August 20, 2019

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Illinois Governor Vetoes Retainage Reform Bill

Illinois Governor Bruce Rauner vetoed Senate Bill 3052, commonly known as the retainage reform bill, on August 24, 2018. This bill was drafted and supported by the subcontractors lobby, was only lukewarmly embraced by the general contractors lobby, and was opposed by the private owners and developers lobby. It would have established a cap on retainage and mandated a retainage reduction midway through most private construction projects.

Governor Rauner said:

This legislation severely restricts private entities’ ability to negotiate retainage amounts by codifying a 10 percent retainage cap prior to 50 percent project completion, and a 5 percent cap thereafter on private construction contracts, except those pertaining to single- or multi-family homes with 12 or fewer units. The retainage restrictions aim to alleviate cash flow issues for contractors and subcontractors, but they consequently deprive owners of the ability to negotiate and withhold appropriate retainage due to poor and nonperformance. Furthermore, retainage amounts often differ by project, and these caps may be too low for retainage to adequately “insure” investments on certain projects, which may ultimately end in fewer approved construction loans or higher financing costs—especially when partnering with firms with less established track records, such as startups.

The governor acknowledged that upstream parties should retain only reasonable amounts of retainage and that “owners and contractors sometimes engage in improper retainage practices.” “This governmental overreach, however, intrudes upon private entities’ right to negotiate their own contracts, and it may constrain economic development,” the governor concluded.

The governor’s veto appears to have been based on policy grounds. In addition to these policy considerations, the bill arguably contained a number of important drafting problems that would have resulted in increased litigation.

The bill would have amended the Contractor Prompt Payment Act, 815 ILCS 603.

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Randolph Ruff, Construction Attorney, Ogletree Deakins Law Firm
Shareholder

Mr. Ruff has been representing general contractors, subcontractors, suppliers and other participants in the construction industry since 1986. As the chair of Ogletree’s construction practice group, that U.S. News and World Report has ranked as a Tier-1 practice group, Mr. Ruff prosecutes and defends claims arising out of public and private construction projects in federal and state court litigation, arbitration and mediation. Mr. Ruff handles claims involving construction and material defects, improper or non-conforming work, extra work, changed conditions, warranty, delay, disruption...

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Jonathan M. Mraunac, Ogletree Deakins, Construction Claim processing Attorney
Of Counsel

Jonathan Mraunac represents general contractors, subcontractors, suppliers, and other participants in the construction industry. As a member of Ogletree's construction practice group, Jonathan advises clients relative to all aspects of the construction process including the prosecution and defense of claims in federal and state court, arbitration, and mediation, the perfection and prosecution of mechanics lien claims, and the formation and negotiation of contract documents.

Recently, Jonathan obtained summary judgment for a subcontractor client in a $2.5 million multi-party lawsuit which alleged construction defects in a downtown Chicago condominium building.

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Eric Berg, Construction Attorney, Ogletree Deakins Law Firm
Of Counsel

Eric A. Berg focuses his practice on construction law, in both litigation and transactional work. Eric has represented developers, international corporations, contractors, subcontractors, construction managers and designers on diverse projects, from Freedom Tower in New York to Willis Tower in Chicago, from dredging the Mississippi River to building casinos in Las Vegas, from Silicon Valley tech hubs to Willy Wonka's Chocolate Factory.

Prior to joining Ogletree, for three years Eric was Deputy General Counsel at Great Lakes Dredge & Dock, in Oak Brook, Illinois, and General...

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