Retainage in the Southwest: A Look Into Arizona and New Mexico Retainage Laws

Retainage is a practice, standard in the construction industry, of withholding predetermined portions of payments due to the contractor until the project is complete. Developers (including project owners and their lenders) prefer requiring retainage for three primary reasons. First, retainage encourages their contractors to successfully complete construction (i.e., to attain the full amount owed to them). Second, it allows developers to maintain a pulse on construction. Third, the developers can access and apply the “retained” amount toward completing construction if the contractor breaches its obligations. Retainage thus protects project owners and lenders by hedging the risk of construction. 

However, retainage can create cash flow challenges for contractors because they are not paid in full until after they complete the work. Retainage is commonly a percentage (often 5-10%) that is withheld from each progress payment until a set milestone is reached. For example, if a project has 10 estimated payments of $100,000 each and a set 10% retainage is agreed to, the owner will only pay $90,000 for each payment. The retained $100,000 would be released upon completion or after a period specified in the contract. State regulations governing retainage laws in the southwest vary, as represented by Arizona and New Mexico statutory retainage laws.

Retainage in Arizona

In Arizona, retainage laws vary depending on whether the project is privately or publicly funded. Generally, the Arizona Prompt Payment Act governs construction projects and sets rules designed to ensure that contractors and subcontractors who have performed according to their contracts are timely paid. Layered within that legislation includes a permission for retainage with respect to private projects. For private projects, an owner may withhold a “reasonable amount of retention.”¹ However, the amount retained can only be an amount that is sufficient to pay the direct costs and expenses the owner reasonably expects to incur to protect the owner from loss for which the contractor is responsible.² On substantial completion of the work, a contractor shall submit a billing or estimate for release of retention.³ This billing or estimate shall be deemed approved within 14 days after the owner receives it.⁴ The owner then has 7 days to pay the contractor.⁵  

For public projects, the rate of retainage is 10% of the approved billing or estimate of the work.⁶ An estimate is deemed approved for payment 7 days after it is submitted, however, the owner can withhold a reasonable amount to cover any deficiencies in the work by the contract.⁷ Payment then must be made within 14 days after the work is certified and approved.⁸ When the contract is 50% completed, the contractor can request the release of half of the retained payment.⁹ Thereafter, retainage is limited to 5% so long as there is satisfactory progress.¹⁰ If the progress is not determined satisfactory by the owner, the 10% retention rate shall be reinstated.¹¹ Retainage must be paid within 60 days after completion of the contract.¹² In lieu of retainage, a contractor may choose to provide substitute security equal to 10% of the contract.¹³  

Retainage in New Mexico

In New Mexico, retainage in construction contracts is prohibited for privately or publicly funded projects.¹⁴ There is a narrow exception only for road contracts.¹⁵  More typically, all contract payments are required within 21 days of the owner receiving an undisputed request for payment.¹⁶ If the owner is a local public body, the payment must be made within 45 days if certain protocols are followed.¹⁷ Moreover, 10 days after certification of completion, any amount remaining due to the contractor shall be paid.¹⁸ 

One way project owners overcome this prohibition is by structuring payments such that the payment amounts increase over the course of the contract, with the largest payment due upon final completion of the work. For example, if a contract is for $100,000, the project owner and contractor can agree that during construction, eight regular monthly payments will be made in the amount of $10,000 each, with a final payment in the amount of $20,000 due upon final completion. 

While retainage is subject to debate among owners, contractors, and subcontractors, this practice remains in many private and public construction contracts as allowed by state law. Given the varied laws state to state, it is prudent to check local laws prior to including any sort of retainage clause or expectation in a construction contract. In the southwest, the laws vary from a permitted 10% retainage (Arizona) to no retainage allowed (New Mexico).

Footnotes

1. ARIZ. REV. STAT. § 32-1182(D) (2002). [Back]
2. ARIZ. REV. STAT. § 32-1182(E). [Back]
3. ARIZ. REV. STAT. § 32-1182(H). [Back]
4. Id. [Back]
5. ARIZ. REV. STAT. § 32-1182(I). [Back]
6. ARIZ. REV. STAT. § 34-221(C)(2) (2022). [Back]
7. Id. [Back]
8. Id. [Back]
9. ARIZ. REV. STAT. § 34-221(C)(3)(2022). [Back]
10. Id. [Back]
11. Id. [Back]
12. ARIZ. REV. STAT. § 34-221(C)(5) (2022). [Back]
13. ARIZ. REV. STAT. § 34-221(C)(5) (2022). [Back]
14. N.M. STAT. ANN. § 57-28-5 (2021). [Back]
15. N.M. STAT. ANN. § 67-3-48. [Back]
16. N.M. STAT. ANN. § 57-28-5(B). [Back]
17. N.M. STAT. ANN. § 57-28-5(A). [Back]
18. N.M. STAT. § 57-28-8. [Back]