This article is taken from a webinar that was hosted by SunRay Construction Solutions and features Kevin M. Estevez who represents Arizona business owners, contractors, subcontractors, and construction suppliers. He is a partner at Holden Willits as well as a prolific writer with his own blog called ‘Arizona Construction and the Law.’
This is the ninth part in our series of articles on lien and bond claim laws, and general construction law in Arizona.
- Part 4: Bad Checks and Credit Card Chargebacks – How to Deal with Them in the Context of Construction Debts
- Part 9: Getting Paid Faster in Arizona with Liens, Bonds and Contracts
In order to get paid faster in Arizona and in most states, contractors and suppliers have several remedies in the event of nonpayment and those primarily consist of contract claims, bond claims and mechanic’s liens.
Contractor and Supplier Remedies in the Event of Nonpayment
Depending on the nature of the project, there are some of the most effective sources of getting paid and getting paid faster. Contract claims can also be effective. Arizona also has potential, depending on the situation, nonpayment claims that can be filed with the Arizona Registrar of Contracts and other potential remedies. But we will talk mostly about contract claims, mechanic’s liens, and bond claims.
Step 1: Enter a Favorable Contract
First, the first step to getting paid faster is always to negotiate a favorable contract.
a. Look to the contract
It may sound rudimentary, but the basis for nearly every relationship in the construction industry is in the contract that the parties negotiate, whether it be the prime contract that the general contractor enters into with the owner, the subcontract that the general contractor enters into with a particular trade, or the credit agreement that a material supplier enters into with a trade.
i. A.R.S § 32-1158(A) sets forth 9 minimum elements that every prime contract must contain
So with respect to the terms of the construction contract, as reflected in A.R.S § 32-1158(A). It sets forth nine minimum elements that every construction contract must contain.
b. Many provisions in construction contracts or credit agreements can affect timing of and ability to collect payment
When referring to every construction contract, you should remember that this means prime contracts and those are general requirements like data completion, payment terms, payment schedule, and things of that nature.
Interestingly enough, while 32-1158 does require specifics in terms of contract terms, if those specifics are not included within the contract, the statute specifically says that that does not render the contract unenforceable.
But aside from the minimum that you would need in a contract, and some of them will affect payment, there are numerous provisions that you can imagine in construction contracts or credit agreements. These can affect the timing of and the ability to collect payment including payment terms, and this also includes claim notice provisions, and interest provisions.
If payments are not made in a timely fashion, what interest is going to accrue on those dispute resolution clauses. If there is a dispute over something that happens on a project, how does that play out? Are there informal negotiation procedures, is there mandatory mediation, is there an alternative dispute resolution in terms of an arbitration that is ultimately going to decide the dispute rather than proceeding with a civil lawsuit to collect payment?
There are also more specialty clauses that can pop up such as the no-damages-for-delay clauses, pay-if-paid provisions, and attorney’s fees provisions. So all of these things can affect the ability of a contractor or a supplier to get paid and they are all things that need to be carefully looked at in entering into a contract.
For each of these subjects, you could spend a whole number of articles, but in this article, they will be touched upon briefly.
c. Arizona’s Prompt Pay Act
One thing to keep in mind is that Arizona has a Prompt Pay Act. The state was at the forefront of instituting Prompt Pay Acts back in the day. Arizona's Prompt Pay Act will likely govern payments on all projects lasting longer than 60 days.
