Executive Summary
- Arizona’s Prompt Payment Act ensures licensed contractors, subcontractors and material suppliers of private and public construction projects receive timely payments from the entity they are contracted with.
- For private projects, owners have 14 days to approve a contractor’s payment request and then seven days to pay. For public projects, approval is expected in seven days, and payment must follow in 14 days. In both cases, contractors must pay subcontractors and suppliers within seven days of compensation.
- Late private project payments can incur 1.5% monthly interest, while late payments for public projects are subject to 1% interest per month. In both scenarios, attorney fees may be awarded to the winner of the legal dispute.
- Some potential exceptions that could legally warrant withholding payments to the parties you are contracted with are poor progress, faulty work, damage to the contractor or unpaid financial dues.
Understanding Arizona’s Prompt Payment Act
Arizona’s Prompt Payment Act consists of a series of statutes intended to ensure payments in the construction industry are made promptly and fairly. These Arizona prompt pay laws establish legal guidelines for when payments must be made between property owners or public entities, contractors, subcontractors and material suppliers.
For most private projects, the property owner has 14 days to approve or deny a payment request from the contractor. Once approved, the owner must pay them within seven days. However, in the majority of public projects, the proposed progress payments must be approved or denied within seven days. After approval, payments must be sent to the contractor within 14 days. In both private and public projects, the contractor has seven days after receiving their payment to pay the subcontractors and suppliers.
If any of the payments mentioned above are late and do not qualify for an exception outlined by the Arizona Prompt Pay Act, they are subject to interest fees and other penalties. So, if you are contracted with another party for a construction project, it is crucial to understand the key aspects of the Arizona prompt pay statutes to ensure legal compliance.
What is Arizona’s Prompt Payment Act?
The Arizona Prompt Payment Act is a collection of statutes that establish payment deadlines for entities involved in private or public construction projects. By outlining acceptable timelines for how fast money should move from property owners to contractors to subcontractors and material suppliers, these laws ensure everyone involved in the contract gets paid fairly within a timely manner.
What Statutes Govern Payments for Private Construction Projects?
The eight Arizona prompt pay statutes that set requirements for private-sector construction contracts are:
- ARS 32-1181 – Provides definitions for the following statutes and outlines applicability.
- ARS 32-1182 – Sets expectations for progress payments from property owners, listing specific conditions and penal interest payments.
- ARS 32-1183 – Discusses performance and payment guidelines for contractors, subcontractors or material suppliers, outlining conditions and potential interest payments for failing to comply.
- ARS 32-1184 – States when construction contracts can be legally interrupted or terminated, clarifying how damages should be paid in such scenarios.
- ARS 32-1185 – Covers when contractors and subcontractors can suspend performance or terminate construction contracts.
- ARS 32-1186 – Explains when components of construction contracts are against the state’s public policy, making them void and unenforceable.
- ARS 32-1187 – Lists which statutes do not apply to the state or political subdivisions of Arizona.
- ARS 32-1188 – Declares that ARS 32-1182 does not apply to the construction of a dwelling for an owner-occupant unless specific language is used.
Together, the above statutes work to ensure payments for private construction projects are made on time. They also guarantee that contracts are only paused or terminated under reasonable circumstances.
What Laws Manage Payments for Public Construction Projects?
The four statutes that set expectations for public-level construction projects throughout Arizona are:
- ARS 34-221 – Lists requirements for contracts between public entities and contractors, concentrating on payment timelines, security, progress payments and dispute resolution options across public works.
- ARS 41-2576 – Controls procurement and contract administration for public works, such as the approval and handling of progress and final payments.
- ARS 41-2577 – Outlines compensation procedures for state construction projects, ensuring timely payments to contractors and subcontractors.
- ARS 28-6924 – Explains regulations surrounding highway contracts, covering bidding, payments and penalties for delays in highway construction projects.
Like the statutes governing private construction projects, the above laws promote fair and timely payments from public entities to construction contractors. Consequences such as court-ordered interest payments can result from incompliance with any of the Arizona prompt pay statutes.
The History of the Prompt Payment Act
Federally, congress passed a Prompt Payment Act under Public Law 97-177 on May 21, 1982. This act essentially forced the United States government to pay interest on overdue payments for contract-based construction projects. After the federal government set this standard, many states followed suit, implementing prompt payment laws that protect all key parties involved in public and private construction projects separate from the federal government.
