Illinois prompt payment act and retainage rules

Illinois has a private-project prompt payment law with real teeth: the Contractor Prompt Payment Act, 815 ILCS 603. An owner must pay an approved pay application within 15 calendar days, and a pay app is deemed approved 25 days after the owner receives it unless the owner explains in writing what it is withholding and why. Contractors and subs pay the next tier within 15 calendar days of receiving money for that tier's work. Late payments carry 10% annual interest, and retainage is capped at 10% until the contract is half done, then cut to 5%. Public work runs under separate acts for state agencies and local governments.

Which private jobs the act covers

The act defines a construction contract as a contract or subcontract for the design, construction, alteration, improvement or repair of Illinois real property. It excludes contracts that require the expenditure of public funds and work on single family residences or multifamily residences with 12 or fewer units in a single building. A 40-unit apartment building, a warehouse fit-out, or a retail strip center is covered. A custom home or a six-flat is not, so the contract alone governs there.

Owner payment: 15 days after approval, deemed approved at 25

Once a contractor has performed and the owner or its agent approves the pay application, the owner has 15 calendar days to pay. The deemed-approval rule is the part that matters most. If the owner does not deliver a written statement of the amount withheld and the reason within 25 days of receiving the pay app, it is approved by law. An owner telling its lender or architect to process the payment does not count as approval.

Owners may only withhold the reasonable value of work that is not in accordance with the contract, and must pay for the portions that are. Say a GC bills $180,000 on a medical office build-out and the owner rejects $12,000 of ceiling grid. The owner can hold the $12,000, but owes the other $168,000 on time.

Paying subs within 15 days

Section 10(2) says that when a sub has performed and its work has been accepted by the owner, the owner's agent, or the contractor, the contractor must pay it the full amount received for that sub's work within 15 calendar days of receiving each periodic payment, final payment, or retainage. Subs owe their own subs on the same 15-day schedule. The statute ties the deadline to receipt of payment, so it does not settle whether a pay-if-paid clause is enforceable when the owner never pays. That question turns on the contract wording and court decisions.

Interest and the right to stop work

• Interest: a late party owes the payment plus interest at 10% per year (Section 15(a)).
• Suspension: after 7 calendar days' written notice, an unpaid contractor or sub may suspend performance without being in breach until it is paid (Section 15(b)).
• No double dipping: interest under the act does not duplicate interest charged under the Mechanics Lien Act (Section 15(c)).

Retainage: 10% down to 5%

Section 20, in its current form from Public Act 101-432 (effective August 20, 2019), says no construction contract may hold more retainage than it allows. Up to 10% may be withheld from payments made before the contract is 50% complete. At 50%, the amount held must be reduced to no more than 5%, and later payments may have no more than 5% withheld. On a $2 million contract, about $1 million has been billed at the halfway mark, so as much as $100,000 may be held by then. At 50% complete that balance must drop to $50,000. The act does not set a separate release deadline, but released retainage must reach subs within the 15-day pass-through.

Putting it to work

Date-stamp every pay app on receipt so you can prove when the 25-day clock ran out, and log the day each owner payment lands so subs know when their 15 days started. Keep your Illinois mechanics lien deadlines moving, and check Illinois prevailing wage rules on public jobs. Our prompt payment act primer covers the basics. Smart Business Automator tracks invoices, retainage and sub payments on every job; see construction accounts receivable automation.