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ARIZONA STATE SENATE
Fifty-Fourth Legislature, First Regular Session
construction contracts; public works; payments
Purpose
Establishes prompt payment requirements for public construction contracts. Outlines requirements for payment approval and rejection, payment timeframes, retention, termination or suspension of work and complaints relating to public construction contracts.
Background
Private Construction Contracts
Private construction contracts entered into with any person, firm, partnership, corporation, association or other organization (owner) that last more than 60 days are required to comply with statutory prompt payment requirements. Progress payments must be made on the basis of certified and approved billings or estimates of work performed and materials supplied during the preceding 30-day billing cycle, unless a different billing cycle is specified in the private construction contract. Owners must make progress payments to the contractor within seven days after the date the billing or estimate is certified and approved. Additionally, upon a substantial completion of the work, the contractor must submit a billing or estimate for release of retention and final payment, which must either be certified and approved or declined for statutorily authorized reasons within 14 days of receipt by the owner. Contractors and subcontractors are required to pay any subcontractors and material suppliers within seven days of receipt of a progress payment. Any diversion by the contractor or subcontractor to pay subcontractors and material suppliers constitutes grounds for disciplinary action by the Registrar of Contractors (ROC) (A.R.S. §§ 32-1129 – 32-1129.07).
Public Construction Contracts
The Director of the Arizona Department of Transportation (ADOT) administers all state highway and maintenance work and must direct the preparation of all plans and specifications and supervise construction for work on state highways (A.R.S. § 28-6922).
State agencies, counties, cities, towns and certain special taxing districts must retain 10 percent of the amount of each progress payment estimate until final completion to ensure proper performance of the public construction contract (contract). Estimates of work completed are deemed approved and certified for payment after seven days from the date of submission. When a contract is 50 percent completed, half of the amount retained must be paid to the contractor upon the contractor's request, so long as satisfactory progress on the contract is made. Retained percentages must be paid to the contractor within 60 days of completion or filing of a notice of completion (A.R.S. § 34-221).
A county, city, town or special taxing district may make progress payments on contracts of less than 90 days and must make monthly progress payments on all other contracts based on certified and approved estimates of work performed during the preceding calendar month.
Progress payments for contracts entered into with ADOT, state agencies subject to the Arizona Procurement Code, counties, cities, towns and certain special taxing districts (government entities) must be made within 14 days after an estimate of work is certified and approved. Estimates of work are deemed approved and certified after seven days of submission (A.R.S. §§ 28-6923; 41-2576; and 41-2577).
Contractors for all contracts with government entities are required to pay their subcontractors within seven days of receipt of each progress payment. Failure to reasonably account for the application of those payments by the contractor constitutes grounds for disciplinary action by the ROC. A contractor or subcontractor can withhold application and certification for payment to a subcontractor or material supplier for specified reasons (A.R.S. §§ 28-6923; 34-221; and 41-2577).
The Arizona Procurement Code
The
Arizona Procurement Code regulates the buying, purchasing, renting, leasing and
acquiring of materials, services, and construction services by the state using
public monies. The procurement process is overseen by the Arizona Department of
Administration (ADOA), with the Director of the ADOA acting as the central
procurement officer of the state (A.R.S.
§ 41-2511). Certain public bodies, including the Arizona Board of Regents
(ABOR) and the legislative and judicial branches, are exempt from requirements
of the Arizona Procurement Code. ABOR and the judicial branch must adopt rules
prescribing procurement policies and procedures (A.R.S.
§ 41-2501). Additionally, the State Board of Education is required to adopt
rules for procurement practices for all school districts in the state (A.R.S.
§ 15-213).
Fiscal Impact
There may be an increase to the state General Fund as a result of the requirement that the ROC deposit 50 percent of any surety bond or cash deposit posted by a contractor, subcontractor or material supplier filing a complaint with the ROC into the state General Fund if the complaint is found to be without merit and frivolous.
Provisions
Payment Requirements for Contracts
1. Requires a contractor to submit a billing or estimate for:
a) the retention release after a substantial completion of work in a contract; and
b) the final payment after final completion of work in a contract.
2. Specifies that a billing or estimate for retention release or final payment is deemed certified and approved within seven days of the government entity's receipt, unless a written statement is issued detailing the reasons for denial.
4. Allows a contractor or subcontractor for a contract to request payment for any changed or additional work requested by a government entity that was completed in the preceding calendar month in monthly payment estimates based on the costs incurred to perform the work.
