Recent Retainage Reforms in Illinois: First Private Projects, Then Local Government, and Now State Agencies

By James T. Rohlfing of Saul Ewing LLP
Originally published August 13, 2025

1. Introduction

The construction industry understands retainage as the practice of withholding a portion of interim and final payments due for construction work performed, to assure the owner that the work will be properly completed. The practice of withholding retainage was adopted in the nineteenth century when contractors were less accountable and profit margins were far greater. In recent decades, most states have enacted laws limiting the retainage that may be withheld on public and private construction projects, reasoning that previous retainage levels were unnecessarily burdensome to contractors and economically disadvantageous to the construction industry. Illinois has recently addressed this concern with three separate legislative measures restricting the amount of retainage that may be withheld from contractors and subcontractors under most private and public Illinois construction contracts.

On June 1, 2025, the Illinois legislature passed House Bill 1224 (HB 1224), restricting retainage permitted to be withheld from contractors on construction projects with certain Illinois state agencies. The bill was sent to the Governor June 24, 2025 for signature and, assuming it is signed, it will be the third new law in the last six years enacted by the Illinois legislature restricting the withholding of retainage under Illinois construction contracts. Effective August 20, 2019, most private commercial construction contracts could withhold no more than 10 percent retainage for the first half of a contract, with retainage being reduced to 5 percent when the project is half complete, and it was capped at 5 percent thereafter. Nearly identical retainage restrictions were put in place for Illinois local government construction projects, effective January 1, 2024. The third and most recent measure (HB 1224) would impose the 10 percent, 5 percent, and 5 percent restrictions described above on affected state agencies, but with an additional provision which wholly disfavors withholding any retainage, except as may be deemed appropriate on a project-by-project basis.

This article will summarize the retainage laws for private projects and local governments, and then discuss the measure recently passed by the legislature affecting state agencies that, if signed by Governor Pritzker, is set to become law June 1, 2027.

2. Illinois’ Retainage Law for Private Construction Projects

The Contractor Prompt Payment Act, 815 ILCS 603/1 (CPPA), which governs the timing of payments to contractors on most private projects in Illinois, was amended effective August 20, 2019 to provide that a maximum of ten percent retainage may be withheld from payments under construction contracts (excepting certain residential projects) and, after the contract is one-half complete, retainage must be reduced to five percent and then kept at five percent for the remainder of the contract. Section 20 of the CPPA provides:

No construction contract may permit the withholding of retainage from any payment in excess of the amounts permitted in this Section. A construction contract may provide for the withholding of retainage of up to 10 percent of any payment made prior to the completion of 50 percent of the contract. When a contract is 50 percent complete, retainage withheld shall be reduced so that no more than 5 percent is held. After the contract is 50 percent complete, no more than 5 percent of the amount of any subsequent payments made under the contract may be held as retainage.

The above provision must be understood within the context of the CPPA which, in turn, incorporates definitions from the Illinois Mechanics Lien Act (770 ILCS 60/0.01). The CPPA, including the new retainage section, applies to construction contracts between general contractors and owners, and to subcontracts. It does not apply to contracts for the construction or improvement of residential properties of twelve or fewer units. Also excluded from its reach are contracts that require the expenditure of public funds. It is reasonable to read the CPPA to provide that fifty percent completion of a contract occurs when half of the price of the contract has been earned.

3. Retainage Restrictions for Local Government Projects

The Illinois Public Construction Bond Act (30 ILCS 550/1) (Bond Act), was amended effective January 1, 2024 to restrict the retainage that could be withheld under construction contracts subject to the Bond Act for local government projects in Illinois. The Bond Act requires the state of Illinois, as well as all Illinois local governments, to obtain a surety bond from every contractor which performs work for them, guaranteeing the contract is fully performed and that the subcontractors and laborers who perform the work are paid. The retainage restrictions only apply when a bond is required under the Bond Act. Until January 1, 2029, the threshold at which a bond is required is $150,000 for all public works, except those let by the Department of Transportation (IDOT) and the Illinois State Toll Highway Authority (ISTHA), and for those entities the threshold is $500,000. Those threshold amounts at which a bond is required are set to return to $50,000 on January 1, 2029.

