Last week, Illinois introduced retainage laws by passing Senate Bill 1636. Previously, retainage was unregulated on Illinois private construction projects.
Illinois introduces new retainage laws
This is an incredibly short statute – merely 4 sentences long. It reads, in full:
“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.”
To put it more simply, the statute says:
- These retainage rules apply to all private construction contracts.
- For the first half of the project, 10% retainage may be withheld.
- Once the project is 50% complete, the withheld retainage must be reduced to 5%.
- Once the project is 50% complete, only 5% may be withheld from progress payments.
That’s the gist of it – all the big takeaways. However, there are some details that might be worth diving into. Let’s take a little bit deeper look at each of these 4 requirements.
Everything you need to know about retainage:
New retainage laws apply to all private construction projects
“No construction contract may permit the withholding of retainage from any payment in excess of the amounts permitted in this Section.”
This might be the simplest part of the statute. As written, these retainage rules apply to all private construction contracts. While the text of that sentence, itself, appears to apply to all contracts – this amendment from SB 1636 places the new retainage law at section 603/20 of the Illinois prompt payment statutes, which cover private projects.
The statute is clearly written and does not provide the ability to waive retainage requirements. Plus, no other section of the Illinois Prompt Pay Act seems to provide the ability to waive its requirements. So, as a result, it doesn’t appear that owners, lenders, or construction businesses will be able to avoid this cap on retainage.
Retainage is capped at 10% until the project is halfway complete
“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.”
For the first half of the project, retainage can be withheld up to 10%. Essentially, that means an owner, contractor, or other construction business can withhold 10% of each progress payment they make down the chain. Once the project is 50% complete, the cap on retainage drops to 5%.
Why would retainage be front-loaded on the project?
When a project goes according to plan, most of the costs are associated with the front half of the project. Plus, that’s when the project is at the greatest risk to get derailed and to face crippling delays. So, with most of the money and the risk associated with the front half of the job, it makes sense that retainage would be greater at the beginning.
Once the job is halfway done, retainage must be dropped from 10% to 5%
“When a contract is 50% complete, retainage withheld shall be reduced so that no more than 5% is held.”
Let’s do a little math. If 10% of every progress payment is withheld as retainage, that means after the job is half way done, 10% of the overall cost (up to that point) has been retained. Now, at the halfway point, that retainage fund must be reduced to 5%. Meaning, half of the retainage that’s been accumulated should be released down the chain to the appropriate parties.
Retainage reduced to 5% of progress payments after halfway point
“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.”
This couldn’t be simpler – once the project is 50% complete, progress payments can’t have more than 5% retainage withheld from them.
How should Illinois construction businesses feel about the new retainage laws?
The answer to this question will probably depend on where you are on the payment chain. But, on the whole, limiting retainage is a good thing. When retainage is unregulated, that means a contract could feature a high retainage rate. And, while the freedom to contract should be respected, operating without a cap on retainage disadvantages small businesses.
At the same time, there are strong arguments for and against retainage. On one hand, it gets the job done. On the other hand, it pushes too much risk on companies who aren’t fit to bear it, and higher-tiered construction businesses essentially get a free credit line for the life of the project.
Regardless of how you feel about retainage, it’s here to stay – so you may as well get comfortable with these new regulations.