Assigned to GOV FOR
COMMITTEE
Assigned to GOV FOR
COMMITTEE
ARIZONA STATE SENATE
Fifty-Third Legislature, Second Regular Session
construction contracts; public works; payments
Purpose
Adds prompt payment rules and procedures to public contracts governed by the Arizona Department of Transportation (ADOT), Public Buildings and Improvements and the Arizona Procurement Code.
Background
Arizona law provides for the procurement of professional services and construction services by the state and its political subdivisions.
A.R.S. Title 34 outlines procedures for cities, towns and counties to procure construction, and Title 41 contains similar procedures for the state and its agencies, including the Arizona Board of Regents. Other sections of statute govern more specifically the procurement of small contracts, sole source contracts and emergency contracts. Existing law establishes a separate process for the procurement of construction services by ADOT.
Laws 1989, Chapter 301 established prompt payment rules on public projects for all levels except between owners and contractors on private projects. In 2000 for the first time, owners on private projects were subject to prompt payment requirements which gave unpaid contractors and subcontractors on private projects the right to stop work for non-payment (Laws 2000, Chapter 233).
Arizona’s Prompt Pay Act (Act) outlines statutory requirements for a construction contract, progress payments made by the owner to the contractor, and timeframes for prompt payments. Additionally, the Act permits the owner to make alternate or extended payments under specific circumstances if outlined in a construction contract. The Act requires the owner to make a progress payment for the preceding 30 days’ work that was performed and the materials that were supplied. The Act also addresses the release of retention or final payment to a contractor.
Statute stipulates that any billing or estimate of construction work performed and materials supplied are deemed approved and certified 14 days after the owner receives the billing or estimate, unless during the 14 days the owner issues a written statement detailing the items not approved or certified. If there are documented problems, an owner may withhold an amount that is sufficient to pay for the direct expenses the owner reasonably expects to incur to correct any of the unapproved items. An owner can withhold payments for several reasons including unsatisfactory job progress, defective construction work or materials, disputed work or materials, damage to the owner or failure to comply with other material provisions of the contract.
There is no anticipated fiscal impact to the state General Fund associated with this legislation.
Provisions
Performance and Payment by Contractors of Public Contracts
1. Stipulates a contractor, subcontractor, design professional or material supplier who performs in accordance with a construction contract or design professional service contract is entitled to payment from the contracted party.
2. Requires a contractor to pay their subcontractors, design professionals or material suppliers who perform in accordance with the provisions of a construction contract.
3. Requires each subcontractor or design professional to pay their subcontractors, subconsultants or material suppliers the full amount received for the subcontractor's or design professional's work and materials supplied based on the subcontract.
4. Stipulates payment is not required unless the subcontractor, design professional or material supplier provides a billing or invoice for the work performed or materials supplied according to the construction contract or design professional service contract.
5. Outlines any diversion of payments by the contractor or subcontractor or failure to reasonably account for the application or use of such payments is grounds for disciplinary action by the Registrar of Contractors (ROC), including suspension or license revocation.
6. Permits the subcontractor or material supplier to notify the outlined entities in writing of any payment, less than the amount or percentage approved, for the class or item of work as outlined.
7. Establishes the contractor or subcontractor are not prevented from withholding application and certification to outlined entities for payment to the subcontractor, design professional or material supplier for any of the following reasons:
a) unsatisfactory job progress;
b) defective design professional services, construction work or materials not remedied;
c) disputed design professional services, work or materials;
d) third-party claims filed or reasonable evidence of a pending claim;
e) failure of a subcontractor or design professional to make timely payments for design services, labor, equipment and materials;
f) damage to the contractor, another subcontractor or design professional;
g) reasonable evidence the subcontract or design professional service contract cannot be completed for the unpaid balance of the subcontract or design professional service contract; or
h) a reasonable amount for retention that does not exceed the percentage retained by outlined entities.
8. Prohibits a contractor or subcontractor from withholding retention from a subcontractor that is greater than the actual amount of the retention retained by outlined entities for the subcontractor's work.
9. Requires the contractor or subcontractor, who chooses to withhold the application or certification as outlined, to issue a written statement within 14 days to the applicable subcontractor, design professional or material supplier stating reasons for withholding the application or certification from entities as outlined.
10. Stipulates if ADOT or the owner issues a written statement as outlined, declining to certify or approve all or a portion of the contractor's billing or estimate, the following will occur:
a) the affected contractor must send a copy of that written statement within seven days after receipt, to any affected subcontractor or material supplier; or
b) the affected subcontractor must send a copy of that written statement within seven days after receipt to any of its affected subcontractors or material suppliers.
11. Requires a contractor to pay any subcontractor or material supplier, whose work was not the basis of withholding for defective construction work or materials not remedied, within 21 days after payment would have been made by ADOT or the owner, regardless if the contractor did not receive sufficient payment to pay any subcontractor or material supplier due to defective construction work.
12. Stipulates withholding for defective construction work as outlined, does not limit a subcontractor's rights to suspend performance or terminate a construction contract as specified.