5. Requires the person designated in the contract with responsibility for certifying and approving monthly payment estimates to make an interim determination to approve paying monthly costs and certify the amount determined to be reasonably justified.
6. Requires a government entity to specify the reasons for not approving all or any portion of an estimate of work performed in a request for progress payment regarding a contract.
7. Allows a government entity to decline to certify and approve an estimate or portion of a billing or estimate and allows a contractor or subcontractor to withhold an application and certification for payment to a subcontractor or material supplier for:
a) unsatisfactory job progress;
b) defective construction work or materials not remedied;
c) disputed work or materials;
d) failure to comply with provisions of the contract;
e) failure of a contractor or subcontractor to make timely payments for labor, equipment and materials;
f) claims filed by third-parties;
g) damage to the government entity; or
h) the existence of reasonable evidence that the contract cannot be completed for the unpaid balance of the contract sum.
8. Allows a government entity to:
a) decline to certify and approve all or a portion of a billing or estimate for retention release or final payment due to the contractor's failure to complete a material requirement of the contract, failure to complete a portion of the work or other outlined reasons; or
b) withhold up to 150 percent of the direct costs and expenses of the direct costs that the government entity reasonably expected to incur for protection for which the contractor is responsible.
10. Prohibits a contractor from submitting more than one billing or estimate during each billing cycle, unless otherwise agreed.
11. Specifies that performance by a contractor, subcontractor, material supplier or design professional in accordance with the terms of a contract entitles the contractor, subcontractor, material supplier or design professional to payment from the contracting government entity.
12. Requires a contractor, subcontractor or design professional to pay the full amount received for a subcontractor, material supplier or design professional for work completed in accordance with the contract within seven days of receiving any progress payment, retention release or final payment.
13. Specifies that payment by a contractor, subcontractor or design professional is not required unless the subcontractor, design professional or material supplier provides a billing or invoice for work performed or material supplied.
14. Specifies that payment is not required unless a contractor provides the government entity with a billing or estimate in accordance with the terms of the contract.
15. Allows a contractor and a government entity to change payment and payment certification and approval timelines after the effective date of a contract.
16. Requires a contractor or subcontractor to be paid as outlined in a contract, unless the contractor or subcontractor provides written consent to modify any payment or certification timelines.
17. Prohibits a contract for the procurement of construction to include a provision that limits or precludes a contractor's recovery of damages related to expenses incurred by the contractor for a delay:
a) for which the government entity is responsible;
b) that is unreasonable under the circumstances; and
c) that is not within the contemplation of the parties to the contract.
18. Allows contracts to contain provisions that:
a) require notice of delays;
b) provide for arbitration; and
c) provide any other procedure for the settlement or provision of liquidated damages.
19. Requires the successful party in any action or arbitration brought to collect payments or interest in a contract to be awarded reasonable attorney fees and costs.
20. Allows, rather than requires, a subcontractor or material supplier to notify ROC and the government entity of any payment received by a contractor in an amount less than the percentage approved for the class or item of work performed.
21. Prohibits a contractor or subcontractor from withholding retention from a subcontractor in an amount greater than the actual amount of the retention returned by the government entity pertaining to the subcontractor's work.
22. Requires a contractor or subcontractor that chooses to withhold the application or certification for a subcontractor or material supplier's billing or estimate to provide written notice within 14 days that outlines the reasons for withholding.
23. Requires a contractor to send a copy of any statement regarding refusal to certify or approve the billing or estimate by a government entity to any affected subcontractor or material supplier within seven days.
24. Requires a subcontractor, after receiving a statement from a subcontractor regarding a refusal to certify or approve billing or estimate by a government entity, to send a copy of the statement to any affected subcontractors or material suppliers within seven days.
25. Requires a contractor, after receiving notice from a government entity of a refusal to certify or approve billings or estimates for defective construction work or materials not remedied, to pay any subcontractor or material supplier whose work was not the basis for the withholding within 21 days of the date the payment would have otherwise been made.
26. Allows ADOT to retain five percent of all estimates as a guarantee for complete performance of a highway construction contract.
27. Allows any government entity except ADOT to retain five percent, rather than ten percent, of the amount of each progress payment estimate for a contract until final completion and acceptance is deemed approved as a guarantee for complete performance of the contract.
