For more than a decade, in public construction contracts, statutes mandated the payment cycle and relief for failure to abide by that cycle on Illinois and municipal construction contracts and subcontracts.

But private developers/owners, contractors and subcontractors were free to negotiate their own cycle and the relief for failure to abide by the cycle.

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Act Effective in August

Now Illinois has enacted a new act mandating a payment cycle and relief on private construction contracts, the “Contractor Prompt Payment Act”, P.A. 095-0567. The new act became effective Aug. 31.

The act does not contain any provision for retroactive application. Accordingly, the new act will govern only contracts entered into after the Aug. 31 effective date. See American Family Mutual Ins. Co. v. King, 2007 Ill. App. LEXIS 985, *9 - 10 (2d Dist. Aug. 30, 2007) (The Illinois Constitution’s prohibition against impairment of contracts meant amendment to Insurance Code effective subsequent to entry into insurance contract could not raise limit on damages threshold for right to jury trial instead of arbitration even though limit changed before arbitration occurred).

The act applies to all private construction contracts and most lower-tier subcontracts except for single family or multi-family residential projects with 12 or fewer units in a single building, § 5(b).

Under the act, all construction contracts “shall be deemed to provide” particular provisions regarding the deadlines for approval and subsequent payments of payment applications, § 10. The deadlines apply if the requesting contractor or subcontractor “has performed in accordance with the provisions” of the relevant contract or subcontract. § 10(1) and 10(2).

At the prime contract level, “the owner shall pay the amount due to the contractor pursuant to the payment application not more than 15 calendar days after the approval,” § 10(1).

A payment application is “deemed approved” 25 days after the owner receives it unless the owner provides before that date a written statement of the amount withheld and the reason for withholding, § 10(1). Instructions or notice from an owner to a lender or architect to process or pay a payment application do not constitute approval of the payment application under the Act, § 10(1).

If the owner finds a portion of the work to be not in accordance with the contract, an owner may withhold payment “for the reasonable value of that portion only,” § 10(1). Payment must be made for the conforming work, § 10(1).

Regarding subcontracts, if the subcontractor performed in accordance with the subcontract and the owner and contractor accepted the work, the contractor must pay the subcontractor “within 15 calendar days of the contractor’s receipt from the owner,” § 10(2). The amount paid must be “the full amount received for the work of the subcontractor.”

The same terms that govern the contractor-subcontractor payment deadline and amounts to be paid govern the subcontractor-sub-subcontractor relationship, § 10(2).

If a payment is not made timely, the delinquent party is liable for the amount of the payment plus 10% annum interest, § 15(a). That interest is not duplicative of the interest charged under the Mechanics Lien Act, § 15(c).

In addition, a contractor or subcontractor who is not paid as required by the Act is entitled to suspend performance without penalty until the payment is made, § 15(b). However, the suspension right becomes effective only after the suspending party gives seven calendar days’ written notice to the defaulting party, § 15(b).

During the legislative process, a version of the bill contained a provision permitting parties to contract to “expressly exclude the provisions of this Act,” HB0743. That provision was deleted. Accordingly, parties cannot contract out of the Act’s provisions.

Impact of Act

What should be the practical impact of the new Act?

A comparison of the new Act to a popular series of contract contracts, the American Institute of Architects forms A101 (Stipulated Sum), A111 (Cost Plus with a Guaranteed Maximum Price) (soon to be redesignated as A102) and A201 (General Conditions of the Contract for Construction) is instructive.

Regarding time of payment, both AIA A101 and A111 provide for the parties to fill a blank on the timing of progress payments after the architect certification of the payment application, at § 5.1.3 and § 12.1.3, respectively. The A201 General Conditions provide a seven-day period for the architect to certify or to decline certification after contractor submission of the payment application, A 201, § 9.7.1.

Regarding final payment, A101 provides the payment is to be made either 30 days after the architect’s certification or as the parties decide otherwise in the contract. A101, § 5.2.2. Under the A111 (Cost Plus with Guaranteed Maximum Price), final payment is to be made within 30 days after the architect’s certification or as the parties otherwise provide in the contract, A111, § 12.2.2. However, in the A111, the Architect’s certification follows within seven days after architect’s receipt of the owner’s accountant’s written report on the contractor’s written accounting, a process that permits the accountants to spend a month reviewing the accounting, A111, § 12.2.3.

Each of the A101 and A111 leave a blank for the parties to fill for an interest rate on late payments, A101, § 7.2; A111, § 14.2. Each give the contractor the right to suspend performance for nonpayment upon seven days’ written notice of a payment default but only after owner fails to pay by the contractual deadline plus another seven-day grace period, A201, § 9.7.1.

At the prime contract level, a 30-day payment cycle with another seven-day grace period is prevalent. The new act cuts the standard 37-day period (30 days plus seven-day grace) to 15 days (no grace) before the seven-day written notice to suspend may be given.

Many construction contracts, like the AIA documents, provide the owner or architect only a seven-day period to decline to certify the contractor’s payment applications. The act gives the owner 25 days to decide. Interest rates seem to vary by contract.

In light of the fact that the act appears to be for the benefit of the payee contractor, it remains a question whether a shorter contractual certification period or higher interest rate on overdue payments will govern over the statutory period and rate. We will have to await caselaw to develop on such questions.

At the subcontract level, most subcontracts already provide for payment within 15 days of contractor’s receipt. Many though, provide longer than a seven-day period of prior notice for the subcontractor to suspend performance for non-payment. That feature of the new act will benefit subcontractors.