Gov. Pritzker Signs Retainage Cap Into Law – Immediately Impacts Construction Contract and Loan Negotiations
On August 20, 2019, Governor Pritzker signed SB1636 into law, making a significant and immediately effective amendment to the Illinois Contractor Prompt Payment Act, 815 ILCS 603 (the “Act”). This amendment impacts all contracts not in effect as of August 19, 2019, and all ongoing contract negotiations involving construction contracts with retainage provisions. The newly enacted law adds Section 20 to the Act, and codifies a 10% cap to the amount of retainage that may be withheld on all private construction contracts in the state of Illinois. Section 20 also requires that once a construction contract is 50% complete, the maximum retainage that may be withheld on the remainder of the project is 5% of the remaining payments to be made under the contract. Of note, unlike other states, this amendment affects ALL private construction contracts in Illinois, regardless of size or cost.
While SB1636 did not amend the Act further, Section 20 creates a host of new obligations and questions for contractors, subcontractors, lenders, developers, and owners. In particular, this statutory change will immediately impact construction loan negotiations between owners and lenders. Section 20 limits the amount of retainage that may be withheld by a contracting owner, but does not appear to affect what terms a lender may require for a construction loan. Owners need to take this new retainage requirement into account during their negotiations with their lenders in order to ensure the owner’s project cash flow requirements (particularly after 50% completion) will not be affected by this change in the law. The wording of the Act also may leave open the question of whether at 50% completion retainage is reduced to 5% of the contract value or 5% of the remaining value of the “subsequent payments” to be made. The question remains of whether this provision and/or the Act itself, can be waived in Illinois. As of this alert, Illinois appellate courts have not addressed whether the provisions of the Act or the Act itself are waivable via contract.
While a significant change to Illinois construction law, such retainage caps are becoming increasingly common throughout the United States. Twenty states have capped private contract retainage at 10% or less via statute, with New Mexico prohibiting retainage entirely. The enactment of SB1636 comes almost a year to the day of then-Governor Rauner’s veto of SB3052 on August 24, 2018, which proposed the same amendment to the Act.