Arizona Payment Terms Guide & FAQs

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Arizona Payment Terms Overview

Arizona Payment Terms Overview


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Pay when Paid valid Icon
Pay When Paid is Valid

When unambiguous, a pay when paid provision in Arizona can be enforced as a pay-if-paid clause sufficient to bar payment. However, any ambiguously worded clause is treated as a mere timing mechanism such that payment must ultimately be made.


Pay If Paid is Valid

Pay if paid clauses can be valid and enforceable in Arizona, provided that the clause sets forth that the clause is a specific "condition precedent" to payment. Note, however, that the clause is unenforceable when payment is not made due to gross mistake or fraud.


Trust Fund Statute Applies to Owner-Occupied Residential Projects Only

In Arizona, a construction trust fund statute exists, but is only applicable to direct contractors on owner-occupied residential projects. Since Arizona does not allow mechanics liens on owner-occupied residential projects by anybody other than a direct contractor, these trust fund requirements provide some protection to everybody else on the project.


Reasonable Amount of Retainage Icon
Retainage Only Limited to "Reasonable Amount"

While retainage amounts are not specifically limited in Arizona other than to a "reasonable amount" there are other requirements related to retainage. Property owners are required to notify subcontractors of release of retention within five days of the subcontractor’s request. Additionally, on substantial completion of the work, a contractor shall submit a billing or estimate for release of retention.


7
DAYS
Payment Due to Subs/Suppliers in 7 Days

For Subs & Suppliers, payment required within 7 days after payment received from above; unless otherwise agreed. Payment to GCs is required within 7 days from approval of invoice (invoice must be approved within 14 days of receipt), unless otherwise agreed in contract.


lien waivers regulated
Lien Waivers Are Regulated

The forms and process for exchanging lien waivers are very specific in Arizona, and regulated. It's important to follow the state's rules in order to make sure that proper form and procedure is used.

Pay when Paid valid Icon
Pay When Paid Valid

When unambiguous, a pay when paid provision in Arizona can be enforced as a pay-if-paid clause sufficient to bar payment. However, any ambiguously worded clause is treated as a mere timing mechanism such that payment must ultimately be made.


Pay If Paid Valid

Pay if paid clauses can be valid and enforceable in Arizona, provided that the clause sets forth that the clause is a specific "condition precedent" to payment. Note, however, that the clause is unenforceable when payment is not made due to gross mistake or fraud.


Trust Fund Statutes Does Not Exist for Public Jobs

In Arizona, a construction trust fund statute exists, but is only applicable to direct contractors on owner-occupied residential projects. Accordingly there is no explicit trust fund requirements for public projects.


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Retainage Initially Set at 10%

In Arizona, retainage is initially set at 10% - but once 50% of work is completed, retainage is limited to 5% if work is satisfactory.


7
DAYS
Payment Due to Subs/Suppliers in 7 Days

Payment to subs/suppliers due within 7 days after payment received from above. This can be modified by contract, but contract cannot "materially alter" the right to prompt payment. Payment to GCs due 14 days after approved invoice (invoice must be approved within 14 days from receipt).

Arizona has a lot of regulation surrounding construction payment – whether that is the time in which payments must be made, the treatment of construction funds prior to payment, the amount that can be withheld, and more.

It’s very important for construction participants in Arizona to carefully review their construction contracts. Payment terms included in contracts can alter and even completely prohibit a participant’s right to payment in certain circumstances. Clauses contained within general “standard” construction contracts can act as a complete bar to payment, so even commonly used templates must be examined thoroughly in order to ensure that project payment is set up in a fair manner.

There are some key laws that regulate the construction payment process in Arizona, which include:

And additionally, state statutes and case law frequently interpret how certain construction contract provisions should be interpreted, and whether the provisions should be allowed, turned into something else, or completely excised from the contract. This means that some specific payment terms included in construction contracts may be enforceable or unenforceable depending on the specific words used in the contract itself. This is particularly true with respect to pay if paid provisions. Although very common to see in construction contracts (after all, these provisions are within the AIA standard documents), these clauses require very specific language in order to be enforced in Arizona. Otherwise, they merely work as a mechanism that can delay the timing or payment, but not withhold it entirely.

If the “magic words” are used, though, a contract clause can completely bar the ability of a construction participant to recover payment. Arizona has strong public policy in protecting the rights on construction participants to get paid – but both pay when paid and pay if paid provisions are allowable and enforceable provided that specific and explicit language is included. This means that it is critical for construction participants in Arizona to read their contracts carefully, and make sure they understand what it is they say.

Also, Arizona has additional rules that apply to owner-occupied residential projects. Since mechanics liens are not allowed on owner-occupied residential projects for any party other than a direct contractor, Arizona has created alternate protections for sub-tier participants through a construction trust fund statute. This statutes works to ensure that there is a pool of “untouchable” money to provide protection to parties who would be protected by lien rights on other projects.

The Arizona construction trust fund requirements are set out in Ariz. Leg. §33-1005which states:

Monies paid by or for an owner-occupant to a contractor as payment for labor, services, materials… for which a lien is not provided… shall be deemed for all purposes to be paid in trust and shall be held by the contractor for the benefit of the person who furnished labor, services, materials…

Such monies shall neither be diverted nor used for any purpose other than to satisfy the claims of those for whom the trust is created and shall be paid when due to the person entitled thereto.

It’s important for everyone on a construction project to treat one another fairly. But, when it comes to signing construction contracts in Arizona, exchanging payment applications, holding construction funds prior to payment, and eventually, providing or receiving payment itself . . . it’s important to know the rules of the game. This page provides a resource to you to really understand those rules.

Payment Applications & Payment Terms FAQs in Arizona

The construction payment process is highly regulated in Arizona. It can be confusing to figure out when payments must be made, how to make them, and how to best protect your company from expensive problems. Here are some frequently asked questions that come up with the payment application and payment process on Arizona jobs.

Arizona Payment Terms & Payment Applications FAQs

Do Prompt Payment Requirements Apply to All Arizona Projects?

No. In Arizona, school projects are exempt from the general prompt payment requirements that specify particular time-frames for payment.

In Arizona How Long Can Funds be Retained?

In Arizona, the length that retainage can be withheld depends on the project type.

For private projects in Arizona, the owner must release retention to the contractor within 7 days after the date the billing or estimate for release of retention is certified and approved, unless otherwise specified in the contract.

For public projects in Arizona, funds must be released to the contractor within 60 days of completion or filing a Notice of Completion.

What are the Trust Fund Requirements in Arizona?

The trust fund requirements apply to the funds paid by the owner to the direct contractor. Arizona does not allow mechanics liens on owner-occupied residential projects by anybody other than a direct contractor. These trust fund requirements provide some protection to everybody else on the project. Arizona is strict in that provides individual officers and directors of a contractor in violation of the construction trust fund requirements, can be held personally liable, and any personal debts incurred because of it may not be discharged in bankruptcy. There is no requirement that the trust funds be held in a separate account with distinct accounting.

Can I Lose Out on Payment Because of My Contract?

Yes. Since Arizona allows pay if paid clauses to act as a ban to payment if payment is not received from above when specific wording is used in the contract, sub-tier participants can be at risk of losing out on payment if their contracts include a specifically worded pay if paid clause. Since many “standard” construction contracts, including AIA documents, contain pay if paid provisions, it is very important for construction participants to thoroughly review their contracts.

When language is included in Arizona construction contracts that specifically states that receipt of payment from above is a condition precedent to down-stream payment, it is enforceable to shift the risk of nonpayment down the payment chain.

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