Arizona’s first state-specific prompt pay laws were passed in 1989, but they have undergone various amendments since then. For example, changes to the Arizona Prompt Payment Act were approved in 2010 to give owners, contractors and subcontractors broader rights and responsibilities. Some noteworthy additions fueled by these 2010 amendments are:
- Added specific timelines for billing.
- Included rules on withholding funds for defective work.
- Gave subcontractor rights to request payment information.
- Added requirements for contractors to notify lower tiers of billing disputes or an owner’s failure to approve payment.
In 2015, another amendment stage gave architects and engineers the right to prompt payment for their contributions to many public projects throughout Arizona. These additions have helped make construction-related projects more equitable throughout the entire state.
Main Requirements of the Prompt Payment Act
Arizona prompt pay laws outline specific timelines for both private and public construction projects. The following figures illustrate the expectations laid out by the Arizona prompt pay statutes.
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Private Construction Projects |
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| Relationship: | Property owners to contractors | Contractors to subcontractors | Contractors to material suppliers |
| Payment deadline: | Progress payments are due within seven days of invoice approval. | Payment is due within seven days of receiving payment from the owner. | After receiving payment from the owner, payment is due within seven days. |
| Invoice approval deadline: | The property owner has 14 days after receiving the invoice to approve or deny. | ||
|
Public Construction Projects |
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| Relationship: | Public entity to contractors | Contractor to subcontractors | Contractors to material suppliers |
| Payment deadline: | Progress payments are due within 14 days of invoice approval. The final payment is due 60 days after the work has been approved as a whole. | Payment is due within seven days of receiving payment from the public entity. | Payment is due within seven days after receiving payment from the public entity. |
| Invoice approval deadline: | The public entity has 7 days after receiving the invoice to approve or deny. | ||
The Arizona Prompt Payment Act requires parties to notify each other if there are disputes about work quality or the payment due. This requirement facilitates timely resolutions to any problems that come up. Still, if payments are delayed for an inexcusable reason, the affected party can receive interest payments from the incompliant entity.
Rights and Responsibilities Under the Act
Each party within a construction contract has unique legal rights and obligations. For example, contractors are entitled to timely payment from the property owner or public entity after their work is completed correctly. Still, property owners or public entities have the right to withhold payment if the job is not completed to the agreed standard or within a reasonable amount of time. Once the main contractor receives compensation, they are responsible for paying subcontractors and material suppliers promptly, assuming these lower tiers have fulfilled their obligations.
According to Arizona’s Prompt Pay Act, all parties must follow notice requirements to address withheld or disputed payments. If payment is disputed or withheld for a public or private project, written notice must be provided to explain why. For private projects, property owners must issue a notice within 14 days of receiving the contractor’s billing request per ARS 32-1183. For public projects, the public entity only has seven days to approve or dispute the invoice and provide notice of their reasoning, thanks to ARS 34-221. If a contractor has a valid reason for withholding or refusing payment to their lower tiers, they have seven days to notify affected subcontractors or material suppliers.
Consequences for Non-Compliance
Depending on the scale of the construction project, failing to comply with Arizona’s Prompt Payment Act can lead to legal action with significant penalties. Arizona’s prompt pay laws outline interest rate penalties for private construction projects under ARS 32-1182, stating that the party who was late or wrongfully withheld payments, whether it is the property owner or main contractor, accrues a 1.5% per month interest rate on what they owe.
For public works, ARS 41-2576 and ARS 41-2577 mandate that responsible parties must add the penalty interest rate of 1% per month to what they already owe. These penalties apply when payments are delayed without a valid reason. In both private and public scenarios, attorney fees may be awarded to the winner in a legal dispute, meaning the party at fault has to pay for the opposing side’s court and legal representation expenses, assuming they are within reason.
Filing a Lien
After a construction project, unpaid contractors can place liens on properties to secure outstanding payments. The process and fees associated with submitting a mechanic’s lien, also known as a construction lien, materialman’s lien or an artisan’s lien, can vary depending on the county. Nevertheless, the three key aspects to consider when filing a mechanics lien in Maricopa County, Arizona, are:
- Contractors must send a Preliminary 20-Day Notice to retain their lien rights, which is unique to Arizona.
