Lang Baker & Klain: Arizona Prompt Payment Law, Post-2011

Arizona Prompt Payment Act

summary of the 2010 amendments

Updated September 04, 2011

Arizona Prompt Payment Act: Summary of the law before the 2010 amendments

Arizona Prompt Payment Act: Summary of the amendments enacted in 2010
Lien, Prompt Pay and Stop Notice Index

Following are some of the significant 2010 changes and additions to the Arizona Prompt Payment Act. These revisions apply only to construction contracts where:

the owner first distributed bid plans, specifications or contract documents to a contractor or subcontractor on or after January 1, 2011, or
the owner and contractor enter into their contract on or after January 1, 2012.

HIGHLIGHTS

Residential contractors that build for owner-occupants are required to place a specific notice on their bids and all invoices; otherwise, the Act will not apply, and contractors will not benefit from the Act’s increased protection.
With respect to retention, the "old" Act requires prompt payment of progress invoices, but it does not provide for prompt payment of retention and final invoices. The new law requires owners to promptly pay retention and final payments on the same 21-day basis that has applied to progress payments in the past.
The Prompt Payment Act defines “substantial completion” and provides that contractors are to bill for retention when the owner occupies or begins to use all or part of the project or receives a temporary certificate of occupancy. Contractors must submit final invoices upon “final completion,” when the project receives a final certificate of occupancy. The law further protects subcontractors from having retention or final payment wrongly withheld for defects when the subcontractor is not at fault.
Owner retainage at the end of the project is limited to 150% of punch-list items, as opposed to a percentage of the total contract value.
General contractors and subcontractors are required to pay their subcontractors and suppliers unless the contractor promptly notifies them in writing why the invoices they have submitted are disapproved. Disapproval must be based on one of the reasons set forth in A.R.S. § 32-1129.01(D).
A contractor must pay its subcontractors and material suppliers within seven days after receipt of payment from the owner. In addition, every contractor is responsible for paying its subcontractors and suppliers if their work or materials are satisfactory.
Finally if the owner declines to pay a portion of a contractor’s billing and pays the contractor less than is required to pay all of its subcontractors, the contractor is still required to pay everyone whose work was satisfactory and whose performance was not the basis for the owner’s disapproval. Payment must be made within 21 days of the date when payment would otherwise have been due from the owner.

SUMMARY OF PROMPT PAYMENT ACT – OLD AND NEW

A.R.S.	“Old” Provisions: For construction contracts where (a) the owner first distributed bid plans, specifications or contract documents to a contractor or subcontractor before January 1, 2011, and the owner and contractor entered into their contract before January 1, 2012	”New” Provisions: For construction contracts where (a) the owner first distributed bid plans, specifications or contract documents to a contractor or subcontractor on or after January 1, 2011, or the owner and contractor enter into their contract on or after January 1, 2012.
32-1129		The following terms are defined: ”construction contract,” “contractor,” “final completion,” “owner retention,” “subcontractor,” “substantial completion,” and “work.”
	Owner’s progress payment are to be made on the basis of a duly certified and approved billing or estimate of the work performed and materials provided during the previous 30-day billing cycle.	If Contractor performs work during a billing cycle, Contractor must submit a timely invoice during that billing cycle.
32-1129.01D-E	Owner may withhold approval of progress invoice or portions of it, and withhold direct expense Owner reasonably expected to correct the work, provided Owner notifies Contractor in writing within 14 days of receipt of Contractor’s billing.	Owner may withhold from a progress payment an amount sufficient to protect Owner from direct costs Owner reasonably expects and from other loss for which Contractor is responsible because of (a) unsatisfactory job progress, (b) defective work or materials not remedied, (c) disputed work or materials, (d) material failure to comply with the contract, (e) third-party claims, (f) failure to timely pay for labor, equipment or materials, (g) damage to owner, (h) reasonable evidence that the contract cannot be completed for the unpaid balance of the price, or (i) reasonable retention
32-1129.01F	Owner may extend the time for certifying and approving billings for progress payments by giving notice in the contract and on every page of the plans.	Owner may extend the time for certifying and approving retention and final payments by placing a notice in the contract and on every page of the plans.
32-1129.01H		Contractors must submit billings for release of retention upon substantial completion, i.e., upon Owner’s occupying and using the building or upon temporary certificate of occupancy. Except where the time is extended, Owner must pay retention within 7 days after certification and approval of Contractor’s retention billing unless Owner issues a written notice stating why it disapproves the billing. Owner may refuse to pay retention for failure to complete a material requirement of the contract, failure to complete portions of the work, or for any reason stated in Subsection D, but Owner may withhold only 150% of expected direct loss for which Contractor is responsible. When Contractor cures a reason stated by Owner for withholding retention, the Contractor may submit a supplemental invoice, but no more than one invoice per billing cycle.
32-1129.01K		On final completion, i.e., final inspection and certificate of occupancy, Contractor submits invoice for final payment. The same 14-day and 7-day provisions apply to certification and approval and to making final payment, unless Owner notifies Contractor in writing why it disapproves payment. Owner may withhold no more than 150% of its expected direct loss caused by the Contractor.
32-1129.01L		When Contractor removes Owner’s reason for withholding final payment, Contractor may submit a supplemental invoice, but no more than one invoice per billing cycle.
32-1129.01M		On a federal project, Owner must pay Contractor within 7 days after federal agency’s final approval.
32-1129.01R	Subcontractor may request notice from Owner of payment to General Contractor, but request applies only to current month.	Subcontractor’s request for notice of payment to General Contractor remains in effect for the duration of Subcontractor’s work on the project.
32-1129.01U		In the contract, Owner may define “substantial completion,” “final completion,” “retention” and applicable billing cycle differently from statute.
32-1129.02B	Contractor must pay subcontractors and suppliers within 7 days after Contractor received Owner’s payment for their work.	Extends same requirement to retention monies.
32-1129.02D	Contractor may not withhold retention from a subcontractor or supplier in excess of the sum the Owner withheld.	Contractors must pay to a subcontractor or supplier, within 7 days of receipt, any retention monies applicable to the subcontractor’s or supplier’s work or materials.
32-1129.02E		If Contractor withholds approval of an invoice from a subcontractor or supplier, Contractor must notify subcontractor or supplier within 14 days in writing why Contractor does not approve.
32-1129.02F		If Owner disapproves a portion of Contractor’s invoice, Contractor must send a copy of Owner’s written statement to any affected subcontractor or material supplier within 7 days. The same obligation applies to subcontractors.
32-1129.02G	If Owner fails to pay Contractor, Contractor is not required to pay subcontractors and suppliers. Pay-when-paid provisions are enforceable.	If Owner declines to pay a portion of a Contractor’s billing, Contractor nevertheless must pay subcontractors and suppliers whose work or materials are satisfactory and not disapproved by the Owner. Payment must be made within 21 days of the date when payment would otherwise have been made by Owner.
32-1129.07		Prompt Payment protection does not apply to a contract to construct a dwelling for an owner-occupant unless the Contractor puts a specifically worded notice on his estimate and on every billing.

