LEGAL GUIDE
Written by attorney Guy W Bluff | Apr 15, 2013

AN ANALYSIS OF ARIZONA PROMPT PAYMENT STATUTES

I. Arizona’s Prompt Payment Statutes [1]

In Arizona, there are a number of different Prompt Payment statutes governing both public and private projects. A common misconception in the construction industry and even among legal practitioners is that ARS §32-1129.01 to §32-1129.06 apply to all Arizona projects–regardless of whether the project is new or remodeled residential, commercial, or work for the State or other public agency. The typical Prompt Payment statute referred to in most legal articles relates only to private projects, which make up only a small fraction of all construction projects in Arizona. This has been especially true for the past 5 years (2007 – 2011), when private lending has been difficult—if not impossible—to obtain for new development.

An analysis of the Prompt Payment statutes applicable to work performed for the various state agencies, cities, towns, school districts, counties, and for the StateUniversity system have been uniformly ignored by most legal authors. What follows is a summary of each of the various statutes and codes applicable to the majority of construction projects in Arizona—both private and public. (The scope of this article is not intended to address the Prompt Payment statutes and regulations for work performed for the federal government [2], or work performed on tribal lands. [3] )

The Arizona Procurement Code covers most state agencies. However, the Arizona Department of Transportation (ADOT) and the Arizona University System, governed by the Arizona Board of Regents (ABOR), each have specific statutory or code provisions relating to Prompt Payment.

School districts are covered by Arizona State Board of Education School District Procurement Rules. Counties, cities, and certain special districts are governed by ARS §34-221. Only private construction projects are governed by ARS §32-1129.01 and 32-1129.02.

What follows is a brief summary of the various statutory and regulatory provisions relating to Prompt Payment laws. A review of the relevant provisions has been prepared for quick reference, and the full text of the applicable statutes has been included, in order to allow the legal practitioner a quick reference guide for use in their practice and when advising clients.

A. The “General Rule"

As a general rule, the numerous Prompt Payment statutes and codes that follow provide procedures and deadlines to ensure timely and prompt payment to general contractors, their subcontractors and suppliers alike. With few exceptions, each statute or code provides for:

1) The timing of submission of periodic pay application, or invoices for payment (generally every 30 days or for work performed in the prior month);

2) The date by which the Owner must review, approve, or reject the application for payment (7 or 14 days);

3) The requirement for specific written reasons to justify any rejection of a pay application, whether in whole or part (7 or 14 days);

4) A provision that the Owner or Contractor’s failure to timely object (in writing) results in the pay application or invoice being “deemed approved" or “certified";

5) The requirement that payments be made on approved or certified pay applications or invoices within a specified period of time (7 or 14 days);

6) The requirement that the General Contractor and each Subcontractor make timely payment to lower tier Subcontractors or Suppliers for work performed or materials supplied on certified pay applications or invoices (7 days);

7) A penalty or mandatory interest for late payment (between 10 and 18%)

The Prompt Payment laws provide for mandatory actions and payment to be completed within a relatively short time frame after submission of a proper invoice for payment. Each statute or rule provides for the submission of an invoice or application for payment, the certification of such application (whether it be through affirmative action, or through inaction), a deadline for payment from the public or private owner to the General Contractor (14 days), and then subsequent payment deadlines for each lower tier Subcontractor or Supplier (7 days). Depending on the statute or rule, interest on late payment will accrue at either 10.0% per annum, 1.0%, or 1.5% per month. Only ARS §32-1129.01 and 1129.02 provide the mandatory award of attorneys fees in the event of a breach of the Prompt Payment law.

B. Objections Must be In Writing and Specific

Once a “proper" [4] invoice or application for payment has been submitted [5], the project Owner or General Contractor must either act affirmatively by approving the application for payment, or otherwise by identifying, in writing, very specific reasons for the rejection of the application or invoice. Even in those instances, there is an affirmative duty on the Owner or Contractor to approve so much of the application for payment as is appropriate. Typical justifications for rejecting (in whole or part) invoice, billing or applications for payment include:

  1. Unsatisfactory job progress.

  2. Defective construction work or materials not remedied.

  3. Disputed work or materials.

  4. Failure to comply with other material provisions of the construction contract.

  5. Third party claims filed, or reasonable evidence that a claim will be filed.

  6. Failure of the Contractor or a Subcontractor to make timely payments for labor, equipment, and materials.

  7. Damage to the Owner, Contractor, or another Subcontractor.

  8. Reasonable evidence that the construction contract cannot be completed for the unpaid balance of the construction contract sum.

  9. The Owner has withheld retention from the Contractor, in which case the amount of the retention withholding by the Contractor shall not exceed the actual amount of the retention retained by the Owner pertaining to the subcontractor's work. See ARS §32-1129.02

Regarding the billing or invoice for release of retention, the Owner may withhold or refuse to release retention due to failure of the Contractor to complete a material requirement of the construction contract, to complete portions of the work, or for any reason identified above.

The Owner may also withhold from retention or final payment an amount equal to 150% (private projects only) or 100% (pubic projects) of the direct costs and expenses the Owner reasonably expects to incur to protect the Owner from loss for which the Contractor is responsible and results from the Contractor's failure to complete portions of the work at the time of substantial completion, or for any reasons set forth in writing,

(Due to length of article please see link below for full text.)

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