Arizona’s Prompt Payment Act: Don’t Count On It
The Arizona Prompt Payment statute requires a contractor to pay “within seven days of receipt by the contractor or subcontractor of each progress payment or final payment, the full amount received for such subcontractor’s work and materials supplied based on work completed or materials supplied under the subcontract.” See A.R.S. 32-1129.02(B). As long as a subcontractor or supplier submits an invoice or payment request, and as long as there is no dispute over the quality of the work or materials, then the law demands that payment is made within seven days after the general contractor has been paid. As any contractor knows, however, payments are not always made as quickly as the statute requires. Why is this?
The answer can be found in the penalty provisions of the Prompt Payment Law. The penalties imposed upon a general contractor for violation of the Prompt Payment statutes are: (1) the Registrar of Contractors may take disciplinary action against a violating contractor; and (2) the violating contractor must pay interest at the rate of 1´% per month on the unpaid balance.
It would be difficult to find a contractor who would be concerned about having his license suspended or revoked because he waited thirty days to pay his subcontractors. Even if a complaint were filed with the Registrar of Contractors, it would probably take several months to hold a hearing. The contractor will probably have paid by then, which would take away the subcontractor’s incentive to spend the time and money necessary to pursue the complaint any further. Under these circumstances, it is unlikely that any significant disciplinary action would be imposed against the contractor, even after an administrative hearing.
It is also difficult to imagine that a contractor would make early payments merely to avoid a 1´% penalty ($150.00 per month for each $10,000.00 owed). Even after a delay of a month or two, contractors may simply offer to pay the principal amount, and subcontractors will probably take it to avoid fighting over the small penalty. In practice, the only way to enforce the 1.5% monthly interest penalty is by filing a lawsuit and asking the court to add that to your damages. However, if you have to file a lawsuit to enforce the Prompt Payment Law, then it really hasn’t done that much to ensure prompt payment.
Although the Prompt Payment Act looks good on paper, its weak penalty provisions make it a paper tiger, at best. In fact, uneducated subcontractors and suppliers, having heard about the Prompt Payment law and its seven-day payment requirement, may become lax in their contract negotiations or documentation. Don’t allow yourself to fall into this trap. Your interests will be much better protected, and you will improve your chances of prompt payment, by simply including contract terms that will give the general contractor a true incentive to pay you when agreed.