There is a photograph on the Internet of a large yacht with the name “Change Order” painted across the stern. The yacht is towing a small dinghy with the name “Original Contract” on its side. While humorous, the photograph is a cynical meme conveying the message that some contractors make extraordinary profits on change orders. In fact, contractors often do not like disruptive or excessive change orders as they can delay a project and lead to disputes with owners and subcontractors. Further, when an owner delays paying for changes, there can be unjust hardship on contractors and subcontractors who cannot afford delays in payment due to extended change order negotiations. Disputes over changes can impede progress payments, damage morale, and cripple the progress of a project.
To ensure timely payment of change orders, California launched The Private Works Change Order Fair Payment Act, which is intended to keep struggling contractors afloat, but which may also unleash a torrent of construction claims and disputes.01 For all commercial, mixed-use, mid-rise, and high-rise residential construction contracts entered into after January 1, 2026, California Civil Code section 8850 imposes new construction claim procedures, prompt payment penalties on owners, and expanded liabilities related to payment disputes. While the new statute is intended to “promote economic stability” and “ensure efficient project completion,” it may have the opposite effect by incentivizing claims and litigation.02 This article will analyze the changes in the law and explore potential impacts on the construction industry.
I. The Multi-Stepped Claim Review Procedures
The new statutory procedures are mandatory unless mutually waived or modified in writing. They are also complicated and cumbersome.03 Under Civil Code section 8850, when a contractor or subcontractor (through the contractor) submits a claim sent by registered mail or certified mail with return receipt requested for additional time or compensation, the owner must respond in writing within 30 days and identify the disputed and undisputed portions of the claim. Undisputed amounts must be paid within 60 days after the owner issues that written response, and failure to pay the undisputed amounts triggers an interest penalty of 2% per month. If the claimant disputes the owner’s response, or the owner fails to respond, the claimant may demand a meet-and- confer conference, followed by mandatory non-binding mediation for the unresolved amounts. If the parties cannot agree on a mediator, the contractor has the right to select one. Where the owner refuses mediation, fails to pay undisputed claim amounts, or fails to timely respond to a claim, the contractor may suspend work, “without penalty, until payment is received,” after providing a 30-day written payment demand followed by a 10-day notice to stop work.
The new procedures for resolving claims by mediation are similar to the claim procedures applicable to public works projects set forth in California Public Contract Code section 9204, which provides: “Amounts not paid in a timely manner as required by this section shall bear interest at 7 percent per annum.” Although enacted in 2016, Public Contract Code section 9204 has generated no reported official case decisions. Unlike Public Contract Code section 9204, Civil Code section 8850 has several big hammers: a 2% per month (24% per annum) interest rate penalty, the early accrual of interest, and the right to suspend work for non-compliance with the statute. In comparison to Public Contract Code section 9204, Civil Code section 8850 shortens the time for private owners to respond to claims from 45 days on public works to 30 days on private projects, increases penalties for late payments from 7% per annum to 2% per month, allows interest on disputed amounts from the date money was due “had they not been disputed,” and grants the right to suspend work after notice if the owner misses a required payment, response date, or refuses to mediate.
II. Expanded Basis for Penalties
The potential penalties imposed on owners for not paying claims have been expanded under the new statute. Prior to Civil Code section 8850, existing law imposed statutory penalties of 2% per month for non-payment of undisputed amounts and allowed a contractor to suspend work for non- payment of amounts due. Existing law also allowed a 2% prompt payment penalty on amounts withheld as to which there is no good faith dispute.04 The new statutory procedure will change the existing law by adding new penalties for withholding disputed amounts later determined owed. In other words, the new law eliminates the requirement under existing statutes that the contractor or subcontractor prove the owner did not act in good faith in withholding disputed amounts to recover interest at the penalty rate. Allowing contractors and subcontractors the right to recover 24% interest on disputed claims will make them less willing to compromise. Further, the threat of penalties will not only be used offensively to compel payment but will also be used as a defensive shield by contractors and subcontractors. Whenever there is a contractor-caused or subcontractor-caused delay, bid bust, or back charge, the contractor or subcontractor responsible for the loss or delay might be tempted to assert a counterclaim under the new statute.
