The Arizona legislature has enacted statutes to give contractors and construction material suppliers additional remedies for collection of debts on private construction jobs. These statutes are referred to as the Arizona Prompt Pay Act (A.R.S. § 32-1129 et seq.). Public projects are not governed by the Arizona Prompt Pay Act. However, there are statutes containing similar provisions regarding prompt payment on public jobs in A.R.S. § 41-2577.
Violations of the Arizona Prompt Pay Act for private jobs are punished by the imposition of interest at the rate of 18% per annum (1.5% per month) unless the contractual interest rate agreed to by the parties is higher. In addition, the prompt pay statutes provide for attorney’s fees in the event of litigation in any form and also possible suspension of a contractor’s license by the Arizona Registrar of Contractors.
Prompt payment statutes are an additional remedy to any other remedy available to a Contractor, Subcontractor or Material Supplier. A.R.S. § 32-1129.02(A) specifically states that a Contractor, Subcontractor or Material Supplier is entitled to payment from the party with whom the Contractor, Subcontractor or Material Supplier contracts. This means that Contractors, Subcontractors and Material Suppliers may bring a breach of contract action outside of the Arizona Prompt Pay Act against the party with whom they have contracted and this effectively eliminates “pay when paid clauses”. A Contractor, Subcontractor or Material Supplier may bring an action for breach of contract against the party with whom they have contracted even if that party has not been paid pursuant to the Arizona Prompt Pay Act.
The Arizona Prompt Pay Act also allows a Contractor or Subcontractor to terminate or suspend performance on a construction contract or subcontract without penalty if an Owner or Contractor has failed to make payment pursuant to the statutes. A.R.S. § 32-1129.04 details the appropriate written notice required to terminate or suspend a construction contract or subcontract for failure to make payment. A.R.S. § 32-1129.04(C) allows Subcontractors to suspend performance or terminate a subcontract even if the Owner has made a timely payment to the Contractor, but the Contractor has failed to make a timely payment to the Subcontractor. In addition, A.R.S. § 32-1129.04(D) allows Subcontractors to suspend performance or terminate a subcontract if the Owner has failed to certify and approve a Contractor’s billing for reasons that are not directly related to the Subcontractor’s work. Contractors, Subcontractors or Material Suppliers who wish to suspend performance or terminate a construction contract or a subcontract must comply with the written notice provisions of A.R.S. § 32-1129.04 in order to be afforded protection for the suspension of performance or termination of the contract.
The Arizona Prompt Pay Act also voids any provision in a construction contract that makes that contract subject to the laws of another state or requires litigation to occur in another state. In addition, any provision in a construction contract that purports to eliminate any party to the contract’s rights to protections afforded by the Arizona Prompt Pay Act is void and enforceable.
Owners may set a billing cycle that is different than the 30-day cycle set forth by the prompt pay statutes if the Owner and Contractor agree to an alternate billing cycle in their construction contract. However, to be enforceable the alternate billing cycle must be set forth clearly and conspicuously on each page of all of the plans including bid plans and construction plans using specific statutory language.
General Contractors are required to pay their subcontractors within 7 days of receipt of payment from the Owner. Subcontractors are required to pay their subcontractors and material suppliers within 7 days of receipt of any progress or final payment as well. If payments are not made within the 7-day time frame, interest will begin to accrue on the day after the payment was due at the rate of 1.5% per month. However, if an Owner declines payment and certification/approval of a billing, the Owner must state the reasons in writing to the Contractor within 14 days of receipt of the billing in order to avoid automatic certification and approval. Owners should keep documentation of the objection to the billing, how it was delivered and when the Contractor received it. The statute only states that the Owner must object in writing within 14 days of receipt of the billing, however does not clarify whether or not the Contractor needs to receive the objection before the 14 days expires or if the objection must be postmarked within 14 days. Owners should err on the side of caution and deliver any written objection to the Contractor within 14 days.
There is no penalty pursuant to the Prompt Pay Statutes for an Owner/Contractor/Subcontractor to withhold payment for any of 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 or subcontract;
- Third party claims filed or reasonable evidence that a claim will be filed;
- Failure of the Contractor or a Subcontractor to make timely payments for labor, equipment and materials;
- Damage to the Owner, Contractor, another Subcontractor or Material Supplier; or
- Reasonable evidence that the construction contract or subcontract cannot be completed for the unpaid balance of the construction contract or subcontract sum accounting for a reasonable or actual amount of retention.