Illinois Expands Protections Under the Contractor Prompt Payment Act by Imposing New Restrictions on Retainage

The Illinois Contractor Prompt Payment Act, 815 ILCS 603/1, et seq. (the “Act”) was first enacted in 2007 and designed to safeguard contractors and subcontractors on private projects by providing a mechanism to expedite payments for work performed. The Act applies to all private construction projects in Illinois, except those involving single family residences or multiple family residences with twelve or fewer units in a single building. With the Act, Illinois joined a growing number of states that had enacted similar legislation.

On August 20, 2019, Illinois amended the Act and again joined a growing number of states that are expanding their protections for contractors, this time by restricting the amount of retainage that may be withheld on a construction project. The amendment, codified at 815 ILCS 603/20, imposes a ten percent (10%) cap on the amount of retainage that may be withheld and reduces that cap to five percent (5%) once the project is fifty percent (50%) complete. Specifically, the Act provides:

No construction contract may permit the withholding of retainage from any payment in excess of the amounts permitted in this Section. A construction contract may provide for the withholding of retainage of up to 10% of any payment made prior to the completion of 50% of the contract. When a contract is 50% complete, retainage withheld shall be reduced so that no more than 5% is held. After the contract is 50% complete, no more than 5% of the amount of any subsequent payments made under the contract may be held as retainage.

815 ILCS 603/20

A “construction contract” under the Act “means a contract or subcontract” for the “design, construction, alteration, improvement or repair” of property. Therefore, this cap applies equally to owner-contractor agreements and to contractor-subcontractor agreements, as well as to owner-architect and design agreements. Also, because the terms “contractor” and “subcontractor” have the same broad meanings ascribed to them by the Illinois Mechanics Lien Act, this cap equally applies to construction managers, design-builders, sub-subcontractors, and material suppliers.

While the amendment is effective immediately, it does not impact contracts entered into prior to August 20, 2019. It will, however, impact any ongoing contract negotiations involving the withholding of retainage.

The amendment represents a significant victory for contractors, who have long argued that withholding 10% of payments earned until the end of a project negatively impacts their cash flow. The requirement to reduce retainage to 5% once the project reaches its midpoint and thereafter to withhold no more than 5% from subsequent payments will result in an infusion of funds to the contractor and a reduction of an owner’s security from what has been traditionally withheld on construction projects in Illinois. Whether there will be a resulting increase in the prevalence of payment and performance bonds or other forms of security on construction projects remains to be seen.

The cap presumably is tied to the contract price for determining when the contract has been 50% completed, as opposed to the overall percentage of work actually performed. But for projects where those benchmarks may not be commensurate with each other, this issue could be the subject of contract negotiations between owner and contractor.

Owners will need to bear the cap in mind when they negotiate construction financing with lenders. For, while the amount of retainage that owners may withhold is now capped, the Act does not apply to construction loans or limit the amount of retainage that lenders may insist on withholding from construction draws. Owners will need to make sure that their cash flow requirements for a project are sufficient, in view of what their lenders ultimately insist on withholding.