Arizona’s Prompt Pay Act
Now we will touch a little bit on Arizona’s Prompt Pay Act.
a. Arizona has private and public sector Prompt Payment Laws
Arizona has both private and public sector Prompt Payment Laws.
b. A.R.S. § 28-6924, A.R.S. § 41-2577, and A.R.S. § 34-221 govern public construction projects
A.R.S. § 28-6924 governs ADOT projects, then you have A.R.S. § 41-2577 which governs state projects, and § 34-221 which is for city, county, and improvement district projects. These are the Prompt Pay Laws that cover public construction projects.
c. A.R.S. § 32-1181 et seq., governs private construction projects lasting more than 60 days
A.R.S. § 32-1181 et seq., is the Prompt Pay Law that governs private construction projects lasting more than 60 days with the following exceptions:
- Only applies to residential (owner-occupant projects) if the contract with or invoices to an owner-occupant contain notice that the Prompt Pay Laws apply; and
- The parties can alter the billing cycle by: (1) Providing for a different payment schedule in the prime contract in a ‘clear and conspicuous manner;’ and (2) placing a statutory Notice of Alternate Billing Cycle on every page of construction and bid plan.
The first point means that the Prompt Pay Act will not apply to residential (owner-occupant) projects if the contract with or invoices to an owner-occupant do not contain a notice that the Prompt Pay Law applies. The idea behind this is that people who enter into contracts for construction of homes that they live in are probably not as sophisticated as the folks that work in the construction industry on a regular basis.
If the Prompt Pay statutes are going to apply to their projects, they need to be spelled out in the contract so that they have some sort of frame of reference. So for owner-occupant projects that last longer than 60 days, the Prompt Pay Statute will apply only if there is specifically a notice in the contract that says it applies.
The Prompt Pay statute can be opted out of in any construction project in Arizona, even those lasting longer than 60 days. But it is a rather onerous process and consequently, it is not done very often.
The second point says that the parties can alter the billing cycle through two ways. The idea behind this is if you are going to use a billing schedule that differs from what the Prompt Pay Laws provide, you have to let everyone on the project know so that they can alter their expectations.
The idea of placing the notice on the plans is to give those trades that are going to work on the project and bid the project notice up front that the billing cycle is going to be different from what they typically encounter.
It is a fairly onerous process and as a result, it is not done very often which means that in most cases, if you have a private construction project that is not residential, Arizona Prompt Pay Laws are going to apply. That is irrespective of what is in the contract.
Arizona’s Private Sector Prompt Pay Act – Key Terms
So what is Arizona’s Prompt Pay Act and what does it provide?
a. Standard billing cycle is 30 days
It generally provides a standard billing cycle that is 30 days. In that 30-day billing cycle, it is broken down into several different key dates or milestones.
The first is that once an owner receives a pay application from a general contractor, they have 14 days to review and object in writing to the contents of the payment application. If they do, then that objection is noted and preserved. If they do not do anything within those 14 days, then the pay application is deemed certified and approved.
b. Owner, contractor, and subcontractor have deadlines to approve/pay
That brings us to the next step, that once the payment application is certified and approved, the owner has 7 days to pay the general contractor and the general contractors then have 7 days to pay their subcontractors.
So there is a 14-day time frame to review and approve, and 7 days after that for the owner to make payment and then 7 days after that for the subcontractors to get paid by the general contractor.
c. Owners, contractors, and subcontractors can refuse to approve or certify payment invoice by objecting in writing
As mentioned above, the objection to a pay application has to be in writing.
d. Sums due but not timely paid bear 18% interest
The Prompt Pay Acts also provides that interest will accrue on all paid sums at 18%. It also provides a mechanism to recover attorney’s fees.
Step 2: Serve a Preliminary 20-Day Notice
The second step and going back to the first step, bear in mind that the Prompt Pay Laws are going to most likely apply to the project and know those. There are other different mechanisms in the statute that assist contractors in getting paid and can be very effective and helpful.
a. Some lien claimants and Little Miller Act bond claimants must serve a Preliminary 20-Day Notice
The second step is to serve a Preliminary 20-Day Notice. Except for labor for wages, every lien claimant and some Little Miller Act bond claimants in Arizona must serve a Preliminary 20-Day Notice within 20 days of beginning work according to A.R.S. § 33- 992.01(B).
i. Not serving a 20-Day Notice means you forfeit all lien rights
If you do not serve a 20-Day Notice, and you are a lien claimant, you forfeit all lien rights. If you are a bond claimant, you may forfeit your bond rights.
ii. Not serving a timely notice means you forfeit a portion of all lien rights
If you do not timely serve a 20-Day Notice, you can forfeit a portion of your lien or bond rights. So it is really important if you want to preserve your right to payment in Arizona. At least serve a Preliminary 20-Day Notice.
