Illinois Governor Bruce Rauner vetoed Senate Bill 3052, commonly known as the retainage reform bill, on August 24, 2018. This bill was drafted and supported by the subcontractors lobby, was only lukewarmly 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.

Governor Rauner said:

This legislation severely restricts private entities’ ability to negotiate retainage amounts by codifying a 10 percent retainage cap prior to 50 percent project completion, and a 5 percent 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.