Gov. Pritzker signed Public Act 101-0432 into law yesterday, amending the Contractor Prompt Payment Act, which limits retention on private projects. Retention is a common provision in construction contracts, requiring that a percentage of a contractor’s or subcontractor’s earned payment is withheld until a project is completed or the construction warranty expires.
In short, the new law provides that at the start of the construction contract, retainage can be 10%, but after 50% completion, retention is limited to 5% of the contract amount. The new law becomes effective immediately.
It is an important piece of legislation with a significant impact on the construction industry, affecting owners, lenders, contractors, subcontractors and secondary subcontractors.
The Contractor Prompt Payment Act serves to expedite payments for any Illinois design or construction contract or subcontract, allowing contractors and subcontracts the right to stop work if payment is not made in a timely manner. The two notable exceptions to the Act are those properties where public funds are used or residential properties of 12 or fewer units. The new law goes further by lowering the amount of retention which can be withheld on the project.
However, the new law also leaves a myriad of questions open, some of which are:
- The most significant question is what constitutes 50% completion? Is completion measured by hours, dollars or the project schedule?
- Does the statute apply only to first-tier contractors?
- What is the impact of a ‘pay-if-paid’ clause where the prime contractor does not pay the subcontractor? A pay-if-paid provision provides that payments will only be made if the upstream contractor is paid by the owner. It ensures that each downstream contracting party bears the risk of loss for payment of its own work when funds from the owner are not made to the general contractor. Does the subcontractor still have a claim in the event of a pay-if-paid clause?
- What about third-tier subcontractors? Does the second-tier subcontractor have to pay the third-tier subcontractor when the third tier meets 50%?
- What projects are affected by the new law?
- How will lenders react? Lenders are used to their own payout procedures when it comes to funding their construction projects.