In Delmastro & Eells v. Taco Bell Corp, the court says that the 20-Day Notice is designed to give the owner advanced information of the identities of any unpaid claimants who may perfect liens against the property if their debts remain unsatisfied. So the whole purpose of 20-Day Notices is to put owners on notice of the individuals that are performing work and give the owners an idea of who may be making lien claims in the event that they are not paid.
Contents of an Arizona Preliminary 20-Day Notice
The contents of Preliminary 20-Day Notices can be found in A.R.S. § 33-992.01(C).
According to sub-section C, 20-Day Notices must contain the following information:
- A description of the labor or materials that will be furnished and an estimate of the total price thereof;
- The name and address of the person furnishing the labor or materials;
- The name of the person who contracted for the purchase of the labor or materials;
- An adequate description of the jobsite for identification; and
- A specific statutory ‘Notice to Property Owner’ prescribed by A.R.S. § 33-992.01(C)(5)
A.R.S. § 33-992.01(D) includes a sample 20-Day Notice
The A.R.S. § 33-992.01(D) includes a sample 20-Day Notice and the Preliminary 20-Day Notice that you serve, and you must substantially file the statutory form.
a. Serving Preliminary 20-Day Notices – Who to Serve
Now whom should you serve your notice on?
i. 20-Day Notices must be served on several individuals
Once you have a 20-Day Notice completed, it must be served on the owner or the reputed owner, the original contractor or reputed contractor, the construction lender or reputed construction lender; and the person with whom the claimant contracted.
ii. Should be addressed to recipients at their residence or business address and served via specific mail
It should be addressed to the recipient at their residence or business address and served via either first-class mail with a certificate of mailing or registered certified mail with prepaid postage.
iii. The 20-Day Notice is deemed served when deposited in the mail
The 20-Day Notice is deemed served when they are deposited in the mail.
b. Serving Preliminary 20-Day Notices – When to Serve
Now as mentioned above, there is a potential to waive a portion of your lien claim or bond claim rights if you do not timely serve a 20-Day Notice. So when do you serve it?
i. Serve within 20 days of first commencing work or furnishing materials
The short and simple answer is to serve it right when you start work on a project. Because what happens with 20-Day Notices is they reach back 20 days. So if you have a project that you first furnish labor or material to, say, August 1st but you neglect to serve the 20-Day Notice until August 30.
Well, the 20-Day notice will reach back to August 10th and then you would have lien rights for all the material that you furnish from August 10 going forward on the project, provided you comply with the rest of the preliminary 20-Day requirements. But that period from august 1 to august 10, you would not have lien rights for.
So as can be imagined, as you go further on a project, and the longer you wait to serve a 20-Day Notice from you when you start, the longer the period of time, you are not going to have lien rights for a larger section of your contract or portion of your contract.
ii. 20-Day Notice can be served later than 20 days after labor and/or materials are first furnished to project
As noted in the statute, those who serve 20-Day Notices and wait until after they first furnished labor or material on the project forfeit their lien rights for that portion of time where they are not served. They are not effective, and they only reach back 20 days.
Step 3: Supplement the Preliminary 20-Day Notice if Necessary
So the long and short of it is to send your 20-Day Notice up front right when you start work on the project.
a. Correctly state ‘estimate of the total price’ of labor or materials to be furnished
Make sure it has the correct ‘estimate of the total price’ or value of the labor and materials you intend to furnish to the project. Monitor that with change orders because at some point, you may need to supplement your 20-Day Notice.
Lien is limited to 130% of estimate amount in 20-Day Notice
Pursuant to A.R.S. § 33-992.01(H), a claimant’s lien rights are limited to 130% of the amount in the 20-Day Notice.
