Arizona’s Prompt Payment Act

By Bruce A. Smidt, Esq.

On April 12, 2000, Governor Jane Hull signed Senate Bill 1549 into law.  The new law applies to all private construction contracts where the owner initially distributes any plans, specifications or contract documents after July 18, 2000, or where the parties sign a construction contract on or after January 1, 2001.

Under the new law, owners on private construction projects are subject to statutory prompt payment requirements.  The new law also provides greater protection for subcontractors and gives both contractors and subcontractors the right to suspend performance for non-payment.

Senate Bill 1549 amends A.R.S. §§ 32-1129 and 32-1129.01 and renumbers those sections as A.R.S. §§ 32-1129.02 and 32-1129.03 respectively.  In addition, the bill adds five new sections, A.R.S. §§ 32-1129, 32-1129.01, 32-1129.04, 32-1129.05 and 32-1129.06.

The new statutory scheme establishes presumptive billing and payment cycles for all private construction projects in Arizona.  Pursuant to A.R.S. § 32-1129.01(A), the owner must make progress payments on all construction projects of 60 days or more.  The presumptive billing cycle is 30 days and progress payments are to be made on the basis of a duly certified and approved billing or estimate of the work performed and the materials supplied during the preceding billing cycle.  Payment is to be made 7 days after the billing or estimate is certified and approved pursuant to A.R.S. § 32-1129.01(D).  A.R.S. § 32-1129.01(D) provides that a billing or estimate is deemed approved and certified 14 days after the owner receives the billing or estimate unless the owner issues a written statement before that time detailing those items that are not approved.  Under this system, a contractor should receive payment within 21 days after submitting a pay application and should never have to wait more than 51 days to receive payment on any item of approved work.

With respect to those items that the owner has identified in accordance with A.R.S. § 32-1129.01(D) as not being approved, the owner is allowed to withhold payment.  Pursuant to A.R.S. § 32-1129.01(E), however, the owner may only withhold an amount sufficient to pay the direct expenses the owner reasonably expects to incur to correct such items.

In light of concerns over interfering with an owner’s right to contract, owners were given the right to opt out of the presumptive billing, approval and payment periods by following the procedures set forth in the statute.  In order to alter the presumptive 30 billing cycle: (1) the construction contract must set forth in a “clear and conspicuous manner” the alternate billing cycle; and (2) each page of the plans, including bid plans and construction plans, must include one of the following legends in clear and conspicuous type:

NOTICE OF ALTERNATE BILLING CYCLE

This contract allows the owner to require the submission of billings or estimates in billing cycles other than thirty days.  Billings or estimates for this contract shall be submitted as follows:

NOTICE OF ALTERNATE BILLING CYCLE

This contract allows the owner to require the submission of billings or estimates in billing cycles other than thirty days.  A written description of such other billing cycle applicable to the project is available form the owner or the owner’s designated agent at (telephone number or address, or both), and owner or its designated agent shall provide this written description on request.

A.R.S. § 32-1129.01(B)

In order to lengthen the presumptive 7 day payment period: (1) the construction contract must in a “clear and conspicuous manner” set forth a longer payment period defined by a specified number of days after certification and approval; and (2) each page of the plans, including bid plans and construction plans, must include the following legend in clear and conspicuous type:

NOTICE OF EXTENDED PAYMENT PROVISION

This contract allows the owner to make payment within ____ days after certification and approval of billings and estimates.

A.R.S. § 23-1129.01(C)

In order to extend the presumptive 14 day period for approval of a payment application: (1) the construction contract must in a “clear and conspicuous manner” set forth an extended time period defined by a specified number of days after the owner receives the billing or estimate; and (2) each page of the plans, including bid plans and construction plans, must include the following legend in clear and conspicuous type:

NOTICE OF EXTENDED CERTIFICATION AND
APPROVAL PERIOD PROVISION

This contract allows the owner to certify and approve billings and estimates within _____ days after the billings and estimates are received from the contractor.

