Overview
On May 7, 2026, the Colorado legislature enacted HB 26-1311, Concerning the Use of a Bond in Lieu of Retainage In Construction Contracts (the “Retainage Bond Bill”), introducing a significant shift in construction payment practices with respect to retainage. Specifically, the Retainage Bond Bill expressly permits parties to a private construction contract in Colorado to replace retained funds, which are typically withheld until project completion as security for a party’s performance, with a retainage bond. While this framework may improve liquidity in certain circumstances, it also changes the standard risk allocation for construction projects that has long guided the industry. For contractors, the Retainage Bond Bill raises several concerns, including that it reduces the effectiveness of retainage as leverage for subcontractor performance and replaces a cash-based security mechanism with a surety claim process that may be slower and more complex.
What is a Retainage Bond?
Traditionally, owners or upstream contractors could withhold, as retained funds, up to 5% of the money earned by a contractor or subcontractor for work performed, provided the contract was over $150,000. The Retainage Bond Bill provides another option for performance security, a retainage bond. A retainage bond is a financial guarantee issued by a surety that ensures a party’s work is complete and meets the required standards. With the retainage bond ensuring performance, the paying party (i.e., owner or contractor) will pay the performing party (i.e., contractor or subcontractor) the full amount of earned funds during the project’s course, instead of waiting until substantial or final completion. As such, a contractor (or subcontractor) that provides a retainage bond will receive full payment as it performs the work and the owner (or contractor) must look to the surety backing the bond for correction or completion of the work in the event of a default. The Retainage Bond Bill formalizes this arrangement in Colorado, expressly permitting contractors and subcontractors to substitute a surety retainage bond for withheld retainage in their contracts.
Key Provisions of The Retainage Bond Bill
Colorado’s HB 26-1311 does more than introduce retainage bonds; it establishes specific rights, obligations, and guardrails governing their use across construction contracts. Contractors and subcontractors may elect to provide a retainage bond instead of having funds retained. The bond amount is capped at 5% of the money earned by the contractor or subcontractor, and the upstream party is required to accept the bond and release the corresponding retainage if the bond meets the statutory criteria.
For a retainage bond to qualify, the bond must guarantee that: 1) the contractor or subcontractor will faithfully perform all the provisions of the contract or subcontract; and 2) they will pay all the laborers, suppliers, and subcontractors owed under the contract or subcontract.
Additionally, the owner (or upstream party) may require that the issuing surety have a minimum A.M. Best or successor institution financial strength rating. The minimum rating cannot exceed A-. If a contractor furnishes a retainage bond that causes the release of a subcontractor’s retained funds, the contractor may withhold the subcontractor’s portion of the bond premium.
Furthermore, if an owner accepts a retainage bond from a contractor, the contractor is required to accept equivalent retainage bonds from its subcontractors. In turn, the contractor may require that a subcontractor furnish an equivalent bond if it has elected to provide a retainage bond to the owner.
Why This Matters
Contractors often use retainage to enforce subtrade performance by leveraging retained funds as incentive for the completion of their scope. Contractors may also apply retainage to cover costs to complete defective or outstanding work that a subcontractor failed to complete or performed incorrectly. Under the Retainage Bond Bill, contractors who have received retainage bonds from their subcontractors will have to file bond claims against the sureties to cover costs and damages arising from a subcontractor’s deficient performance, potentially delaying completion of unfinished scope or correction of defects. In some cases, the surety claims process may be slower and more complex than a typical subtrade dispute, and may require arbitration to resolve.
Additionally, the Retainage Bond Bill could negatively impact a project’s cost structure and risk allocation. Because subcontractor retainage is often used to offset back charges and cover incomplete work, contractors may need to increase their contingency to account for such potential risks. Furthermore, the Retainage Bond Bill could create unfavorable consequences for project financing. Without the comfort of retained funds available until the project’s completion, lenders and sureties may scrutinize subcontractor risk more intensely and implement stronger control over project operations, slowing down the payment process.
The Retainage Bond Bill has several clear benefits. It enables contractors to access full payment for performance of the work, improves cash flow during the job, and arguably creates greater capacity for contractors to take on additional projects. However, because retainage flows through to subcontractors, the primary liquidity advantage accrues to downstream parties, with contractors bearing most of the risk and administrative burden.
Practical Takeaway
The Retainage Bond Bill shifts security for project performance from the cash-based withholding mechanism of retainage to the surety-backed framework of a retainage bond. For contractors, this could reduce or remove altogether the established use of retainage as an enforcement mechanism while at the same time introducing additional complexity in managing subcontractor risk. As a new development, however, the actual impacts on the industry remain to be seen. BBG will continue to monitor and provide guidance as construction contract participants in Colorado adapt to this new framework.