III. Enhanced Interest Accrual
Civil Code section 8850 imposes the interest penalty from the date money was due “had they not been disputed.” Prior to Civil Code section 8850, existing law generally did not allow interest to accrue on disputed amounts until the amount was liquidated or made certain.05 This creates an incentive for contractors and subcontractors to pursue claims as early as possible, instead of working through the customary change order request (“COR”) or change order proposal (“PCO”) process. The traditional COR or PCO process takes time because the relevant documentation must be assembled and reviewed, and then the parties must meet.
IV. Incentives to Assert Claims Early
As interest accrues from the date money was due “had they not been disputed,” the new law may incentivize contractors and subcontractors to submit claims as early as possible. Construction contracts typically provide a framework for the pricing, negotiation, and issuance of change orders, which is usually a condition precedent to the submission of a claim. The change order process typically involves notice of a change, delay, or potential claim, followed by the submission of a COR, PCO, or a request for pricing. This is followed by the negotiation of a mutually acceptable change order (contract amendment) or by the issuance of a change directive (or unilateral change order) from the owner, which typically pays for the change on a contractually specified method such as reimbursable costs plus a percentage fee. Unilateral change directives are problematic as they do not fully resolve claims for compensation or extra time, and require monitoring labor, material, and other costs for the extra work or delay impacts by both parties. Unilateral change directives often give rise to disputes over what costs and additional time should be allocated to the original contract work and what should be allocated to the change. Accordingly, timely negotiation of a mutual agreement on change order amounts and time extensions is preferred, as this avoids the additional administrative expense of monitoring costs, delay impacts, and resulting disputes.
The increased incentive to submit claims early has obvious drawbacks, which include less commitment to pre-claim negotiations and compromise, or acceleration of the change order process. The parties may need to employ engineers, consultants, and attorneys to assist the project team with compiling the required backup claim documents and to prepare for meetings and mediation, which will increase project administrative costs and create a more adversarial environment. Moreover, unlike competitively bid public works projects, ongoing relationships between owners, contractors, subcontractors, and the design teams on private works are a major incentive for the prompt and fair resolution of change order disputes. For the sake of the project and the potential next project, parties will often strive to minimize claims and disputes to protect ongoing relationships and foster goodwill. Contractors want to get the next job from the best owners and strive to preserve reputations with developers, designers, and subcontractors. Conversely, owners want to preserve these relationships to get favorable terms from the best contractors and subcontractors. Likewise, subcontractors want the next job from a general contractor, construction manager, or owner.
These relationships are extremely valuable, but sometimes extremely fragile. To some owners, the mere assertion of a claim will damage trust and goodwill. Once mutual trust is broken, compromise becomes more difficult, claims become more contentious, and payment disputes undermine teamwork. In many cases, the harm to teamwork and disruption to business relationships due to the adversarial claim procedures cannot be understated. Without teamwork, projects will often cost much more and take much longer than expected.06 In summary, although Civil Code section 8850 may give a boost to contractors and subcontractors seeking payment for changes and encourage owners to promptly settle claims, the imposition of enhanced penalties and an accrual date will be a major incentive to pursue claims as early as possible, which will potentially damage relationships, teamwork, and the progress of the project.
V. Owners’ Response to the New Law
Civil Code section 8850 will cause most owners to take measures to avoid claims and penalties. Attorneys are advising owners to carefully track claim response deadlines and to revise contract forms to better define pricing, allowable costs for changes, and other key provisions. Owners and construction managers will likely request more favorable contract provisions related to backup documentation, audit rights, risk allocation, detailed payment applications, flow down requirements, notice requirements, project documentation, limitations of liability, no damage for delay, schedule updates, time impact analysis, force majeure, indemnity, insurance, and bonding. Attorneys are also advising owners to obtain pre- qualification disclosures, financial reports, and litigation histories on contractors and subcontractors to eliminate claim-oriented firms. Blacklisting claim-oriented and litigious contractors and subcontractors by owners, construction managers, and general contractors could become more common.
While these recommendations focus on claim mitigation, there will also be more focus on risk allocation and claim prevention. The major causes of changes and construction disputes are incomplete or defective plans and specifications, differing or concealed site conditions, constructability issues, inclement weather, fires, storms, code revisions, product changes, labor and material shortages, vandalism, theft, toxic spills, hazardous substances, cyber-attacks, contractors’ scope omissions, under-bidding, insolvency, pandemics, and failure to competently manage, coordinate, and schedule the work. Aside from program changes and upgrades, few of these causes are under the control of the owner. Nevertheless, depending upon the project delivery system, contracting method, and contractual risk allocation, the owner may have potential responsibility for resultant costs and delays.