A.R.S. § 32-1129.01(F)

Pursuant to A.R.S. § 32-1129.01(H), final payment is to be made in full within 7 days after the project is complete and the owner approves and certifies all work.  On projects which require a federal agency’s final approval, the owner is required to make final payment within 7 days after the federal agency’s final approval.  Unlike the presumptive progress payment period of 7 days after approval and certification, the final payment period cannot be extended by the owner.  In light of the fact that final payment must be made before the time for filing liens has expired, the owner should list any missing full and final lien waivers as deficiencies when approving the application for final payment.  This will allow the owner to withhold sufficient funds to protect itself from possible liens.

In addition to the brand new provisions requiring prompt payment by the owner to the general contractor, the new law also revises the previously existing prompt payment provisions regarding payments from contractors to their subcontractors and from subcontractors to their suppliers.  Under A.R.S. § 32-1129.02(B), a contractor is now required to pay its subcontractors and suppliers and a subcontractor is required to pay its subcontractors and suppliers within 7 days after receiving payment rather than within 14 days as previously allowed.  In addition, A.R.S. § 32-1129.02(C) precludes a contractor or subcontractor from withholding an amount of retention greater than the actual percentage retained by the owner.  A subcontractor can receive notice of when the owner pays the contractor by serving a written request for such information on the owner.  After receiving such a request, the owner is required by A.R.S. § 32-1129.01(L) to notify the subcontractor within 5 days after making a payment to the contractor.

Another major change made by the new law is that contractors and subcontractors now have the statutory right to suspend performance or terminate their contract if the prompt payment provisions are not followed.  A.R.S. § 32-1129.04(A) gives contractors the right to suspend performance or terminate their contract in the event the owner fails to make timely payment of the amount certified and approved pursuant to A.R.S. § 32-1129.01 after giving the owner 7 days written notice.  The 7 day notice period cannot be extended by contract.

A.R.S. §§ 31-1129.04(B)-(D) give subcontractors the statutory right to suspend performance or terminate their contract under three different scenarios.  Under A.R.S. § 32-1129.04(B) a subcontractor can suspend performance or terminate their contract in the event the owner fails to timely pay the contractor the amount certified and approved pursuant to A.R.S. § 32-1129.01 and the contractor fails to pay the subcontractor the amount certified.  Under A.R.S. § 32-1129.04(C) a subcontractor can suspend performance or terminate their contract in the event the owner timely pays the contractor the but the contractor fails to timely pay the subcontractor.  Under A.R.S. § 32-1129.04(C) a subcontractor can suspend performance or terminate their contract in the event the owner fails to certify a portion of the subcontractor’s work for reasons that are not the fault or directly related to the subcontractor’s work.  In the case of non-payment by the owner, the subcontractor must give written notice to the owner and contractor 3 days before the suspension or termination becomes effective.  In the other two scenarios, the subcontractor must give 7 days written notice.  These notice periods cannot be extended by contract.

In the event that a contractor or subcontractor suspends performance pursuant to A.R.S. § 32-1129.04, the contractor or subcontractor is not required to furnish any additional labor or materials until the contractor or subcontractor has been paid all amounts certified and approved and any costs incurred for mobilization resulting from the shut-down or start-up of the project.

The new law also beefs up the remedies for failure to comply with the prompt payment provisions.  Under A.R.S. §§ 32-1129.01(K) and 32-1129.02(D), any payments that are not timely made bear interest at the rate of 1½% per month or at such higher rate as the parties have agreed upon.  A.R.S. §§ 32-1129.01(M) and 32-1129.02(F) provide that in any action or arbitration to collect payments or interest pursuant to the prompt payment provisions, the successful party shall be awarded costs and attorneys’ fees in a reasonable amount.  The court therefore must award attorneys’ fees to the successful party, although it is still left up to the court to determine what amount of attorneys’ fees is reasonable.

In order to prevent parties from to avoid the requirements of the new prompt payment law, A.R.S. § 32-1129.01(J) provides that a construction contract shall not alter the rights of any contractor, subcontractor or material supplier to receive prompt and timely progress payments as provided for in the act.  In addition, A.R.S. § 32-1129.05 provides that the following contract provisions are void and unenforceable as against public policy:

  1. any provision which make the contract subject to the laws of another state or that requires any litigation, arbitration or any other dispute resolution proceeding to be conducted in another state.
  2. any provision stating that a party cannot suspend performance under the contract or terminate the contract if the other party fails to make prompt payments under the contract