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January 1, 2008

The Illinois Legislature recently enacted a law of importance to general contractors and subcontractors. It is the Contractor Prompt Payment Act (the Act) now in effect. The Act pertains to all private construction contracts except those for the design, construction, alteration, improvement or repair of single family residences or multiple family dwellings with 12 or fewer units in a single building. In other words, the Act governs all private commercial/industrial projects and large condominium or apartment buildings. The law mandates the required payment cycle and relief on these types of developments. For all private construction contracts other than those for single family dwellings and condos and apartments with 12 or fewer dwellings entered on or after August 31, 2007, the Act applies.

The Act requires an owner to pay a general contractor who has performed in accordance with the contract the amount due pursuant to a payment application that has been approved within 15 calendar days after the approval. A payment application will be deemed approved 25 days after the owner receives it unless before expiration of the 25-day period the owner issues a written statement of the amount withheld and the reason for withholding payment. If a portion of the work is not in accordance with the contract, the owner can withhold payment for the reasonable value of that portion only.

Similarly, the Act requires the general contractor to pay subcontractors whose work has been performed in accordance with the provisions of the subcontract and whose work has been accepted by the owner, within 15 calendar days of the contractor’s receipt of the monies from the owner. The subcontractor also is required to pay its lower tier subcontractors and suppliers within the same time frames.

If a payment is not made when due, a contractor or subcontractor can suspend performance without penalty for breach of contract after giving seven calendar days written notice to the party who failed to make the required payment. Payments that are delinquent bear interest at 10% per annum.

While the Act is of benefit in providing for a shortened payment cycle, payments from contractors to subcontractors are still dependent on receipt of payment from the owner, so the general contractor’s contract provision of “no pay until I get paid” is still applicable. However, there is leverage in the provision of the new law that allows performance to be suspended without breach of contract if payments are not timely made.

How the construction industry will deal with the Act and its shortened payment cycle and how the courts will interpret its provisions remains to be seen. For example, can an owner in the prime contract provide that the general contractor waives his rights under the Act? There is nothing in the Act that expressly prohibits this from being done. If such a provision is in the owner- general contractor contract, the general contractor will need to make a similar provision in his subcontracts. In addition, because the Act requires that the general contractor pay the subcontractor the full amount received for the subcontractor’s work, general contractors will need to coordinate the retainage amounts in the prime and subcontracts. Also, if owners are concerned with the 15-day payment cycle, it may become commonplace to issue a withholding notice that is questionable in order to give greater time to review, approve and disburse payments.

The Act provides contractors and subcontractors a new means by which to seek prompt payment for work done. However, how it will work in practice is another question. We will have to wait and see how the industry reacts to it and, once disputes arise, how our courts will interpret its provisions. Even though the Act provides some leverage when payments are not timely made, it is important to make sure a violation has occurred before a contractor or subcontractor pulls off a job for lack of payment. Otherwise, you run the risk of being found in breach of contract.