So for simplicity’s sake, say there is a contract for $100,000 on a project and you have change orders for $20,000, well because you have lien rights up to 130% of the estimate of the total price and the Preliminary 20-Day Notice, you would be covered.
When calculated, 130% of $100,000 is $130,000. You are fine. But if change orders increase the cost of the total cost of work on the project beyond that $130,000 amount. You need to supplement your 20-Day Notice to reflect the additional amounts, or you will not have lien rights for those.
b. If contract amount is increased beyond this limit, 20-Day Notice should be supplemented
Again, this reaches back 20 days and where people make mistakes and what you want to avoid, is to avoid doing piecemeal supplementations.
That is where the initial amount of the contract is $100,000. There is a change order that bumps the contract amount to $140,000 and in the circumstances some circumstances will send out an original notice for $100,000 in a supplement for $40,000. They will put $40,000 in the section for the estimate of the total price and the supplemental notice. You want to avoid doing that.
i. Supplemental 20-Day Notice should be served within 20 days of furnishing additional labor or materials
So as with the initial service, the 20-Day Notice, the supplement should be served within 20 days of furnishing the additional labor or materials.
ii. Supplemental Notice must set forth new estimated total price
The estimate of the total price in a supplemental notice should be the aggregate of the labor or materials you are furnishing to the project, which in that case would be $140,000.
So be careful with your supplementations and avoid piecemeal supplementations.
Step 4: Know your Deadline to Record a Mechanic’s and Materialman’s lien or make a payment bond claim
Step 4 to getting paid quickly with contracts, bonds, and liens is to know your deadline to record a mechanic’s lien and to know your deadline to make a bond claim.
a. Liens cannot be recorded on public property
On private projects, mechanic’s liens assert an ownership interest in real estate on the grounds that the claimant provided services or materials to improve the property but has not been paid, liens cannot be recorded on public property.
b. Owner-occupied residence cannot be liened unless contractor or supplier has direct contract with owner
An owner-occupied residence cannot be liened unless the contractor or supplier has a direct contract with the owner.
c. If project is built for tenant, contractor/supplier may only have lien rights against tenant improvements
If the project is being built for a tenant, the contractor or supplier may only have lien rights against tenant improvements. So those are the things to be mindful of.
d. For public property, federal and state law require payment bonds on projects of certain type and size
There are limitations on lien rights on private projects because public property cannot be liened. Federal and state law requires payment bonds on projects of certain types and sizes. Qualified subcontractors and materialmen may have claims against the payment bonds if they satisfy certain notice requirements.
So the big picture on private projects is that there are no lien rights except for particular situations in Arizona and on public projects. But likely a payment bond is going to be required under the Federal Miller Act or Arizona’s Little Miller Act that you may have a claim on, provided that you satisfy certain notice requirements.
A Lien Must be Recorded Within 120 Days after Project Completion
For purposes of recording an Arizona lien, generally, you have 121 days after project completion as set forth in A.R.S. § 33-993(C).
a. ‘Completion’ usually occurs 30 days after Certificate of Occupancy is issued
Completion usually occurs 30 days after a Certificate of Occupancy is issued. So on those projects where a Certificate of Occupancy is issued, you have 120 days from that certificate to record a lien.
b. If no certificate will be issued, completion occurs on last day when labor or materials are furnished
If no Certificate of Occupancy will be issued, completion occurs on the last day when labor or materials are furnished. So in that circumstance, you would have 120 days from the last date that labor and materials are furnished to record your lien.
c. Completion occurs if work stops for 60 days, and stoppage is not due to an ‘Act of God’
Completion occurs if work stops for 60 days, and stoppage is not due to an ‘Act of God.’ So if a project is halted for 60 days, then those 60 days would be counted from when the project is halted. That is ‘completion.’ You have 120 days after that to record your lien.
