A Contractors, Subcontractor’s and Supplier's Step-By-Step Guide to Getting Paid - Arizona - Webinar

In this blog, presented by SunRay Construction Solutions and Kevin M Estevez, Member, Holden Willits PLC, construction professionals in Arizona can learn about all these steps and leverage them to protect and preserve their payment rights and in turn get paid successfully for the work or services they provide on the construction jobs.  

What are the Remedies Regarding Payment Claims Available for Contractors and Suppliers?

In Arizona, there are two critical steps that should be taken to ensure that you get paid:

Step 1 - The first step that construction professionals need to comply with to get paid is to ensure that they have appropriate licenses and ensuring that they have the right licenses for the work they will be performing. If you don’t have the required licenses, then the Court may bar your case.  

Step 2 - The second step is to enter a contract, review the contract, and ensure that you understand the payment terms included in the contract. You must make sure that it has favorable payment terms to the extent you can negotiate those.

All the further steps discussed in this blog assume that you have successfully performed the above two steps.

Arizona law provides various remedies to contractors, subcontractors and suppliers who furnish labor or materials to construction projects. These remedies help them to collect the amount owed to them. The two most effective remedies in this regard are:

• Mechanics lien
• Payment bond claims

To preserve these claims, contractors, subcontractors and suppliers are required to timely serve a proper preliminary 20-day notice. So, if you are not doing so already, make sure that you start sending out your preliminary 20-day notice.

Arizona also has robust Prompt Pay Acts that offer protection to contractors, subcontractors, and suppliers.

These remedies are over and above your regular breach of contract claims and other avenues that can help the construction professionals to get paid.

Step 1 – Serve a Preliminary 20-Day Notice

The first step that you must take is to provide a preliminary 20-day notice. In Arizona, except for laborers for wages, every lien claimant and some Little Miller Act bond claimants must serve the preliminary 20-day notice.

• If you fail to serve the preliminary 20-day notice, then you will forfeit all your lien rights.
• If you fail to timely serve the preliminary 20-day notice, then you will forfeit a portion of your lien rights.
• A preliminary 20-day notice is to give advance information to the owner and others affiliated with the project that there is someone working on the project and expects to be paid.

A) Contents of an Arizona Preliminary 20-Day Notice

The 20-day notice should contain the below details:

• A description of the labor or materials that will be furnished and an estimate of the total price thereof.
• Name and address of the person furnishing the labor or materials.
• Name of the person who contracted for the purchase of labor or materials.
• An adequate description of the jobsite for identification.
• A specific statutory “Notice to Property Owner” as prescribed by A.R.S. §33-992.01(C)(5).
• The Arizona legislature has provided a sample 20-day notice which must be substantially followed.

B) Serving Preliminary 20-Day Notices – Who to Serve?

Below are the parties on whom the 20-day notices must be served:

• Owner or reputed owner
• Original contractor or reputed contractor
• Construction lender or reputed construction lender
• Person with whom the claimant contracted

The notice should be addressed to the recipients at their residence or business addresses. You can serve the notice either via:

• First class mail with a certificate of mailing; or
• Registered or certified mail with prepaid postage.

A key point to remember is that in Arizona, 20-day notices are deemed to be served once they are deposited in the mail.

C) Serving Preliminary 20-Day Notices – When to Serve?

The timing of the service of a preliminary 20-day notice is also very important.

• Ideally, you should serve it within 20 days of first commencing work or furnished materials.
• The law does allow you to serve it later as well; however, you will not have lien rights for all the labor and materials you furnish. This is because in Arizona, a 20-day notice ‘reaches back’ only 20 days.
• For example, you have first furnished your labor/materials to a commercial project on March 1, but you have sent your preliminary 20-day notice only on March 30. In this case, you will have lien rights only for the labor/materials that you furnished on or after March 10.

People often wait to send these preliminary 20-day notices until they are in a payment dispute. However, you should avoid doing this and instead ensure that you send it out as soon as possible.

Step 2 – Know Your Rights Under Arizona’s Prompt Pay Acts

Step two is knowing what rights you have under Arizona’s Prompt Pay Acts.

• Arizona has private as well as public sector prompt payment laws.
• A.R.S. § 28-6924 is applicable on ADOT projects, A.R.S. § 41-2577 is applicable on state projects and A.RT.S. § 34-221 is applicable on other government public construction projects.
• The private construction projects that last for more than 60 days are governed by A.R.S. § 32-1181 et seq. with the below exceptions:
• The statute is applicable on residential projects, i.e., owner-occupied projects only if the contract or the invoices to the owner-occupant contain a notice that the prompt pay laws apply.
• Arizona law also allows parties on private projects to amend the prompt pay structure, but it needs to be done in a specific way:
• The parties will need to provide a different payment schedule in the prime contract in a ‘clear and conspicuous manner’; and
• They will need to place a statutory Notice of Alternate Billing Cycle on every page of construction and bid plans.
• This is done because downstream construction professionals typically expect that Arizona prompt pay laws apply and without any notice, they may not know that the project has deviated from this. Hence, you need to place the notice on every page so that the subcontractors that may be significantly downstream will be alerted when they look at their portion of the plans, that the project is following an alternate billing cycle.

