Arizona Prompt Payment Act

Contractor’s Prompt Pay 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 because of defective work. 

Owner’s Prompt Pay 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. § 32-1185).

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. § 32-1185).

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 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.

Notice

The written notice 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.

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.