Illinois Governor Vetoes Retainage Reform Bill

Illinois Governor Bruce Rauner vetoed Senate Bill 3052, commonly known as the retainage reform bill, on Aug. 24. This bill was drafted and supported by the subcontractors lobby, was only mildly embraced by the general contractors lobby and was opposed by the private owners and developers lobby. It would have established a cap on retainage and mandated a retainage reduction midway through most private construction projects.

Gov. Rauner said:

"This legislation severely restricts private entities' ability to negotiate retainage amounts by codifying a 10% retainage cap prior to 50% project completion, and a 5% cap thereafter on private construction contracts, except those pertaining to single- or multi-family homes with 12 or fewer units. The retainage restrictions aim to alleviate cash flow issues for contractors and subcontractors, but they consequently deprive owners of the ability to negotiate and withhold appropriate retainage due to poor and nonperformance. Furthermore, retainage amounts often differ by project, and these caps may be too low for retainage to adequately 'insure' investments on certain projects, which may ultimately end in fewer approved construction loans or higher financing costs—especially when partnering with firms with less-established track records, such as startups."

The governor acknowledged that upstream parties should retain only reasonable amounts of retainage and that "owners and contractors sometimes engage in improper retainage practices. This governmental overreach, however, intrudes upon private entities' right to negotiate their own contracts, and it may constrain economic development," the governor concluded.

The governor's veto appears to have been based on policy grounds. In addition to these policy considerations, the bill arguably contained a number of important drafting problems that would have resulted in increased litigation.

The bill would have amended the Contractor Prompt Payment Act, 815 ILCS 603.

The Senate Judiciary Committee originally passed the bill in March, awaiting approval from the Senate, House and, ultimately, the governor. According to another article from Saul Ewing Arnstein & Lehr LLP, Is Illinois Ready for Retainage Reform?, published later that month, the bill's opponents wanted to keep the current retainage standards in place so that contractors and subcontractors would finish the project and there would be funds available if problems arose.

The American Subcontractors Association (ASA), based in Alexandria, Virginia, has been quite vocal about retainage over the years, stating the practice should be banned because it causes "higher prices, invites fraudulent withholding of payments, and stifles economic growth." Advantages of reducing retainage include increased business competition, better prices and improved company image.

"The retainage system has become increasingly inequitable and counterproductive," the association states. "ASA supports the elimination of retainage on all construction projects. In addition, ASA supports legislation to prohibit a prime contractor from retaining a higher percentage from its subcontractors than the owner is retaining from it."

Reprinted with permission from Ogletree, Deakins, Nash, Smoak & Stewart, PC.

Eric A. Berg, Esq., of Ogletree, Deakins, Nash, Smoak & Stewart, PC, focuses his practice on construction law, in both litigation and transactional work. Eric has represented developers, international corporations, contractors, subcontractors, construction managers and designers on diverse projects.

Jonathan Mraunac Esq., of Ogletree Deakins, represents general contractors, subcontractors, suppliers and other participants in the construction industry. As a member of Ogletree's construction practice group, Jonathan advises clients relative to all aspects of the construction process including the prosecution and defense of claims in federal and state court, arbitration and mediation, the perfection and prosecution of mechanic's lien claims, and the formation and negotiation of contract documents.

Randolph E. Ruff Esq., of Ogletree Deakins, has been representing general contractors, subcontractors, suppliers and other participants in the construction industry since 1986. As chair of Ogletree's construction practice group, that U.S. News and World Report has ranked as a Tier-1 practice group, Randolph prosecutes and defends claims arising out of public and private construction projects in federal and state court litigation, arbitration and mediation.

NACM Editorial Associate Andrew Michaels contributed to this article.

To view the original article in its entirety, visit the Ogletree Deakins blog.

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Tuesday, 16 July 2019

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