Under the modified Bond Act, retainage on local government projects: i) may not exceed ten percent (10%) for the first half of the contract; ii) must be reduced to five percent (5%) when the project is half complete; and iii) may not exceed five percent (5%) for all payments thereafter. These restrictions apply to retainage held from prime contractors, as well as retainage withheld from first and second tier subcontractors on public projects. So, for payments made during the first half of a project by the public entity, the prime contractor and the first tier subcontractor, retainage of up to 10 percent of the payment may be held, but once the contract is fifty percent complete, retainage in excess of 5 percent of the balance of work completed must be paid to the contractor, and no more than 5 percent may be withheld from the remaining payments due under the contract. The restrictions apply to local governments, which include “ … every county, township, municipality, municipal corporation, school district, school board, forest preserve district, park district, fire protection district, sanitary district and all other local governmental units.” 50 ILCS 505/2.

4. New Retainage Restrictions for Illinois State Agencies

House Bill 1224 would extend to state agencies (except for IDOT), the same retainage restrictions described above for local government projects. That is, retainage may not exceed 10 percent for the first half of the contract, retainage is reduced to 5 percent at 50 percent completion, and no more 5 percent retainage may be withheld thereafter. IDOT is exempted because, as a general practice, its projects which rely on federal funding do not withhold retainage. As with the retainage restriction for local governments, the new law would prohibit contractors and first tier subcontractors from withholding retainage from their subcontractors in excess of the retainage that may be withheld by the public entity.

In addition to the retainage restrictions applicable to local government projects, if it becomes law, HB 1224 would eliminate all retainage withheld by non-exempt state agencies, except as required on a specific project, when it is shown that “… satisfactory progress has not been achieved….” The Tollway was exempted from this provision reportedly because its commitments to bond holders would not permit it to contract for construction work without retainage. This paragraph of HB 1224 would greatly reduce the practice by state agencies of withholding retainage, except in specifically delineated situations as described therein. The new paragraph of the Bond Act containing this restriction states:

Subject to the limitations in this Section, a State agency may withhold as retainage a portion of the moneys from the payment of a contract that is entered into on or after the effective date of this amendatory Act of the 104th General Assembly if and only if the State agency determines that satisfactory progress has not been achieved by a contractor or subcontractor during any period for which a payment is to be made. Satisfactory progress shall be clearly provided for in the contract between the State agency and the contractor or subcontractor. Retainage may not be used as a substitute for good contract management, and the State agency may not withhold funds without cause. Determinations to retain and the specific amount to be withheld must be made by the State agency on a case-by-case basis based on the performance of milestones under the current contract as provided for in the contract between the State agency and the contractor. A contractor may not withhold retainage from a subcontractor except to the extent a State agency has withheld retainage from the contractor which is attributable to that subcontractor’s subcontract. This paragraph does not apply to the Illinois State Toll Highway Authority.

Except for the above paragraph, HB 1224 would bring retainage restrictions applicable to most state projects in line with retainage laws applicable to private construction and local government projects. Because the retainage restrictions for local and state projects would apply only to projects on which a surety bond was provided by the contractor, public owners may still have adequate protection in the event of a contractor default. In any event, the construction industry undoubtedly will be evaluating the impact of the new retainage laws, and especially the above quoted paragraph, on Illinois construction projects.

Update: Illinois Governor JB Pritzker signed HB 1224 on August 15, 2025 and will becoming effective on June 1, 2027.

A version of this article previously appeared in the Summer 2025 edition of Substance, a publication of the Illinois Mechanical & Specialty Contractors Association.

James T. Rohlfing is a Partner with Saul Ewing LLP. His practice is focused in the areas of construction law and business litigation. Since being admitted to the Illinois bar in 1982, James has represented subcontractors, contractors and others in the construction industry to avoid and resolve legal disputes and protect his clients’ rights. He can be reached at james.rohlfing@saul.com or312.876.7843.