Ariz. Admin. Code § R7-2-1104 - Contract Payment Retention and Substitute Security

A. Ten percent of all construction contract payments shall be retained by the school district as insurance of proper performance of the contract or, at the option of the contractor, a substitute security may be provided by the contractor pursuant to this Section. The contractor is entitled to all interest from any such substitute security. When the contract is fifty percent completed, one-half of the amount retained or securities substituted pursuant to this Section shall be paid to the contractor upon the contractor's request provided the contractor is making satisfactory progress on the contract and there is no specific cause or claim requiring a greater amount to be retained. After the contract is fifty percent completed, no more than five percent of the amount of any subsequent progress payments made under the contract shall be retained providing the contractor is making satisfactory progress on the project, except if at any time the governing board determines satisfactory progress is not being made, ten percent retention shall be reinstated for all progress payments made under the contract subsequent to the determination.

B. Notwithstanding subsection (A), there shall be no retention for job-order-contracting construction services contracts. The school district may elect to have no retention for construction-manager-at-risk and design-build construction services contracts. If the school district elects to have retention, then payment retention for construction-manager-at-risk and design-build contracts shall be in accordance with this Section.

C. Retention applies only to amounts payable for construction and does not apply to amounts payable for design services, preconstruction services, finance services, maintenance services, operations services, or any other related services included in the contract.

D. The form of substitute security is limited to the following:

1. An assignment of time certificates of deposit by financial institutions licensed by this state;

2. Share certificate of a financial institution or credit union authorized to transact business in this state; or

3. Security issued or guaranteed as to principal and interest by:

a. The United States;

b. The state;

c. Counties, municipalities and school districts within this state.

E. Conditions for use of substitute security.

1. A contractor may submit substitute security to replace contract payment retention if:

a. The use of substitute security is requested of the school district or designee for work performed under the contract. The contractor shall have the option of submitting the substitute security:

i. Prior to each progress payment in an amount of no less than five percent of each progress payment; or

ii. Once, prior to the first progress payment in an amount no less than five percent of the total contract amount.

b. The interest earned on such security shall accrue to the benefit of the contractor, but shall be retained until the school district has approved completion and acceptance of all work to be performed under the contract;

c. The term of such security shall not mature until after the estimated contract completion date; and

d. The security shall mature no later than one year after the estimated contract completion date.

2. The substitute security shall not be released without written approval by the school district.

3. A contractor may submit a single substitute security for more than one project provided that:

a. The amount of such security is sufficient to cover the aggregate retention amount;

b. The school district determines that such single substitute security is advantageous to the school district; and

c. Such security complies with the requirements of subsection (E)(1).

F. Any retention shall be paid or substitute security shall be returned to the contractor within 60 days after final completion and acceptance of work under the contract. Retention of payments by a school district longer than 60 days after final completion and acceptance requires a specific written finding by the governing board of the reasons justifying the delay in payment. No school district may retain any monies after 60 days which are in excess of the amount necessary to pay the expenses the governing board reasonably expects to incur in order to pay or discharge the expenses determined in the finding justifying the retention of monies.

G. The school district shall not accept any substitute security unless accompanied by a signed and acknowledged waiver of any right or power of the obligor to set off any claim against either the school district or the contractor in relationship to the security assigned. In any instance in which the school district accepts substitute security as provided in this Section, any subcontractor undertaking to perform any part of the contract is entitled to provide such security to the contractor.

Notes

Ariz. Admin. Code § R7-2-1104

Adopted effective December 17, 1987 (Supp. 87-4). Amended by exempt rulemaking at 33 A.A.R. 1526, effective 7/1/2014.