A) Standard Billing Cycle on Public Projects

The standard billing cycle on public projects is structured around a 30-day billing cycle. The structure is set up as below:

• The owner receives the general contractor’s notice and has 7 days to approve it after receipt, and then has 14 days to make the payment.
• Once the general contractor receives the payment, they have 7 days to make the payment to the subs.
• Once the subs have received the payment, they have 7 days to pay the suppliers.

B) Standard Billing Cycle on Private Projects

The standard billing cycle on private projects is also structured around a 30-day billing cycle, similar to the public projects. However, there is on key difference:

• The owner receives the general contractor’s notice and has 14 days to approve it after receipt, and then has 7 days to make the payment. So, on private projects the time to approve and pay is slightly different from that of public projects.
• Once the general contractor receives the payment, they have 7 days to make the payment to the subs.
• Once the subs have received the payment, they have 7 days to pay the suppliers.

C) Key Provisions of the Private Sector Prompt Pay Laws

Here are some of the key provisions of the private sector prompt pay laws:

• As mentioned above, the standard billing cycle structure followed is 30 days.
• The owner has 14 days to approve the general contractor’s pay application and 7 days thereafter to make the payment.
• Contractors and subcontractors then have 7 days each after receiving payment to pay their subs and suppliers respectively.
• If the owner or the contractor is not happy with the work performed by the downstream and wants to refuse to approve the work and their pay application, they will need to object to it in writing.
• The prompt pay laws offer some protection to the contractors and subcontractors as well. They can suspend/terminate their performance if:
• They are not timely paid; and
• If they provide sufficient written notice to the upstream parties within certain timeframes set by the statute.
• Amounts that are due but are not paid in a timely manner may bear an interest rate of 18% per annum.

A key point to consider is to check if your contract has the pay if paid payment clause. In Arizona, this clause is enforceable in certain circumstances. However, it is still not clear on how the clause will mesh with Arizona’s prompt pay laws. So, if you do see the pay if paid clause in the contract, speak to your attorney about it.

Step 3 – Document Change Orders and Supplement Preliminary 20-Day Notice if Necessary

Step 3 is to focus on documenting change order and supplementing your preliminary 20-day notices. One of the key requirements for your preliminary 20-day notice is:

• To include an ‘estimate of the total price’ of the labor or materials that will be furnished. You don’t need to provide the exact amount because the Arizona statutory scheme offers some leg room on this to the contractors and subs. So, ideally,
• Your lien will be limited to 130% of the estimate amount that you include in the preliminary 20-day notice.
• For example, if you have a contract for $100,000 and you issue the preliminary 20-day notice, then you are protected up to $130,000.
• If there are change orders, then you need to document the changed work. You also need to have the written change order document signed by both the parties. So, when there's an issue of you not receiving payment, you can go back, and you have the documentation establishing what the agreement was with respect to the change work.
• If you get a change order and your total contract amount is beyond the 130% threshold, then your 20-day should be supplemented.
• For example, you have a change order for $50,000 and now your total contract value is $150,000 which is more than the $130,000 threshold. In this case, you will need to:
• Serve a supplemental 20-day notice and it must be served within 20 days of furnishing the additional labor or materials.
• The supplemental notice must set forth the new estimated total price. Sometimes people just mention the amount of additional labor, for example, $50,000 as per this example. However, the supplemental notice should include the aggregate amount of the estimate which should be $150,000 as per this example.

Step 4 – Know Your Deadline to Record a Mechanics and Materialman’s Lien or Make a Payment Bond Claim

Step 4 is to know your deadlines with regards to recording your mechanics lien or bond claims.

• A mechanics lien can be recorded on private projects, and it asserts an ownership interest in the real estate on the grounds that the claimant has provided services or materials to improve the property but has not been paid for it.
• You cannot put a lien on public property.
• Owner-occupied residence properties cannot be liened unless the contractor or supplier has a direct contract with the owner.
• If the project is being built for a tenant, then the contractor and supplier may only have lien rights against the tenant improvements. They may not have any lien right on the underlying parcel.
• Since public properties cannot be liened, the federal and state law require payment bonds on projects of a certain type and size.
• If the qualified subcontractors and materialmen satisfy the notice requirements, then they may have claims against the bond.

A) A Lien must be Recorded Within 120 Days after Project Completion

• In the majority of cases, a lien must be recorded within 120 days after project completion. So, whether you are someone who was part of the project in its initial stages or someone who worked on the last phase of the project, the 120-days timeline is applicable for everyone.
• For purposes of the Arizona law, a ‘completion’ usually occurs 30 days after a certificate of occupancy is issued. Then you have 120 days to record your lien, so ideally, you have about 150 days to record your lien.
• If no certificate of occupancy is issued, then completion occurs on the last day when labor or materials are furnished.  
• Completion may also occur if work stops for 60 days, and the stoppage is not due to an act of God. In this scenario, you will have about 180 days to record your lien.

