Arizona officials have enacted new "prompt pay" rules to keep cash flowing to struggling contractors, caught by banks and developers that have been withholding project payments in tough times. Gov. Janice K. Brewer (R) on May 11 signed into law a bill establishing retainage and final-payment timetables for properly completed construction work. Failure to comply results in penalties of 1.5% monthly interest charges.

 “Retention issues should be dealt with immediately and not be dragged out for cash-flow purposes, ” says Michael F. Markham Sr., president of Markham Contracting Co. Inc., Phoenix. “The banks have been a problem with this. They discourage developers from finishing the project, knowing they would foreclose upon [it] once it’s done, and then the contractor loses out on the retention. This law shortens the timeline.”

The law applies to project contracts, plans or specifications distributed on or after Jan. 1, 2011, and establishes a 21-day cycle for project owners to pay prime contractors for final monies due. Prime contractors, in turn, must pay subs and suppliers within seven days of receipt or provide a detailed written explanation for retainage.

“You can only withhold money when it’s an itemized part of the invoice, and it can’t be retroactive,” says Richard B. Usher, government-relations chairman for the American Subcontractors Association of Arizona. “We also have defined substantial completion in our statute, as when the owner begins beneficial use of the project or receives a temporary certificate of occupancy.”

The law protects a contractor from payment being wrongly withheld for defective work or materials when the contractor is not at fault. Further, owner payment retainage is limited to 150% of punch-list items as opposed to a percentage of the total contract value.

“It’s important in a very positive way,” says Eric Hedlundt, senior vice president of Tempe-based Sundt Construction Inc. “This bill was negotiated between owners, subs and trade groups to create a reasonable consensus.”

The law comes as Arizona faces the loss of 27,500 construction jobs statewide between March 2009 and March 2010, a 20% employment drop, the U.S. Bureau of Labor Statistic reports.

“With a continuing recession, it’s more important than ever to have subcontractors that have a healthy cash flow,” says David Mendes, spokesman for the American Subcontractors Association. “Many payment problems come toward the end of the project or at the end of a contractor’s work, so achieving timely release of those payments really means a lot.”