Current
Overview
Arizona Prompt Payment Act
Updated
September 04, 2011
The Arizona Prompt
Payment Act (A.R.S.
§ 32-1129.02) provides that a licensed contractor, licensed subcontractor,
or material supplier who has performed according to its contract is entitled to
prompt payment from the party with which it contracted.
Legislative amendments
enacted in 2010 give all owners, contractors and subcontractors broader rights
and responsibilities. The amendments apply to projects put out for bid after
January 1, 2011.
Contractor’s
prompt payment obligation. Every
contractor or subcontractor must pay its licensed subcontractors and suppliers
for their labor or materials within seven days of its own receipt of payment
from the owner. An unpaid subcontractor or supplier is entitled to interest on
unpaid amounts at 18% per annum. Failure to pay is also grounds for disciplinary
action by the Arizona Registrar of Contractors. Unlicensed contractors and
subcontractors cannot enforce the prompt payment law.
The Prompt Payment
Act requires regular monthly invoices from materialman to subcontractor,
subcontractor to contractor, and contractor to owner, for labor and materials
that meet the contract requirements. A contractor or subcontractor is not
required to submit a downstream provider’s invoice to the owner for payment if
that contractor or subcontractor disputes the sufficiency of the work performed
or the materials supplied. A contractor or subcontractor can withhold approval
of a subcontractor’s work or a supplier’s materials for unsatisfactory job
progress; defective construction work or materials; disputed work or materials;
third-party claims filed or reasonable evidence that a claim will be filed;
failure to comply with material provisions of the construction contract; failure
of the subcontractor to make timely payments for labor, equipment and materials;
damage to another tradesman; or reasonable evidence that the subcontract cannot
be completed for the unpaid balance of the subcontract price.
However, the 2010
amendments impose greater responsibility on all contractors and subcontractors
to pay their own providers. Contractors and subcontractors now must:
-
Identify
defective work and materials, and issue a written statement within 14 days
after receiving a provider’s invoice stating in reasonable detail why some
or all of the charges are rejected;
-
Notify a
subcontractor or supplier in writing if the owner has refused to pay all or
part of its invoice; and
-
Pay its
licensed subcontractors and materialmen for good work and materials out of
its own pocket, even if the owner does not pay.
Owner’s prompt
payment obligation. Similarly, A.R.S. §
32-1129.01 requires a project owner to promptly pay the general contractor. In
most cases, the project owner is required to make monthly progress payments to
the general contractor based upon the general contractor’s billing or estimate
of work performed during the preceding 30-day billing cycle. However, the owner
can modify the billing cycle, retention provisions, and definition of
“completion” by placing a plain notice in the contract and on each page of the
project plans, including bid plans.
An owner is deemed
to have received and approved the general contractor’s monthly progress billing
14 days after receipt, unless the owner issues a written statement detailing the
items that are not approved and certified. The owner must issue the progress
payment to the general contractor within seven days thereafter. Similar seven-day
limits apply to final and retention payments. Late payments bear interest at 18%
per annum.
An owner can
decline to approve and certify any billing or portion of a billing, and withhold
a reasonable amount from the progress payment, for the following reasons:
-
unsatisfactory
job progress;
-
defective
construction work or materials not remedied;
-
disputed work
or materials;
-
failure to
comply with other material provisions of the construction contract;
-
third party
claims filed or reasonable evidence that a claim will be filed;
-
failure of the
contractor or subcontractor to make timely payments for labor, equipment and
materials;
-
damage to the
owner; or
-
reasonable
evidence that the construction contract cannot be completed for the unpaid
balance of the construction contract sum.
The owner may
withhold only an amount sufficient to pay the direct costs and expenses the
owner reasonably expects to incur to protect itself, that results from reasons
set forth in its written notice, and for which the contractor is responsible.
Contractor’s
right to stop work. A contractor may
suspend performance or terminate the construction contract if the owner fails to
timely pay the amount certified and approved, provided the contractor gives
seven days’ prior written notice to the owner (A.R.S. § 32-1129.04[A]).
Subcontractor’s
right to stop work. Similarly, a
subcontractor may suspend performance or terminate a subcontract if (a) the
owner fails to timely pay the amount certified and approved for the
subcontractor’s work, and (b) the general contractor also fails to pay for that
work. Before suspending performance or terminating the subcontract for this
reason, a subcontractor must give three days’ prior written notice to the
general contractor and the owner (A.R.S. § 32-1129.04[B]).
A subcontractor
also may suspend performance or terminate a subcontract if the owner timely pays
the general contractor for the subcontractor’s work but the general contractor
fails to pay the subcontractor. In this instance the subcontractor must give
seven days’ prior written notice to the general contractor and the owner (A.R.S.
§ 32-1129.04[C]).
A subcontractor may
suspend performance or terminate a subcontract if the owner declines to certify
and approve payment for the subcontractor’s work, but the reason for refusal is
not the fault of the subcontractor or directly related to the subcontractor’s
work. In this instance the subcontractor must give seven days’ prior written
notice to the general contractor and the owner. (A.R.S. § 32-1129.04[D]).
Notice. The written notice (see sample
documentation on page 22) required by this section must be personally
delivered to an individual, to a member of a limited liability company, or to an
officer of a corporation, or delivered by any means that gives written,
third-party verification of delivery to the business address of the recipient,
e.g., by courier or Federal Express (A.R.S. § 32-1129.04[G]).
In each case, the
contractor or subcontractor cannot be considered in breach of the contract
because it lawfully suspends work or terminates the contract according to the
statute. A contractor or subcontractor that suspends performance in compliance
with the statute is not required to provide further services or materials until
it receives payment of the amount certified and approved, together with the
mobilization costs of shutting down and starting up the project (A.R.S. §
32-1129.04[E]).