The caveat on these time frames and the only thing that can shorten the time frame to record the lien is if A Notice of Completion is recorded.
d. If Notice of Completion is recorded lien recorded deadline expires 60 days after notice is recorded
If that is the case, then the deadline to record a lien is at least 60 days after the Notice of Completion is recorded. In that circumstance, the owner must provide a copy of the Notice of Completion to every person who served a Preliminary 20-Day Notice.
Payment Bond Claim Notice Requirements
With respect to payment bond claims, there are two acts to keep in mind.
a. Federal Miller Act
Under the Federal Miller Act, laborers and materialmen with no direct relationship to the general contractor furnishing the payment bond, [must] give written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made.
Under the Federal Miller Act, there is no Preliminary 20-Day Notice requirement, but there is a requirement that if you do not have a direct relationship with the contractor furnishing the bond, you have to give them notice within 90 days of when you last did work or furnished materials to the project and that you have not been paid.
b. Arizona Little Miller Act
Arizona’s Little Miller Act which is modeled after the Federal Miller Act, is a little bit different. A claimant who has a direct contractual relationship with a subcontractor of the contractor furnishing the payment bond but not a contractual relationship express or implied with the contractor has a right of action on the payment bond on giving the contractor the following notices:
- A written Preliminary 20-Day Notice pursuant to A.R.S. § 33-992.01
- A written 90-day Notice given within 90 days after the claimant last performed work or furnished material stating the:
(a) amount claimed, and
(b) the party to or for whom the material was supplied, or the labor was performed.
In Arizona, if you do not have a direct relationship with the contractor furnishing the bond (the general contractor), you have to serve a Preliminary Notice, which is the same notice that is required for lien claims that were spoken about above. And you have to give a 90-Day Post-Completion Notice saying the amount you want to claim and who the labor or materials were performed for.
In Arizona, the notice requirements on Little Miller Act bond claims are a little bit more onerous than on the Federal Miller Act bond claims. That is all the more reason to make sure that you are in the habit of getting 20-Day Notices sent out when you start work on a project.
Subcontractors and Suppliers Protected by Miller Act and Arizona Little Miller Act Payment Bonds
Below is a chart of subcontractors and suppliers protected by the Federal Miller act and Arizona’s Little Miller Act.
Those subcontractors and suppliers that have relationships with the general contractor, obviously the subcontractor, is protected. First-tier suppliers are protected as well. The second-tier subcontractors and suppliers are also protected under the bond claim provided they give the correct notice. Third-tier suppliers and second-tier suppliers, in this situation, a supplier to a supplier, on a pure supplier’s side is not protected.
Step 5: Know your Deadline to File Suit to Foreclose on the Lien, Recover Against the Bond, or Assert a Breach of Contract Claim
Step 5 is to know your deadline to file suit to foreclose on the lien, recover against the bond, or assert a breach of contract claim.
a. Claimant must sue to foreclose lien claim within six months.
A claimant must sue to foreclose its lien claim within six months.
i. Foreclosure asks court to order sale of property to satisfy liens
A foreclosure asks the court to order the sale of the property to satisfy liens. Claimants with valid mechanic’s liens share the proceeds.
ii. If no foreclosure action is filed within 6 months, lien expires by operation of law
If no foreclosure is filed within six months after the lien is recorded, the lien expires by operation of law.
b. Payment Bond Claim Deadlines
Now we have the rules for a payment bond claim deadline.
i. Must wait 90 days to recover on the bond
You must wait 90 days under the Miller Act or Arizona’s Little Miller Act after you last furnished labor and materials to the project to make a claim on the bond.
ii. Statute of Limitations for filing suit on bond claim expires one year after date that labor or materials were supplied
You have a year from when you last furnished labor or materials to a project, to sue on the payment bond. So you cannot sue for 90 days after you first furnish labor and materials on a project, but then you have a year from when you last furnished labor or materials to sue to foreclose.
c. Statute of limitations on contract actions
The Statute of Limitations on a breach of contract claim in Arizona on a written contract is six years. So you have more time.