For instance, a leading cause for claims arises from disagreements in the scope, quality, and/or quantity of work, which result from ambiguities or defects in the contract documents, and in particular, erroneous plans and specifications. However, it has long been the law that an owner impliedly warrants that plans and specifications provided to a contractor are accurate, buildable, and complete, unless this implied warranty is modified by contract.07 As a result, owners are typically liable for defects or vagueness in the project design unless they effectively reallocate these risks by contract.08
To avoid being caught in the crossfire between design and construction, there has been a growing trend by owners to contractually shift these risks by employing alternative project delivery systems or alternative contracting methods, such as design-build, construction manager at risk, sale-leaseback, and integrated project delivery contracts. Some private owners require contractors to have plans and specifications peer-reviewed and to assume responsibility for design defects. Another approach is to require the contractor to hire the project architect to design-build the project after plans and specifications are prepared, but before submission to the building authorities for approval. More recently, some owners have adopted a “progressive design-build” approach which emphasizes a qualification-based selection of the design-build team and defers final pricing and the construction contract until design has evolved.
In any case, a private developer or project owner who does not contractually insulate itself from getting muddled and mired in traditional conflicts between design and construction increases the potential for claims. In light of new enhanced penalties, owners have an even greater incentive to contractually shift liability for design, coordination, and constructability errors to other parties. From a risk management standpoint, why should an owner be responsible for defective design, constructability, coordination, procurement, or inclement weather? These issues are more effectively managed by parties who are in a better position to prevent or mitigate these risks, problems, and losses. In summary, owners would be well advised to consider alternative contracting methods and contractual risk allocation to avoid disputes, claims, and alternative dispute resolution proceedings.
VI. Right to Suspend Work
Civil Code section 8850 (k) allows a contractor or subcontractor to suspend work “without penalty” if the owner fails to pay undisputed amounts or if the owner refuses to mediate.09 While the threat of suspension might be used when an owner fails to mediate, actual suspension for non-monetary defaults will probably be avoided in most cases. Suspension is a drastic remedy. Because of the scheduling, coordination, and sequencing of trades, even a brief suspension can severely disrupt a project schedule. To avoid this result, general contractors will likely avoid suspension as a remedy for non-monetary defaults.
VII. Mediation With Almost No Rules
Although Civil Code section 8850 requires mediation, it does not include much detail, such as when or where the mediation must take place, who must attend, the qualifications of the mediator, limits on compensation, the part of Civil Code section 8850 (f) provides:
(1) If, following the informal conference, there remains any disputed portion of the claim, the remaining disputed portion of the claim shall be submitted to nonbinding mediation, with the owner and the claimant sharing the associated costs equally. (2) The owner and claimant shall mutually agree to a mediator within 10 business days after the disputed portion of the claim has been identified in writing. (3) (A) If the parties cannot agree upon a mediator within the time allotted, the contractor may select the mediator to be used.
In light of the absence of more detailed rules in the new law, parties would be wise to include specific mediation procedures in their contracts and subcontracts.10 Care should be taken in drafting a detailed alternative dispute resolution procedure to ensure confidentiality of the mediation.11 To avoid unnecessary costs and wasted time, parties will often agree to defer mediation until claims are ripe for resolution and can be consolidated into one mediation. Successful mediation usually requires considerable preparation, which is time-consuming. Project teams often cannot afford to pull key personnel away from performance and completion of the work to prosecute or defend claims. For these reasons, parties on public works projects often postpone mediation to the end of the project, and do not mediate an individual or small claim where there are multiple claims and major project delays. Consolidation of claims and mediations are significant issues that should be addressed contractually. To avoid unnecessary contract negotiations, the parties should consider incorporating a standard set of rules by reference.12 If standard rules are incorporated, they must be made subject to and subordinate to the mandatory provisions of the new law, and in particular Civil Code section 8850 (f).
VIII. Uncertain Legal Issues
Conflicts among the claim procedures under Civil Code section 8850 and claim procedures under other statutes and traditional contract remedies will create uncertain legal issues. For example, California Civil Code section 8880(b) provides that an owner may withhold from a progress payment an amount not in excess of 150% of an amount disputed in good faith. Similarly, the majority of prime contract forms allow owners to withhold payment for defective or non-compliant work, third-party claims, and contractor-caused delays, provided the owner believes in good faith that the project cannot be completed on time. Typically, owners may withhold reasonable amounts until the lien releases and closeout documents are provided. If the owner withholds or offsets payment to the general contractor in good faith, could the owner nevertheless be subject to a 24% per annum penalty under Civil Code section 8850 for sums otherwise due to a subcontractor? If so, will the new penalties be deemed excessive by courts if the owner had a good faith basis at the time of the withholding?
