This Guide to Arizona retainage laws is meant to provide you with the rates, deadlines and more that you need to know to get paid what you've earned.

Retainage can be an incredibly effective tool for owners and GC to ensure proper completion of the project. From a sub and supplier perspective, this can be a frustrating practice. Although meant to provide an incentive to complete their work, cash is always tight for lower tier project participants. Arizona, like most other states, has enacted regulations to control the potential for abuse regarding retainage.

Arizona retainage laws

 Arizona’s retainage laws establish regulations regarding the withholding of retainage on both public and private projects. It’s important to know your jurisdiction’s laws regarding retainage because, after all, this is money that you’ve earned! This article will break down the two important questions when dealing with retainage; “how much?” and “how long?”

For a deep dive on retainage:

Private projects

Arizona retainage laws governing private projects are found in Ariz. Rev. Stat. §32-1129.01. These statutes provide a fair amount of leeway for owners to structure their retainage practices through their contract.

How much retainage can be withheld?

This statute doesn’t impose any specific limit on the amount of retainage that is allowed to be withheld. It merely states that property owners are allowed to withhold a “reasonable amount of retention.” What is considered a reasonable amount is left up to the courts. However, one thing to keep in mind is that the national average is somewhere around 5-10% per progress payment.

In some cases, owners may be permitted to withhold even more than the agreed-upon retention rate. These include things such as unsatisfactory job progress, defective work or materials, disputed work or materials, third-party claims, etc. One, in particular, is when there is reasonable evidence that the contract cannot be completed for the unpaid balance of the contract sum.”

If this scenario arises, an owner may withhold an amount sufficient to pay any direct expenses that the owner expects to incur to correct or supplement the disputed work.

When is retainage released?

Pay Period 7 days IconFrom the owner to the direct contractor

Owners in Arizona private projects must release retention to the contractor within 7 days after the payment application is certified and approved. A pay application is deemed to be certified and approved within 14 days after the owner receives the request unless, before then, the owner sends a written statement detailing the reasons the payment was not approved.

An owner can choose to extend this period, but only if the contract contains clear and conspicuous language providing for the extended time. To do so, the following statutory language must be included on every page of the bid and construction plans.

“Notice of Extended Payment Provision: This contract allows the owner to certify and approve billings and estimates for progress payments within ___ days after the billings and estimates are received from the contractor, for release of retention within ___ days after the billings and estimates are received from the contractor and for final payment within ___ days after the billings and estimates are received.”

From the direct contractor down the chain

In turn, once a direct contractor receives any retainage form the owner, they have the same 7-day period to pay retainage to their subs. This deadline also applies to retention payments from the subs to their subs and suppliers, and so on down the payment chain.

Subcontractors may be asking themselves, how will I know if I am receiving my retention in a timely fashion? Well, all it takes is a simple request. The statute provides that upon a written request from a subcontractor, the owner is required to notify them anytime progress, final or retainage payments are released within 5 days.

Interest rate

Any retainage funds improperly withheld past the deadline to release payment will incur some penalties. The retainage will amount will accrue interest in favor of the payee at a rate of 1.5% a month, or a higher rate if specified within the contract terms.

Public projects

Any retainage on an Arizona public works project is governed by Ariz. Rev. Stat. §§34-221 and 34-609. 

How much retainage can be withheld?

Retainage 10% IconThe owner shall retain 10% of the amount of each estimate until final completion and acceptance of all material, equipment, and work covered by the contract.

Owners on private projects may withhold an amount from the progress payment sufficient to pay the expenses the owner reasonably expects to incur, in correcting the deficiency set forth in writing.

The direct contractor may elect to substitute securities in place of retention. This option is available to subcontractors and the like, but only if the direct contractor opts to do so first.

Halfway point in the project

Once the work has reached the 50% completion mark, the owner should reduce retention to no more than 5%. However, there is an exception to this. If at any point, the owner determines that satisfactory progress is not being made on the project, they can choose to reinstate the 10% retention rate.

This mid-way point also holds some extra significance for specific types of contracts. These being construction-manager-at-risk, design-build, and job-order construction contracts. On these types of projects, contractors a right to request some of the retention payments. If the contractor has been performing satisfactory work, they may request that one half of the amount of retention withheld to be released.

Payment Period 60 Days Icon

When is retainage released?

Upon completion and acceptance of the work, payment including retention should be paid in full. This is to be done within 60 days after completion of the filing of a Notice of Completion.

Any retention withheld longer than the 60 day time period either needs to be justified by the owner in writing. If not, the improperly withheld payments will begin accruing interest at a rate of 1.5% per month.

Bottom line

Retainage is a construction industry standard. There’s no use in fighting it because it exists on basically every construction project in the country. Arizona retainage laws have set out relatively clear provisions concerning the withholding and release of retainage. Prudent contractors and subs should be aware of their rights to their hard earned money.

Additional resources

Arizona Retainage Laws | A Guide to Private & Public Projects
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Arizona Retainage Laws | A Guide to Private & Public Projects
This Guide to Arizona retainage laws is meant to provide you with the rates, deadlines and more that you need to know to get paid what you've earned.
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