream party (e.g., the property owner or upstream contractor) may require that the authorized surety providing the bond maintain a minimum A.M. Best financial strength rating.
- Flow-Down Obligation²: In addition to the unconditional acceptance obligation above, the act imposes a separate flow-down requirement. When a property owner accepts a bond in lieu of retainage from a contractor, the contractor must also accept a substantial equivalent or “like bond” from any subcontractor that submits one.
- Bond Premium³ Costs: If the contractor provides a retainage bond to obtain release of the subcontractor's retainage, the contractor may withhold the subcontractor's portion of the bond premium from payments that would otherwise be made to the subcontractor.
- Lien Rights Preserved: The bond and its proceeds are subject to claims and liens in the same manner and priority as provided under Colorado’s existing mechanics’ lien statutes.
- Public Project Exemption: The retainage bond alternative does not apply to contracts or subcontracts for property owned by a public entity, including contracts arising from public-private partnerships.
HB 26-1311 represents a significant modernization of Colorado’s construction payment practices. Retainage has historically created financial pressure within the construction industry, particularly for subcontractors and smaller trade businesses that often must fund labor and material costs for extended periods while waiting for retained funds to be released. The new retainage bond option offers a more balanced approach by preserving protections for project stakeholders while improving cash flow throughout the construction chain.
HB 26-1311 allows contractors and subcontractors to improve cash flow and financial flexibility by replacing traditional retainage withholding with a retainage bond, enabling them to access earned funds while still providing the security traditionally afforded by retainage. Contractors should account for the downstream obligation to accept comparable bonds from subcontractors when the contractor has provided a retainage bond to an upstream party.
For project owners, the law preserves protections through the surety bond mechanism and maintains existing lien rights and remedies. Owners may set reasonable surety financial strength requirements, up to the "A-" threshold.
Summary: Clients should work with legal counsel to review current contract templates and retainage practices before the new requirements are expected to take effect on August 12, 2026. Contractors and subcontractors considering the retainage bond option should consult with their surety providers and legal counsel to understand the potential costs, bonding capacity implications, and flow-down obligations before electing to use a bond in lieu of retainage.
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¹ A “retainage bond” is a surety bond that allows a contractor or subcontractor to receive payment amounts that would otherwise be withheld as retainage. Retainage provides security to the project owner or upstream contractor, ensuring that the work will be completed and any retainage obligations will be satisfied. In essence, instead of holding back a portion of payment, the contractor provides a bond as a substitute security to the project owner (or upstream contractor). The bond protects the party that would have held the retainage if the contractor/subcontractor fails to meet its obligations.
² In general terms, a “flow-down obligation” refers to a contractual requirement imposed on a contractor or subcontractor that originates in an upstream agreement and is passed down through lower-tier contracts, requiring downstream parties to comply with the same or similar obligations. In simple terms, a flow-down obligation is a requirement that “flows down” from one contract level to another, such as from owner to general contractor and then to subcontractors. Flow-down provisions vary, and contracting parties are encouraged to contact counsel for specific guidance.
³ “Bond Premium” means the fee paid to a surety company in exchange for issuing a bond. The premium is typically calculated as a percentage of the bond amount and is thought to reflect the risk associated with the bonded obligation. In simple terms, the bond premium is the cost associated with obtaining the bond.