Similarly, it has long been the law that subcontractors could not sue owners for unpaid work and materials, absent “privity” or an agreement by the owner to pay for the work.13 Although subcontractors do not have a right to directly sue an owner for labor and materials in the absence of privity, subcontractors (along with general contractors, design professionals, and material suppliers) have statutory rights and remedies against the improved property, including the right to unilaterally lien real property, a right typically available only to taxing and government authorities. In general, these statutory rights and remedies limit the claimants’ recovery to the value of the labor and materials installed on a work of improvement but generally do not allow recovery for certain damages such as extended overhead due to delays, loss of productivity, lost opportunities, and unabsorbed home office overhead.
Civil Code section 8850 defines the term “Claim” broadly to include a separate demand for a time extension or for payment of “money or damages arising from work done by, or on behalf of, the contractor.”14 The term “damages” is broader than “the reasonable value of the work” allowed under mechanics liens and payment bonds.15 Although Civil Code section 8850 does not expressly confer the right on subcontractors to sue owners, the new statute mandates a pass-through claim procedure for the benefit of subcontractors.
Specifically, the new law provides: “If a subcontractor or a lower tier subcontractor lacks legal standing to assert a claim against an owner because privity of contract does not exist, except as provided in paragraph (4), the contractor shall present to the owner a claim on behalf of a subcontractor or lower tier subcontractor.”16 Civil
Code section 8850 (j)(4) states: “Within 30 days of receipt of this written request, the contractor shall notify the subcontractor in writing as to whether the contractor presented the claim to the owner and, if the contractor did not present the claim, provide the subcontractor with a statement of the reasons for not doing so.” Civil Code section 8850 (j)(3)(B) states: “The contractor shall exercise good faith in fulfilling their obligations on behalf of the subcontractor under subdivisions (d), (e), and (f) and shall make no settlement of any claim to which the subcontractor does not approve, in writing.”
Can a general contractor be liable to a subcontractor for rejecting a valid subcontractor claim that the contractor believes in good faith to be invalid? Does good faith require a contractor to allow a subcontractor to participate in a meet and confer conference, mediation, arbitration, or litigation of a subcontractor’s claim? If a subcontract agreement limits damages for delay, can a general contractor in good faith reject a subcontractor’s delay claim due to an owner-caused change for which the general contractor seeks additional compensation? Without clarification, these and many other issues created by the new law will need to be resolved by the courts.
Conclusion
There will always be owners who unfairly delay or withhold payments to contractors, as well as contractors and subcontractors overcharging for change orders. Encouraging early claims by contractors with enhanced penalties on owners will likely further burden development by increasing construction costs.17 However, there is no reason fairness cannot be achieved without increased construction costs and penalties. By encouraging teamwork through better integration of design and construction, owners and contractors can build more efficiently, avoid claims, and create a more constructive environment.
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[1] Senate Bill No. 440: “The Private Works Change Order Fair Payment Act,” signed into law on October 10, 2025, and codified as California Civil Code section 8850.
[2] The statutory intent to “promote economic stability” and “ensure efficient project completion” is stated in California Civil Code section 8850(a)(4).
[3] An abbreviated summary of the claim procedure deadlines is as follows:
a) Contractors or subcontractors may submit a “Claim” to an owner for a time extension or payment of any disputed amount by registered mail or certified mail with return receipt requested;
b) Within 30 days, owners have to review claims and provide a written statement as to what is disputed and undisputed;
c) Within 60 days of the response, owners must pay any undisputed amounts;
d) If a claimant disputes the owner’s response or if the owner fails to respond, the claimant may demand in writing an informal conference;
e) Upon receipt of a request for a conference, the owner shall schedule an informal conference within 30 days;
f) Within 10 days of the conference, the owner shall provide another written statement stating what is disputed and undisputed;
g) Within 60 days of the conference, the owner must pay the undisputed amounts;
h) Within 10 days after identifying the disputed amounts in the post-conference statement, the owner and claimant must agree on a mediator and submit the claim to non- binding mediation;
i) If the parties cannot agree on a mediator, the contractor may select the mediator;
j) If the owner fails to pay any undisputed amount, refuses to mediate, or fails to timely respond to a claim, the contractor or subcontractor may, without penalty, suspend work after sending another letter by mail that payment is due, followed by a separate 10-day notice to stop work to owner;
k) If mediation is unsuccessful, the disputed amounts shall be subject to the dispute resolution procedures in the contract, or if none, by final judgment or by operation of law.