13. Requires a contractor or subcontractor to pay their subcontractor or material supplier interest if a progress or final payment or release of retention is delayed by more than seven days after receipt of the monies, except if payment is withheld as outlined.
14. Specifies interest begins to accrue on the eighth day at a rate of one percent per month or a fraction of a month on the unpaid balance or a rate agreed on by the parties.
15. Requires any licensed contractor, licensed subcontractor or material supplier filing a complaint with the ROC to post a surety bond or cash deposit of $500 or one-half of the amount due, whichever is less to secure they payment of claims.
16. Stipulates if the ROC determines the complaint to be frivolous, the ROC must order the person filing the complaint to pay:
a) one-half of the amount of the required surety bond or cash deposit to the respondent; and
b) one-half to the ROC for deposit in the state General Fund.
17. Establishes if no claim is made as outlined against the surety bond or cash deposit, they must be returned to the complainant.
18. Stipulates the surety bond or cash deposit must be in the name of the licensee or material supplier filing the complaint and is subject to claims by ROC and the respondent licensee as outlined.
19. Requires the surety bond or cash deposit to be conditioned on and provide payment within 30 days after the order is final, upon the presentation of a certified copy of the ROC order and a certification by the complainant of nonpayment.
20. Requires the surety bond to be executed by the complainant as principal with a corporation that is duly authorized to transact surety business.
21. Requires evidence of the surety bond to be submitted to the ROC in an acceptable form and the cash deposited by the ROC in the contractor's prompt pay complaint fund for the payment of claims.
22. Allows a subcontractor, material supplier or design professional to notify specified entities in writing requesting notification within five days after payment of each progress payment, and remains in place for the duration of the project.
23. Specifies ADOT does not have a duty to a subcontractor or material supplier, besides issuing notification as outlined, and there is not a cause of action in favor of a subcontractor or material supplier against the state, ADOT or any state employee or agent.
24. Specifies a successful party, in any action or arbitration to collect payments or interest, will be awarded reasonable attorney fees and costs.
Suspension of Performance and Contract Termination
25. Allows a contractor to suspend performance or terminate a construction contract for failure by specified entities to make timely payment of the certified and approved amounts.
26. Requires a contractor to provide written notice to outlined entities at least seven calendar days before the contractor's intended suspension or termination, unless a shorter time is prescribed.
27. Deems a contractor not in breach of the construction contract for suspending performance or terminating a construction contract as specified.
28. Prohibits a construction contract from extending the time-period for a contractor or a subcontractor to suspend performance or terminate a construction contract.
29. Allows a subcontractor to suspend performance or terminate a construction contract for the following reasons:
a) failure by outlined entities to make timely payment of the certified and approved amounts; and
b) the contractor fails to pay the subcontractor for the certified and approved work.
30. Requires a subcontractor to provide written notice to the contractor, owner or ADOT at least three calendar days before the suspension or termination, unless otherwise specified.
31. Deems a subcontractor is not in breach of a construction contract for suspending performance or terminating a construction contract and prohibits a contract from extending the time-period suspending performance or terminating a contract.
32. Allows a subcontractor to suspend performance or terminate a construction contract if the contractor fails to pay the subcontractor for the work and requires written notice to the contractor, owner or ADOT, at least seven calendar days before the intended suspension or termination, unless a shorter notice period is prescribed in the contract.
33. Allows a subcontractor to suspend performance or terminate a construction contract if ADOT or the owner decline to approve or certify portions of the contractor's billing or estimate for that subcontractor's work, but are not the fault of or directly related to their work.
34. Requires a subcontractor to provide written notice to the contractor and the owner or ADOT at least seven calendar days before the subcontractor's intended suspension or termination, unless a shorter notice period is prescribed.
35. Deems a subcontractor is not in breach of a construction contract for suspending performance until issues are addressed or terminating a contract.
36. Deems a contractor or subcontractor suspending performance are not required to furnish further labor materials or services until they are paid the certified and approved amount, together with any costs incurred for mobilization resulting from the shutdown or start-up of a project.
37. Specifies written notice is deemed to be provided if:
a) the notice is delivered in person to the individual, a member of the entity or to an officer of the corporation for which it was intended; or
b) the notice is delivered or sent by any means that provides written, third-party verification of delivery to the last known business address.
State Policy
38. Deems a provision, covenant, clause or understanding in, collateral to or affecting a construction contract or a design professional services contract, as against the state's public policy and are void and unenforceable for the following reasons:
a) making the contract subject to out-of-state laws or requiring contract litigation to be conducted out-of-state; or
b) prohibiting a party to the contract from suspending performance under the contract or terminating the contract if another party to the contract fails to make prompt payments under the contract as previously outlined.
39. Specifies any mediation, arbitration or other dispute resolution from a construction contract or a design professional services contract for work in the state, must be conducted in this state.