The deadlines above may sound confusing but they main pint to remember is that you need to have completion and completion can be defined in various ways depending on how the project is going. You also need to remember that in most cases, the deadline is 120 days after completion for recording the lien.

However, there is one exception to this 120-day deadline:

• If the owner records a Notice of Completion, then the deadline for recording the lien is reduced to just 60 days after the notice is recorded. However, for this deadline to be applicable, the owner must provide a copy of the Notice of Completion to everyone who served a preliminary 20-day notice.  
• The notice should also be recorded in the county where the project is located.

B) I have Recorded My Lien – What Happens Next?

• Once you have recorded your lien, the first step is to serve the Notice and Claim of Lien. As per Arizona law, the lien claimants are obligated to serve a copy of their Notices and Claims of Lien on the property owners within a reasonable time of recording.
• The notice should be served via mail by first class, registered or certified mail along with a certificate of mailing, registration or certification.  
• Since the phrase ‘a reasonable time after recording’ is not clearly defined in Arizona law, the best step is to serve the notice as promptly as possible.

C) Payment Bond Claim Notice Requirements

• Federal Miller Act
• On public projects, general contractors are required to post payment and performance bonds.
• Under the Federal Miller Act, laborers and materialmen who do not have a direct contract with the general contractor furnishing the payment bind, must give a written notice to the contractor.
• This notice must be given within 90 days from the date on which the person performed the last of the labor or furnished materials for which the claim is being made.
• Arizona Little Miller Act
• Under the Arizona Little Miller Act, any claimant who has a direct contract with a subcontractor of the contractor furnishing the payment bond but has not direct contract with the contractor has to provide the following notices to exercise their claim rights:
• A written 20-day preliminary notice
• A written 90-day notice within 90 days after the claimant has performed the last work or supplied materials to the project. This notice should include the amount claimed and the party to or for whom the materials were supplied, or labor was performed.  

So, in a nutshell,  

• The first-tier subs and suppliers are protected by the Federal Miller Act and Arizona Little Miller Act Payment Bonds.  
• Second-tier subs and suppliers to first-tier subs are also protected but they need to send the required notices.
• Third-tier subs and suppliers and second-tier suppliers to suppliers are not protected.

Step 5 – Know Your Deadline to File Suit to Foreclose on the Lien or Recover Against the Bond

The last and final step is to know your deadline with regards to filing a suit to foreclose on the lien or recover against the bond.

• Lien claimants must sue to foreclose its lien within six months.
• Foreclosure means that you are asking the court to order the sale of the property to satisfy the lien amounts and those claimants who have a valid mechanics lien will share the proceeds.
• If you fail to file a suit within six months, then the lien will expire by operation of law.
• A key point to remember here is that when we talk about deadlines, there is a difference between months and days. So, if the deadline is six months, it does not automatically mean 180 days. You need to make sure that you are calculating these deadlines accurately.
• For payment bond claims, as per the Miller Act or Little Miller Act, you need to wait for 90 days after the last labor was furnished or materials were supplied to bring a lawsuit to recover on the bond.
• So, you cannot recover the bond before you provide the 90-day notice.
• Post the notification, you will have one year after the date the claimant last performed labor or supplied materials to file suit on a bond claim.

Key Takeaway

Having knowledge and information about all these key steps and ensuring adherence to all the notice and timing requirements will help contractors, subcontractors, and suppliers get paid successfully for the work they perform or he materials they supply on different types of construction projects.  

FAQs

What are the key steps for filing a mechanics lien in Arizona, and what deadlines should I be aware of?

The key steps for filing a mechanics lien in Arizona include sending a preliminary notice, recording the lien within a specific timeframe (usually 120 days after the last work or delivery), and then enforcing the lien within a certain period (usually within 6 months of recording the lien).

What are Arizona's preliminary notice requirements and how they impact payment rights?

In Arizona, preliminary notices are required to preserve payment rights for subcontractors and suppliers. Failure to send a preliminary notice within 20 days of first furnishing labor or materials can limit your ability to file a mechanics lien later on.  

What are some common mistakes contractors make that lead to payment delays, and how can they be avoided?

Common mistakes include not keeping accurate records of work performed and materials supplied, not sending timely invoices, and not following up promptly on payment issues. To avoid delays, it's crucial to maintain detailed records, send invoices promptly, and address payment disputes promptly.

In what situations can one pursue bond claims in Arizona, and what steps are involved in this process?

Contractors, subcontractors, and suppliers can pursue bond claims in Arizona when working on public projects or projects where a payment bond is in place. The process typically involves notifying the bond principal and surety, documenting the claim, and following specific legal procedures outlined in Arizona's bond claim laws.