28. Permits a government entity to opt to have no retention on a contract.
29. Removes the requirement that half of any amount retained by a government entity, except ADOT, be paid to the contractor when half the contract is completed.
30. Specifies that any provision, covenant or clause affecting a construction-manager-at-risk, design-build or job-order-contracting contract with the state or a political subdivision is void and unenforceable if it subjects the contract to the laws of another state or requires any litigation arising from the contract to occur in another state.
31. Removes language requiring a contractor to be paid any amount withheld by the state or a political subdivision as a guarantee for complete contract performance within 60 days of final completion.
32. Allows a material supplier to request notification from a government agency within five days of any progress payment made to the contractor.
Termination or Suspension of Work in a Contract
33. Allows a contractor or subcontractor to suspend performance or terminate a contract due a government entity's failure to timely pay any certified and approved amount.
34. Requires that notice of intention to suspend or terminate a contract, due to failure to timely pay by a government entity, be provided:
a) seven days before executing a suspension or termination for a contractor; and
b) three days before executing a suspension or termination for a subcontractor.
35. Specifies that a contractor or subcontractor is not deemed in breach of a contract for suspension of performance or termination due to the failure of a government entity to timely pay.
36. Allows a subcontractor to suspend performance or terminate a contract if a government entity:
a) timely pays certified and approved amounts, but the contractor fails to pay the subcontractor; or
b) declines to approve and certify portions of the contractor's billing or estimate for the subcontractor's work, but the reasons for withholding of approval are not the fault of, or directly related to, the subcontractor's work.
37. Requires notice of intention to suspend or terminate a contract by a subcontractor for reasons other than a failure to pay by the government entity to be provided to the government entity and the contractor seven days before executing a suspension or termination, unless a shorter period is required in the contract.
38. Specifies that contractors and subcontractors that suspend performance for authorized reasons are not required to furnish further labor, materials or services until the contractor or subcontractor is paid the amount that was certified and approved, plus any costs incurred for mobilization resulting from the shut down and start-up of a contract.
39. Requires written notice of a suspension or termination of a contract to be:
a) delivered in person to the individual or member of the entity for which it was intended; or
b) delivered or sent by means that provide written third-party verification of delivery to the last known business address of the entity.
40. Specifies that a provision, covenant or clause relating to a contract is void and unenforceable if it states that a party cannot suspend or terminate the contract if another party fails to make prompt payments pursuant to statute.
41. Exempts agricultural improvement districts from the definitions of contractor and subcontractor relating to void and unenforceable contract clauses.
ROC Complaints and Disciplinary Action
42. Specifies that any diversion by the contractor or subcontractor of payments received or failure to reasonably account for the application of payments, constitutes grounds for disciplinary action by the ROC, including suspension or revocation of a license.
43. Requires any licensed contractor or licensed subcontractor or material supplier that files a complaint with the ROC relating to payment of contract work to post a surety bond or cash deposit of $500 or half the amount due, whichever is less, with the ROC to secure the payment of claims.
44. Requires the ROC to order a complainant who files any claim determined to be without merit and frivolous to pay:
a) half of the amount of the required surety bond or cash deposit to the respondent; and
b) half of the amount to the ROC for deposit into the state General Fund.
45. Requires that the surety bond or cash deposit be:
a) returned to the complainant if a claim is not made against the surety bond or cash deposit; and
b) in the name of the licensed contractor, licensed subcontractor or material supplier that files the complaint.
46. Specifies that the security bond or cash deposit is conditioned on and must provide for payment on the presentation of a certified copy of a ROC order and a certification by the complainant of nonpayment within 30 days of the final ROC order.
47. Requires that the surety bond be executed by the complainant as principal with an authorized surety corporation in Arizona.
48. Requires that evidence of the surety bond be submitted to the ROC in an acceptable form.
49. Requires that the cash deposit be deposited by the ROC in the Contractors Prompt Pay Complaint Fund and held to pay claims.
Miscellaneous
50. Requires the procurement rules for school districts adopted by the State Board of Education to strictly comply with prompt payment requirements.
51. Requires the procurement policies adopted by ABOR and the judicial branch to strictly comply with statutory prompt payment requirements.
52. Defines contract, contractor, design professional services contract, design professional services, final completion, retention, subconsultant, subcontractor, substantial completion and work.
53. Makes technical and conforming changes.
54. Becomes effective on the general effective date.
Prepared by Senate Research
February 7, 2019
MH/kja