The following is the notice that must be placed on bids and invoices for construction of an owner-occupied dwelling:

Return to "'New Law 'Highlights"

NOTICE TO OWNER OF APPLICABILITY OF ARIZONA PROMPT PAY ACT

(NOTICE REQUIRED BY ARIZONA REVISED STATUTES SECTION 32-1129.07)

ATTENTION: YOUR OBLIGATIONS TO PAY YOUR CONTRACTOR ARE SUBJECT TO THE ARIZONA PROMPT PAY ACT. THAT ACT IS SET FORTH IN SECTION 32-1129, ARIZONA REVISED STATUTES, AND SECTIONS 32-1129.01 THROUGH 32-1129.07, ARIZONA REVISED STATUTES. THE FULL TEXT OF THE STATUTES ARE AVAILABLE AT YOUR LOCAL PUBLIC LAW LIBRARY OR THE INTERNET. UNDER THAT ACT, YOU HAVE THE RIGHT TO WITHHOLD ALL OR A PORTION OF A PAYMENT TO A CONTRACTOR FOR A VARIETY OF REASONS, INCLUDING DEFECTIVE CONSTRUCTION WORK THAT HAS NOT BEEN CORRECTED. HOWEVER, IN ORDER TO DO SO, YOU MUST ISSUE A WRITTEN STATEMENT SETTING FORTH IN REASONABLE DETAIL YOUR REASONS FOR WITHHOLDING PAYMENTS WITHIN FOURTEEN (14) DAYS AFTER THE DATE YOU RECEIVE A BILLING OR ESTIMATE. IF YOU FAIL TO ISSUE THE WRITTEN STATEMENT WITHIN THAT PERIOD, THE BILLING OR ESTIMATE WILL BE DEEMED APPROVED. ONCE THE BILLING OR ESTIMATE IS DEEMED APPROVED, YOU MUST PAY THE BILLING OR ESTIMATE WITHIN SEVEN (7) DAYS. GENERALLY, YOU ARE LIMITED BY THE CT TO WITHHOLDING ONLY AN AMOUNT THAT IS SUFFICIENT TO PAY THE DIRECT COSTS AND EXPENSES YOU REASONABLY EXPECT TO INCUR TO PROTECT YOU FROM LOSS FOR WHICH THE CONTRACTOR IS RESPONSIBLE. YOU ARE ENCOURAGED TO READ THE ACT IN FULL TO KNOW YOUR OBLIGATIONS AND RIGHTS.