- Only licensed contractors can file a mechanics lien—unlicensed individuals are prohibited.
- Lien rights are limited to parties with a direct contract with the property owner. Therefore, material suppliers or subcontractors without this direct contract do not have lien rights.
In addition to the requirements mentioned above, the Maricopa County Recorder provides specific filing demands. For example, liens and stop notices are due 120 days after substantial project completion, but that period can be shortened to 60 days if a Notice of Completion is filed.
Mechanics liens in Maricopa County can be filed in person, by mail or electronically. Mail and in-person filings can be made at the Downtown Phoenix or Mesa offices, which offer kiosk services. For electronic filing, you must set up an account with the Recorder’s office, after which you’ll receive login credentials to submit documents digitally. Typically, electronic filings don’t carry additional fees beyond regular recording charges.
Before filing a mechanics lien, contact a trusted construction law attorney to facilitate the process and ensure compliance.
Mediation and Dispute Resolution
These laws allow parties to use mediation as a form of dispute resolution for payment concerns, protecting parties from some of the financial losses that can come with going to court. Mediation procedures usually involve neutral third-party mediators who help parties negotiate payment disputes. Dispute resolution is intended to ensure compliance with payment timelines, maintain project cash flow and avoid prolonged litigation. However, if mediation fails, disputes may escalate to arbitration or court.
Exceptions and Limitations
Sometimes, certain conditions allow for the lawful withholding of payments within private and public construction projects. Some exemptions that may be permitted by ARS 32-1183 for private projects are:
- The job’s progress is unsatisfactory.
- Construction work or materials are defective and aren’t fixed.
- There is a dispute over the quality or scope of work or materials.
- The subcontractor hasn’t followed the contract’s terms.
- Third-party claims have been filed or are pending.
- The subcontractor hasn’t made timely payments to their workers or suppliers.
- The subcontractor caused damage to another contracted party.
- There’s proof the subcontract can’t be completed if the missing funds are paid.
- The contractor withholds retention because the owner withheld retention.
ARS 34-221 allows withholding payments for public projects, listing similar reasons to the private project exceptions above, such as defective work or failure to meet contract specifications.
Serving as an exception to both public and private projects, payment timelines can sometimes change if contract modifications or additional work orders are issued. Additionally, prompt pay laws do not usually apply to residential owner-occupied dwellings projects, unlicensed contractors or informal contracts.
Impact of the Prompt Payment Act on Arizona’s Construction Industry
Arizona’s Prompt Payment Act is vital to the construction industry by ensuring payment security, especially for small businesses and subcontractors. Some potential benefits that can result from these statutes are:
- Preventing long payment delays.
- Improving cash flow.
- Expediting project timelines.
Most parties involved in a construction-related contract can experience the advantages above. However, these laws can make it difficult for some contractors to operate if they do not have the administrative power to pay subcontractors and suppliers promptly. Plus, contractors may face challenges if they do not entirely understand the law’s requirements or how to handle disputes.
Best Practices for Ensuring Compliance
Some tips that can help contractors and property owners remain compliant with the Arizona Prompt Pay Act are:
- Establish well-defined, clear contracts with payment schedules and terms.
- Collect detailed records of completed work and requested payments.
- Keep an open line of communication with all contracted parties.
By implementing the above practices, you can avoid misunderstandings about work and payment. Sometimes, contracted parties can agree on terms that differ from typical timelines and expectations before the work starts as long as the contract is clear and fair.
Protect Your Rights To Prompt Payment
The Arizona Prompt Payment Act is essential in promoting fair, timely and transparent payments for public and private construction projects. Arizona prompt pay laws set strict payment deadlines for property owners, public entities, contractors, subcontractors or material suppliers while providing some exceptions and limitations.
If you encounter payment issues or delays for contract-based work in the construction, architecture, design or engineering industry, seek legal advice to understand your options. The employment law team at JacksonWhite Law has substantial experience working with Arizona prompt pay statutes. We can help you address wage disputes or payment-related concerns and make it easier to resolve construction project issues promptly.
Call the JacksonWhite employment law team at (480) 351-6732 to get help navigating the Arizona Prompt Pay Act and ensuring lawful payments.
