There is one simple truth in the construction industry, money needs to flow for work to happen.
For those who are involved in the construction sector of the economy, you will know that there has been a lot of buzz about the recent amendments to the newly styled Construction Act, R.S.O. 1990, c. C.30, formerly called the Construction Lien Act.
Some of the most significant changes have come about as a result of the fact that prior to these new legislative changes (which will take effect on October 1, 2019) there has been what some may call a broken system of payment in the construction industry. Presently, it is not uncommon for trade contractors to have to wait 120 days or longer to obtain payment for work that has been certified as complete.
Construction and Subcontractors
The current pre-amendment payment environment is rife with delays. Ultimately, payment delays provide an inherent advantage to owners and developers of construction projects over contractors and their subtrades as owners enjoy the time-value of the funds that they are not advancing to their contractors.
Delays in payments from owners to contractors have a trickle-down effect in the construction pyramid, where owners who are at the top of the pyramid prevent funds from flowing downstream to contractors, it will inevitably create delays in the payments from contractors to their subcontractors, sub-subcontractors and suppliers and so on.
Contractors and subcontractors in the present environment of payment delays effectively finance the completion of projects on their unpaid work and unlike lenders in traditional financing models, their additional costs incurred as a result of payment delays are largely uncompensated for.
Many of the clients that I serve in my construction law practice are small subcontractors who run businesses employing between two and ten employees. They are the parties who struggle the most when funds do not flow properly down the construction pyramid from owners to contractors to subcontractors. For them, payment delays increase the cost of financing their operations and can put them under serious financial strain as they already generally operate with less cash flow and credit; ultimately threatening their ability to even continue normal business operations. The problems can be exacerbated for those contractors and subcontractors who chose to protect their legal rights through the registration of constructions liens, as they will not only not be paid, but will incur further costs in what can often be long and drawn out legal battles.
The problem is a simple economic one. In order to operate your business you need positive cash flow at all times. Where you have negative cash flow, you are unable to continue to cover your business operating expenses, (called “cash outflow”); which in construction can be quite high, as salaries, material and equipment costs and mobilization/demobilization costs are high and must be paid throughout the course of a project. Where cash inflow from payments received for work performed is delayed, what results is a situation where contractors and subcontractors have negative cashflow and need to use and often exhaust, all credit options. There is often little option for trades to cease work in a delayed payment environment, because a work stoppage will result in further delays for the payment which ultimately originates from an owner.
Changes to Construction Lien Legislation
Several changes to the construction lien legislation in Ontario came into force on July 1, 2018, but the changes that will likely have the most impact on trades will be the introduction of the prompt payment schedule and mandatory adjudication for certain disputes, scheduled to come into force on October 1, 2019.
On October 1, 2019, the hope for many trades who have suffered under the pre-amendment regime is that money will finally start to flow in a reasonable fashion on construction projects.
Determinations will need to be made if your project is subject to the new rules at the time they come into force. But for those contracts to which it applies, the changes will effectively do away with the pay-when-paid model for payment on construction projects.
Once in force, owners, contractors and subcontractors must either pay or dispute the required payments through a procedure regulated through the Construction Act; which includes giving “notice of non-payment” within a set number of days after the submission of proper invoices.
Under the new regime, owners must either pay the amounts owing, under what are called “proper invoices”, no later than 28 days after receiving a proper invoice from a contractor, or provide a notice of non-payment with respect to some or all of the invoice, and pay any non-disputed amounts within those 28 days.
Contractors receiving full payment from owners must pay each subcontractor who supplied services or materials under a subcontract that were included in the proper invoice to the owner within seven days after receiving payment from the owner.
Where owners provide a notice of non-payment to a contractor, or if an owner fails to pay, a contractor will either pay a subcontractor within 7 days of receiving the notice of non-payment from an owner, or, the contractor will provide a subcontractor with a notice of non-payment and they will start adjudication within 21 days.
Subcontractors have seven days from their receipt of payment from a contractor, or their receipt of a notice of non-payment from a contractor, to either pay their sub-subcontractors or provide the sub-subcontractors with a notice of non-payment and start adjudication within the 21 days.
This system of payment or delivery of notice of non-payment and initiation of adjudication continue down the construction pyramid from contractors to sub-contractors and from subcontractors to their subcontractors and so on.
The most important thing that all of the players in the construction sector can do to prepare themselves for the new changes is to familiarize themselves with the rules and forms and create a system of diarizing dates for when payments or notices are due.
For contractors, there is the added requirement of ensuring that they have “proper invoices” in place to request payment.
The Construction Act
The Construction Act defines “proper invoice” as a written bill or other request for payment for services or materials in respect of an improvement under a contract, if it contains the following information and, subject to subsection 6.3 (2), meets any other requirements that the contract specifies:
- The contractor’s name and address.
- The date of the proper invoice and the period during which the services or materials were supplied.
- Information identifying the authority, whether in the contract or otherwise, under which the services or materials were supplied.
- A description, including quantity where appropriate, of the services or materials that were supplied.
- The amount payable for the services or materials that were supplied, and the payment terms.
- The name, title, telephone number and mailing address of the person to whom payment is to be sent.
- Any other information that may be prescribed.
Ensuring that invoices are in this format is a change that can be implemented for contractors in advance of the coming into force of the prompt payment regime on October 1, 2019.
The promise of these prompt payment amendments, yet to come into force, is a leveling of the playing field for contractors and subcontractors; which for many smaller companies is a welcome and long overdue change. It remains to be seen how the changes and the dispute resolution mechanisms will actually work in practice.
Prior to the new rules coming into force, companies would be wise to consider reviewing their practices to ensure they are ready for compliance and consulting with a lawyer if they have any questions or need direction on how to comply with the rules in their business operations.
The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. Readers are advised to seek specific legal advice in relation to any decision or course of action contemplated.