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Arizona Prompt Payment Law: A Review of Recent Changes

All contractors, subcontractors and suppliers that work on private construction projects in Arizona should become familiar with the changes to the statute and ensure that all construction and supply contracts comply as well

Sharon B. Shively  
 

Significant changes to Arizona’s Prompt Payment Law governing private construction (A.R.S. 32-1129.01 et seq.) were enacted in 2010. With one exception, the 2010 amendments apply to any construction contract where the initial distribution of plans by an Owner to a Contractor or Subcontractor (including bid plans and construction plans, specifications or contract documents) occurs on or after January 1, 2011.

The exception is for any construction contract or agreement between an Owner and a Contractor that is entered into on or after January 12, 2012. In that case, it does not matter if the plans or specifications were distributed prior to January 1, 2011; the amendments to the Prompt Pay Law will govern all such contracts.

Five months into the new law, we thought it would be a good idea to refresh your memory regarding the changes.

Retention

A timeline for billing, approval and payment of retention is now set forth, similar to the scheme followed for progress payments. “Substantial completion” (now defined in the statute) is the trigger for the Contractor to submit a billing for release of retention. After the 14-day time period for certification and approval, retention is to be paid within seven days unless, prior to the 14-day time period, the Owner has issued a written statement detailing the reasons the billing is not certified or approved. Moreover, if the Owner does issue this written notice, the Owner is entitled to withhold from retention only an amount not to exceed 150% of the direct costs and expenses that the Owner reasonably expects to incur, to protect the Owner from loss for which the Contractor is responsible. If a written notice to withhold retention is timely sent, the Contractor may submit a supplemental billing when the “reason” the Owner withheld some of the retention has been removed.

Final Payment

“Final completion” (now defined) is the trigger for the Contractor to submit a billing for final payment. The same timeline set forth above governs final payment as well.

Owner Withholding Progress Payment Monies for Defective Work

If an Owner withholds money from a progress payment to a Contractor, and the Contractor then does not have sufficient funds to pay Subcontractors and Suppliers whose work was not the basis for the Owner’s withholding, the Contractor must pay all such Subcontractors and Suppliers within 21 days of the date when payment would otherwise have been due from the Owner.

Subcontractor’s Right to Seek Payment Information from Owner

Previously, Subcontractors were able to send a written request to the Owner requesting notification within five days of the Owner issuing a progress payment to a Contractor. This written request, however, had to be sent each time a Subcontractor wanted this information. The new law provides that one written request remains in effect for the duration of the Subcontractor’s work on the project.

Contractor Required to Notify Lower Tiers of Reasons Billing Is Not Submitted

Previously, a Contractor could simply adjust the billing of a Subcontractor or Supplier without notifying them of the reasons. Under the new law, within 14 days of receiving a disputed billing, a Contractor must give a lower tier a reasonably detailed explanation for not passing through the billing.

Contractor Required to Advise Lower Tiers of Owner’s Failure to Certify or Approve Billing

Previously, a Contractor did not have to advise Subcontractors or Suppliers if an Owner failed to approve or certify a payment application. Under the new law, a Contractor is required to notify the lower tiers if the Owner’s objection to a billing affects the amounts to be paid to the lower tiers. The Contractor must send a copy of the Owner’s written objection to any affected lower tiers within seven days of receipt. Similarly, a Subcontractor has the same obligation to lower tiers.

Withholding Retention from Subcontractors

Under the new law, a Contractor can withhold from a Subcontractor only the amount of retention retained by the Owner for that Subcontractor’s work.

Notice to Residential Owner-Occupants

The new law requires a specific written notice (the language is set forth in the statute) that must be included on the front page of every billing or estimate from the Contractor to the Owner-Occupant, if the Contractor wishes for the Prompt Payment Law to apply to a “residential owner-occupant” project.

Conclusion

There are other changes to the Prompt Payment Law as well, but this article provides a good summary of the more important modifications. It is recommended that all Contractors, Subcontractors and Suppliers who work on private construction projects in Arizona become familiar with the changes to the statute and ensure that all construction and supply contracts comply as well.