Tuesday, November 30, 2010

Prompt Payment on Construction Contracts

On January 1, 2011, Arizona will join a growing list of states that offer an effective remedy against slow payment on private construction contracts and subcontracts. If you build in Arizona, or in any of the other states with a prompt payment statute, you should understand how to preserve and enforce payment rights.

Of course, the law in every state is at least slightly different. But Arizona offers a good example of how a prompt payment act works. If work on the prime contract will require at least 60 days, Section 32-1129.01 sets payment standards for both residential and non-residential construction: (1) the billing cycle, (2) certification of invoices, (3) payment due dates, and (4) retention and final payment.

Billing Cycle: The prime contractor has to submit an invoice each 30 days for work done during the prior 30 days -- § 32-1129.01 (A).
Certification of Invoices: Invoices for progress payments, final payment and retainage are considered approved by the owner 14 days after delivery unless the owner objects in writing. § 32-1129.01 (D), (H) and (K). There are nine statutory objections, grounds for withholding payment. § 32-1129.02 (C)
Payments Due: Progress payments and final payment must be made and retention must be released by an owner within seven days after an invoice is approved. § 32-1129.01 (C), (I) and (L).
Retention and Final Payment: The contract can give the terms “retention,” “substantial completion” and “final completion” a meaning other than what appears in § 32-1129 and can set different payment dates and conditions for final payment and release of retention.

To use any billing cycle other than 30 days, both the contract and each page of the plans must include the notice in § 32-1129.01 (B). To allow more than 14 days for certification of invoices, both the contract and each page of the plans must include the notice in § 32-1129.01 (F). To extend the payment due date beyond seven days, both the contract and every page of the plans must include the notice in § 32-1129.01 (C). Alternate arrangements for retention and final payment are permitted if each page of the plans and the contract include the notice in § 32-1129.01 (W).

The new Arizona law has teeth
Failure to comply with payment deadlines can result in an interest charge of at least 1.5% per month (or fraction of a month). Plus, courts and arbitration panels are required to award attorney fees if suit is necessary to collect. § 32-1129.01 (Q) and (S).

But there’s a trap for residential prime contractors. If the job consists of Work on an owner-occupied dwelling, the first page of every billing and estimate has to include the notice which appears in § 32-1129.07. Omit that notice and you forfeit protection of the Act.

Note also that subs have to be paid within seven days after the prime contractor is paid. Subcontractors can request notification from the owner when the prime contractor is paid. Subcontractors have the same right to collect interest and attorney fees if a payment is delinquent. § 32-1129.02 (B).

Arizona’s Prompt Payment Act of 2010, is effective on the earlier of either:
1. January 1, 2011 if plans are distributed to a contractor or subcontractor after that date, or
2. January 1, 2012 for every construction contract signed after that date.

To see how Arizona's new Prompt Payment Act affects your jobs, have a look at Arizona Construction Contract Writer. There's no charge for the trial edition.