[4] The existing California Civil Code section 8800 imposes a 2% penalty for any progress payment amounts an owner withholds in bad faith. Civil Code sections 8812 and 8818 impose a 2% penalty for any retention amounts an owner withholds in bad faith and provides that in an action for collection of an amount wrongfully withheld, the prevailing party is entitled to costs and reasonable attorney’s fees.
[5] Cal. Civ. Code § 3287(a).
[6] Unfortunately, a lack of teamwork has plagued the construction industry for decades. Over the past 75 years, productivity in the U.S. construction industry has not increased significantly, and in some areas has decreased.
See U.S. Bureau of Labor Statistics, https://www.bls.gov/ productivity/highlights/construction-labor-productivity.htm. The problem stems from a range of factors, including the fact that traditional design-bid-build project delivery systems are tragically inefficient. Designers create custom plans for unique sites, which are given to unfamiliar contractors who have never constructed the custom design, and whose personnel and subcontractors never previously worked together.
[7] Spearin v. U.S., 248 U.S. 132 (1918). On public works projects in California, see Cal. Pub. Cont. Code §§ 1104, 10120. On private works, see Coleman Engineering C. v. N. Am. Aviation, Inc., 65 Cal. 2d 396, 404 (1988); CACI No. 4500.
[8] A disclaimer of liability by an owner may not overcome the implied warranty of correctness of plans and specifications. Warner Constr. Corp. v. Los Angeles, 2 Cal.3d 285, 292 (1970).
[9] Cal. Civ. Code § 8850(f)(3)(B).
[10] California Civil Code section 8850(m)(2)(B) provides: “Owners, contractors, and subcontractors may agree to reasonable change order, claim, and dispute resolution procedures and requirements in addition to the provisions of this section, so long as the contractual provisions do not conflict with or otherwise impair the timeframes and procedures set forth in this section.”
[11] One should not assume that a mediation under California Civil Code section 8850 is protected by California Evidence Code sections 1115 et seq. See Flatiron W. v. City of Oakland, 2021 Cal. Super. LEXIS 12954.
[12] In addition to California Evidence Code sections 1115 through 1129, construction mediation rules are available from the American Arbitration Association, JAMS, ADR Services, and a number of other mediation administrators.
[13] Truestone, Inc. v. Simi W. Indus. Park II, 163 Cal. App. 3d 715 (1984); Rogers v. Whitson, 228 Cal. App. 2d 662 (1964).
[14] California Civil Code section 8850(c)(1)(B): “Payment by the owner of money or damages arising from work done by, or on behalf of, the contractor pursuant to the contract for a work of improvement or site improvement project and payment for which is not otherwise expressly provided or to which the claimant is not otherwise entitled.”
[15] California Civil Code section 8432 provides: “(a) The lien is a direct lien for the lesser of the following amounts: (1) The reasonable value of the work provided by the claimant: (2) The price agreed to by the claimant and the person that contracted for the work. (b) The lien is not limited in amount by the contract price for the work of improvement except as provided in Section 8600. (c) This section does not preclude the claimant from including in a claim of lien work performed based on a written modification of the contract, or as a result of rescission, abandonment, or breach of the contract. If there is a rescission, abandonment, or breach of the contract, the amount of the lien may not exceed the reasonable value of the work provided by the claimant.”
[16] Cal. Civ. Code § 8850(j)(1).
[17] By excluding low-rise residential projects, the Legislature tacitly acknowledged that the increased prompt payment penalties would increase construction costs. Assuming this is true, the inclusion of mixed-use, mid-rise, and high-rise residential projects under Civil Code section 8850 will likely make high-density housing less affordable. Assuming the production of affordable and workforce housing is important, the Legislature should consider exempting all residential projects from the Act.
* Theodore L. Senet is a mediator with the American Arbitration Association specializing in construction disputes and a partner in the Los Angeles office of Gibbs Giden Locher Truner Senet & Wittbrodt LLP. He previously taught construction and insurance law at Loyola Law School and is a LEED Accredited Professional with a specialty in Building Design + Construction.