Progress and Final Payments, Release of Retention
40. Reduces the retention amount to five percent of each estimate that is retained by the owner until final completion and acceptance of all material, equipment and work covered by the contract.
41. Allows an owner to decline to certify and approve an estimate or portion of a billing or estimate for any of the following reasons:
a) unsatisfactory job progress;
b) defective construction work or materials not remedied;
c) disputed work or materials;
d) failure to comply with material provisions of the contract;
e) third-party claims filed or evidence of an impending claim;
f) failure of the contractor or a subcontractor to make timely payments for labor, equipment and materials;
g) damage to the owner; or
h) reasonable evidence the construction contract cannot be completed for the unpaid balance of the contract sum.
42. Stipulates the progress payments will be paid within 14 days after the work estimate is certified and approved after being submitted to any designated person for the submission, review or approval of the work estimate.
43. Reduces the retention amount to five percent of all estimates to be held by the agent as a guarantee for complete performance of the contract and outlines permitted substitutes.
44. Permits the agent not to have a retention contract as outlined.
45. Allows ADOT or an owner and contractor, after the effective date of the contract, to alter the number of specified days after certification and approval, for the owner to pay the contractor or within which a billing or estimate must be certified and approved.
46. Specifies any contractor or subcontractor without a written consent to the change will be paid as previously agreed.
47. Requires a contractor to submit a billing or estimate for release of retention upon substantial completion of the work to any owner designated person for receipt or for certification and approval.
48. Establishes within seven days after ADOT or an owner receives the billing or estimate, it will be certified and approved, unless before that time ADOT or the owner issues a written statement stating the reason for not certifying or approving all or a portion of the billing or estimate.
49. Allows ADOT or the owner to either:
a) decline to certify or approve a billing or estimate for release of retention or a portion for the contractor's failure to complete a material requirement of the construction contract or to complete portions of the work or for any reason as outlined; or
b) withhold from retention to be released only an amount not exceeding 150 percent of the direct costs and expenses ADOT or the owner reasonably expects to incur to protect from loss which the contractor is responsible and results from their failure to complete portions of the work or for any reasons as outlined.
50. Requires ADOT or the owner to pay the retention to the contractor within 14 days after the billing or estimate for release of retention is certified and approved.
51. Allows a contractor to submit a supplemental billing or estimate for all or a portion of the withheld amounts of retention, when any reason for withholding has been removed, and stipulates the contractor may submit only one billing or estimate during each billing cycle unless otherwise specified.
52. Requires the contractor to submit a billing or estimate for final payment to any ADOT or owner designated person for receipt of or for certification and approval, upon final completion of the work.
53. Specifies seven days after ADOT or the owner receives the billing or estimate, it will be certified and approved, unless before that time, the owner prepares and issues a written statement stating the reasons the billing or estimate has not been certified or approved.
54. Allows ADOT or the owner to either:
a) decline to certify and approve a billing or estimate for final payment or a portion for the contractor's failure to compete a construction contract requirement or portions of the work or for any reason as outlined; or
b) withhold from final payment only an amount not exceeding 150 percent for the direct costs and expenses ADOT or the owner reasonably expects to incur to protect from loss for which the contractor is responsible and resulting from any reasons as outlined.
55. Requires ADOT or the owner to make a final payment to the contractor within 14 days after the billing or estimate for final payment is certified and approved.
56. Allows a contractor to submit a billing or estimate for all or a portion of the withheld amounts of final payment, when any reason for withholding has been removed, and stipulates the contractor may submit only one billing or estimate for final payment, during each billing cycle unless otherwise specified.
57. Specifies payment is not required unless the contractor provides ADOT or the owner with a billing or estimate following the terms of the construction contract between parties.
58. Specifies a successful party, in any action or arbitration to collect payments or interest, will be awarded reasonable attorney fees and costs.
59. Prohibits a procurement construction contract from including a provision limiting or precluding the contractor's recovery of damages related to expenses for a delay, incurred by the contractor for which the agent is responsible, that is unreasonable and not within the contemplation of the contract parties.
Construction Service Contracts
60. Requires the owner to retain 5 percent, instead of 10 percent, of the amount of each estimate until final completion and acceptance of all material, equipment and work covered by the contract.
61. Establishes a construction contract may not alter the rights of any contractor, subcontractor or material supplier to receive prompt and timely payments as provided.
Miscellaneous
62. Stipulates rules adopted by the Arizona Board of Regents and the judicial branch prescribing procurement policies and procedures must strictly follow prompt payment requirements as outlined.
63. Allows 5 percent, instead of 10 percent, of all construction contract payments to be retained by the state as insurance of proper performance of the contract.
64. Defines construction contract.
65. Defines contractor.
66. Defines design professional service contract.
67. Defines design professional services.
68. Defines final completion.
69. Defines retention.
70. Defines subconsultant.
71. Defines subcontractor.
72. Defines substantial completion.
73. Defines work.
74. Makes technical and conforming changes.
75. Becomes effective on the general effective date.
Prepared by Senate Research
February 12, 2018
JO/lat