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.
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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!
For a deep dive on retainage:
Arizona retainage laws governing private projects are found in Ariz. Rev. Stat. §32-1129.01. These provisions are particularly interesting because they establish hard deadlines for not only approval but the release of payment after approval as well. However, these statutes provide a fair amount of leeway for owners to structure their retainage practices through their contract. They go so far as to provide the actual language required in the contract and construction plans
There is no limit to retainage on private projects
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, as there is no definition in the law that provides any guidance. However, one thing to keep in mind is that the industry average is somewhere between 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.
Timing of retainage payments
From the owner to the direct contractor
Ok, these provisions can tend to get a bit confusing, so I’ll break this down with a simple timeline of events. Let’s start from the beginning; the owner receives a payment application from the general contractor when they’ve reached substantial completion of the project.
Once the application is certified and approved, the owner must release retainage payments within 7 days. The statute states that a pay application is deemed to be certified and approved 14 days after receipt of the payment request. Unless the owner sends a written statement detailing the reasons the payment wasn’t approved.
That all seems relatively straightforward, except that all of these periods can be extended through contract terms. The statute goes so far as to even provide the necessary language to do so. The owner can extend both the time for certification and approval and also the time to release payment after certification and approval. To do so, the contract needs to expressly provide for later payment, and the bid and construction plans must contain the statutory language provided in the statute in clear, conspicuous type; provided in §32.1129.01(C)(2) and (F)(2).
From the direct contractor down the chain
Once the general contractor has received retention funds from the owner, they must pay the
applicable portion of retainage to their subs and suppliers within 7 days. The same goes for payments from subs to sub-subs, 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 within 5 days anytime a progress, final or retainage payment is made to the contractor on the construction contract. A request imposes the notice obligation on the owner for the duration of the sub’s work on the project. This is a useful way to keep track of payments on the project, to make sure that you are getting paid on time.
Any retainage funds improperly withheld past the deadline to release payment will incur some penalties. The retainage 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 contracts must withhold 10%
TFor public projects, the entity must withhold 10% of the contract amount to ensure proper performance. The direct contractor on the project may elect to substitute securities in place of having retainage withheld. Additionally, this option is also available to subs and suppliers. But it is only allowable if the prime contractor had opted to do so first.
There are, however, certain types of construction contracts that are or can be exempted from the 10% retainage requirements. Under §34.609(7), Arizona law states that there is no retention for job-order contracts. Furthermore, the government entity can elect to have no retention for construction-manager-at-risk or design-build contracts.
The halfway point in the project
Once the work has reached the 50% completion mark, the entity should reduce retention to no more than 5%. Furthermore, this milestone in the project is important for another reason. At this point, the contractor is allowed to submit a request to release one-half of all retained funds on the project up till that point, as long as the contractor is making satisfactory progress and there is no specific cause or claim requiring more money to be retained.
If at any point after the halfway mark, the owner determines that satisfactory progress is not being made on the project, they can choose to reinstate the 10% retention rate.
When is retainage released?
Lastly, contractors are entitled to the remainder of the retainage 60 days after final completion or the filing of a notice of completion of the contract. Any retainage withheld longer than 60 days needs to be justified by the owner in writing.
If the entity properly withholds retainage, it can’t be any more than an amount necessary to pay the expenses that they reasonably expect to incur due to the contractor performance. If the retainage is being improperly withheld, interest will begin accruing at a rate of 1.5% per month.
Retainage is a construction industry standard. There’s no use in fighting it because it exists on basically every construction project in the country. That’s because it gets the job done! 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.