Review of Changes in Retention for Illinois Projects

Changes to the retention laws in Illinois have shaken up the construction industry. Retention refers to a portion of payment withheld from a contractor or subcontractor until a construction project is completed satisfactorily. This financial mechanism serves as leverage, ensuring that contractors fulfill their obligations under the construction agreement. However, recent changes to Illinois law, particularly with the addition of Section 20 to the Contractor Prompt Payment Act, have redefined how retention is handled, which impacts contractors, subcontractors, and owners alike.

Grzymala Law Offices is committed to keeping our clients informed about the evolving construction laws in Illinois, especially those that impact payment timelines, mechanics liens, and retention practices. Let’s explore the new retention changes and how they could affect your construction projects.

Overview of the New Retention Law

In 2019, Illinois Governor J.B. Pritzker signed into law amendments affecting retention amounts on private construction projects in Illinois. These amendments are specifically relevant to the Contractor Prompt Payment Act (Public Act 102-0502). The key change is that retention for Illinois construction projects must now be capped at 10% for the first half of the project, and must be reduced to 5% when the project reaches 50% completion. This new statutory requirement offers more cash flow to contractors and subcontractors earlier in the construction timeline, which could significantly ease financial stress for many in the industry.

The legislation affects all private construction contracts in Illinois, excluding residential projects of 12 or fewer units and projects where federal funding requires otherwise. For general contractors, subcontractors, and suppliers, the law brings a more predictable path to reducing retained funds, allowing for better planning of cash flow, staffing, and expenses. The new law reflects an effort to alleviate cash flow issues and disputes over retainage, which have long been a source of friction in construction projects. 

Benefits of the Retention Cap

The new retention rules present significant benefits to contractors and subcontractors. Previously, owners were often withholding retention amounts far beyond what contractors deemed necessary, which created serious cash flow issues that trickled down the chain of subcontractors and suppliers. Here are the notable advantages of the new retention cap:

Improved Cash Flow

By capping retention at 10% and reducing it to 5% at 50% completion, the financial burden on contractors and subcontractors is reduced. Cash flow is crucial for these businesses, as payments from owners can affect a contractor’s ability to pay suppliers and employees. The reduction ensures that more funds are available to contractors earlier, helping them cover ongoing expenses.

Encouragement of Project Completion

Reducing retention mid-project incentivizes contractors to stay on schedule. By releasing a portion of the retained funds at the halfway point, contractors and subcontractors have more motivation to continue meeting project milestones, thereby benefiting owners with timely project completion.

Fewer Disputes Over Retention

Retention disputes have historically been a common issue between owners and contractors. The new requirement sets clear boundaries on retention practices, reducing the likelihood of protracted disputes and lawsuits over withheld payments. By following statutory guidelines, the ambiguity is reduced, which could lessen the need for mechanics liens or litigation to recover unpaid retention.

How Does This Impact Mechanics’ Liens Act?

When retention is not timely paid, the contractor or subcontractor may seek remedies through filing a mechanics lien. Under the new retention rules, the likelihood of needing to resort to a lien may be reduced, but it’s still essential to be prepared.

The Illinois Mechanics Lien Act (770 ILCS 60/1) remains a powerful tool for contractors and suppliers who need to secure unpaid funds, and at Grzymala Law Offices, we can assist with understanding the nuances of this law. If you need guidance from an Illinois mechanics lien lawyer, our firm is here to help. For more details on our services, visit this page.

Potential Challenges Under the New Law

While the new retention cap is beneficial to contractors and subcontractors, it is important to be aware of potential challenges, especially for contractors managing multiple subcontracts. Under Section 603/20 of the Contractor Prompt Payment Act, the retainage reduction requirement applies separately to each subcontract once it reaches 50% completion. This means that a contractor could be required to release retained funds for a subcontractor while still having 10% retention withheld by the owner if the overall project has not reached 50% completion.

For example, if an excavating subcontractor’s contract is worth $2 million, the contractor must reduce retainage from 10% to 5% when the excavator reaches 50% completion, requiring an additional $50,000 payout. However, if the owner’s contract with the general contractor has not reached 50% completion, the owner may still hold back 10% retention. Contractors should ensure that their contracts with owners include provisions that address the timing and reduction of retainage to prevent cash flow issues.

What Should Contractors and Owners Do?

Owners, general contractors, and subcontractors must adapt to the retention changes to ensure compliance and avoid costly disputes. Contractors working on private projects in Illinois need to:

• Review Existing Contracts: Contracts for ongoing projects should be reviewed and adjusted to comply with the new retention requirements.
• Negotiate Future Contracts: Ensure future contracts clearly reflect the 10% and 5% retention caps, which will help avoid misunderstandings and disputes down the line.
• Understand Their Rights: Contractors should be aware that, despite the reduced retention, they still have rights under the Illinois Mechanics Lien Act should payments be delayed or withheld improperly.

Grzymala Law Offices offers in-depth contract review and consultation services to ensure that your contracts comply with the latest state requirements and protect your financial interests. The retention cap offers a more balanced approach to managing payments, benefiting all parties involved by reducing the potential for disputes. If you are in need of guidance from an experienced Illinois mechanics lien attorney, Grzymala Law Offices is ready to assist you. With over 45 years of combined experience in construction law, we are committed to supporting your projects and protecting your rights—contact us today.