Illinois Retainage Guide and FAQs

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Illinois Retainage FAQs

Illinois Retainage Overview

Illinois Retainage Requirements


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Retainage Limit

Retainage is capped at 10% on all private projects. Halfway through the project, this drops to 5%.


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Pay Period

There is no provision specifically stating when retainage should be released. However under the IL prompt payment laws, contractors must be paid within 15 days of approval of their payment applications (25 days for approval). Subcontractors must be paid within 15 days of their customer receiving payment.


NO
PROCESS
There's No set Process for Recovery

N/A


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Not Held In Escrow

In Illinois, contractors and owners do not need to hold retainage funds in a separate escrow account.

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Retainage Amount

Not specified in statute.


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Pay Period

Not specified in statute.


NO
PROCESS
There's No Process to Recover

Not specified

Retainage, also called “retention,” is an amount of money “held back” from a contractor or subcontractor during the course of a construction project. In general, retainage serves two main purposes:

  • To provide an incentive to the contractor or subcontractor to complete the project; &
  • To give the owner some protection against problems like liens, contractual defaults, delays, and more.

In most states, laws exist to regulate how the parties use the retainage concept, mostly protecting some parties against abuse of the tool from others. The following are resources, legal information, and answers to frequently asked questions about Illinois’ retainage requirements.

Illinois’ retainage limits and deadlines

Illinois’s retainage statutes only apply to certain private construction projects as of August 20, 2019 (see: Illinois Introduces Retainage Laws & Caps Retention at 10%), and state highway construction projects. On all other projects, retainage will be governed by the terms of the contract.

On private projects (with the exception of residential projects of 12 units or fewer) the amount of retainage that can be withheld is 10% from each progress payment. Upon 50% completion, the retainage must be reduced to just 5% of the remaining payments.

There are no specific timelines for the release under the retainage statutes, but according to Illinois’ prompt payment laws, retainage and final payment on private projects must be released by the property owner within 40 days of the request for payment is received (25 days for approval, and 15 days to make payment after approval).

Illinois Retainage Frequently Asked Questions

Illinois Retainage Private Projects FAQs

What types of private projects are governed by the Illinois retainage laws?

The Illinois retainage rules for private projects apply to all commercial and residential projects; with a few exceptions. On the following types of projects, retainage isn’t regulated by statutes, and therefore are governed by the terms of the contract; publicly funded projects, single-family residential projects, and multi-family residential projects of 12 or fewer units.

Unsure what type of project you’re on?

• See: Types of Construction Projects – What They Are & Why You Should Care?

Does Illinois limit the amount of retainage that can be withheld from a contractor?

Retainage is limited to 10% on Illinois private projects for the first half of the job. Once the job is 50% complete, the amount being retained must be reduced so that no more than 5% of retainage is being withheld, overall and from each remaining progress payments.

• See: What happens when the retainage  terms and conditions of the construction lender are greater than the current law?

So what constitutes 50% completion? This is the point where 50% of the contract has been earned by the contractor. Each contract and subcontract is considered on an individual basis; not the overall project percentage of work performed.

How long can a party withhold retainage in Illinois?

There isn’t one clear deadline before which all retainage must be released. However, once a project has reached 50% completion, retainage cannot exceed 5%.

Considering that up to 10% retainage may be withheld before that point, it’s likely that some amount of retainage will be released at the halfway point of a project.

Under Illinois’ prompt payment laws, a contractor must be paid within 15 days of their payment applications being approved. Invoices are required to be approved within 25 days of receipt of then invoice. Additionally, subcontractors must be paid within 15 days of their customer receiving payment.

• See: Does a contractor have to wait for all other trades to complete before retainage is paid to all other contractors?

Does Illinois require retained funds be deposited in a special account? Can securities be substituted for retainage?

Illinois state law does not require that retainage payments be held in any special account.

How can I make a claim to recover retainage in Illinois?

No method has been specified for the recovery of retainage in Illinois. Presumably, other collection tools – like filing a mechanics lien claim , claims under the Illinois Prompt Payment Act, or pursuing contract claims – are available to recover retainage payments.

Is there a specific notice required to recover retainage in Illinois?

Illinois state law does not provide any special notice for the recovery of retainage on private projects within the state, sending a prompt payment demand letter and a Notice of Intent to Lien is a good place to start.  However, other recovery methods which may be used to recover retainage may have their own notice requirements.

Illinois Retainage Public Projects FAQs

Does Illinois limit the amount of retainage that can be withheld from a contractor?

There is no limitation on the amount of retainage that can be withheld on a public works project. Thus, retainage will be determined by the terms of the contract or subcontract.

Highway projects do discuss retainage, but the particular retainage amount is not specified.

How long can a party withhold retainage in Illinois?

There is no general limit set forth by statute for most projects.

However, under Illinois’ prompt payment laws, payment must be approved within 30 days of the public entity’s receipt of a proper pay application. Once approved, payments will be made by local gov’t entities within 30 days, and state gov’t entities within 60 days.

Does Illinois require retained funds be deposited in a special account? Can securities be substituted for retainage?

There is no specific requirement to have retainage deposited in a special account.

For highway projects, a contractor may request and the Department approve, under a trust agreement, to have the retainage deposited in an Illinois financial institution. The interest accrued will be paid to the contractor. Subcontractor may also request the same if the total amount to be withheld is $20,000 or more.

How can I make a claim to recover retainage in Illinois?

The Illinois retainage statute for public projects doesn’t specify how a claim for retainage can be brought. However, retainage can be included in a public bond claim, as well as a claim under Illinois’ Prompt Payment Acts, or claims under the contract.

Additionally, if working on a State project, there is the option of filing a notice and request for a hearing with the contracting entity.

• For more on this, see: What is the best practice for making a demand under Illinois’ prompt payment laws?

Is there a specific notice required to recover retainage in Illinois?

There are no specific notices required in order to recover retainage withheld on Illinois public works projects. Sending a prompt payment demand letter and a Notice of Intent to Make a Bond Claim is a good place to start.

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Illinois Retainage
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Illinois Retainage Statutes

Getting informed about prompt payment laws is important. An examination of Illinois’ retainage laws, the rules and regulations related to the amount and timing of allowable retained payments, is important to know your rights and responsibilities as a party on a construction project. Illinois’ specific laws can be found in 815 ILCS 603/20 for private projects, and 605 ILCS 5/4-103 & 4-104 for state highway construction projects. Updated as of 2020.

Retainage Statute on Private Projects

§ 603/20. Retainage

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.

Retainage Statutes on Public Highway Projects

§ 5/4-103. Letting contracts for construction of highways; partial payments; trust agreements

Any contracts that may be entered into for the construction of highways shall be let after due public advertisement to the lowest responsible bidder, or bidders, upon terms and conditions to be fixed by the Department, and the Department shall also require the successful bidder, or bidders, to furnish good and sufficient bonds to insure proper and prompt completion of such work in accordance with the provisions of such contracts.

Partial payments may be made for the work as it progresses provided that the Department retains an amount as required by the Standard Specifications for Road and Bridge construction.

At the request of the contractor and with the approval of the Department the retainage of the contract may be deposited under a trust agreement with an Illinois financial institution, whose deposits are insured by an agency or instrumentality of the federal government, of the contractor’s choice and subject to the approval of the Department.

The contractor shall receive any interest thereon.

Pursuant to application by the contractor, a trust agreement by the financial institution and the Department shall contain as a minimum, the following provisions:

a. The amount to be deposited subject to the trust;

b. The terms and conditions of payment in case of default of the contractor;

c. The termination of the trust agreement upon completion of the contract.

The contractor shall be responsible for obtaining the written consent of the financial institution trustee, and any costs or service fees shall be borne by the contractor.

The trust agreement may, at the discretion of the Department and upon request of the contractor, become operative at the time of the first partial payment in accordance with existing statutes and Department procedures.

The provisions of this Section shall apply to all contracts in effect on and after the effective date of this amendatory Act of 1981.

§ 5/4-104. Subcontractors' trust agreements

Subcontractors’ trust agreements. This Section applies to subcontractors’ retainage amounts expected to be equal to or greater than $20,000. Upon the contractor’s receipt of the first partial or progress payment from the Department, at the request of the subcontractor and with the approval of the contractor, the retainage of the subcontract shall be deposited under a trust agreement with an Illinois financial institution, whose deposits are insured by an agency or instrumentality of the federal government, of the subcontractor’s choice and subject to the approval of the contractor. The subcontractor shall receive any interest on the amount deposited.

Upon application by the subcontractor, a trust agreement by the financial institution and the contractor must contain, at a minimum, the following provisions:

(1) The amount to be deposited subject to the trust.

(2) The terms and conditions of payment in case of default of the subcontractor.

(3) The termination of the trust agreement upon completion of the subcontract.

The subcontractor is responsible for obtaining the written consent of the financial institution trustee. Any costs or service fees must be borne by the subcontractor. The trust agreement may, at the discretion of the contractor and upon request of the subcontractor, become operative at the time of the first partial payment in accordance with existing statutes and Department procedures. Subcontractors’ trust agreements are voluntary and supersede any prohibition regarding retainage that may be adopted by any transportation agency.

This Section applies to all subcontracts in effect on and after the effective date of this amendatory Act of the 92nd General Assembly.

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