Prompt payment: What have you done for me lately?
When it comes to Ontario’s new prompt payment regime, some contractors might be asking, “what have you done for me lately?”
The fact of the matter is that some trades contractors still feel frustrated with the payment terms they’re seeing in their contract documents. But do they understand the depth and breadth of the tools available to them under the province’s Construction Act? And have they adjusted their operations to take advantage of mandatory prompt payment provisions?
Ottawa lawyer and Ottawa Construction Association board member Dan Leduc of Norton Rose Fulbright delivered a special session on prompt payment to a Link2Build webinar audience of about 100 people on November 12. His message was that the Construction Act provides the tools contractors need to dramatically decrease the time spent waiting for payment. It’s up to the contractors to use them.
Cash neutrality is the goal
Leduc began by explaining that the goal of Ontario’s prompt payment provisions is to allow contractors to become as cash neutral as possible. In other words, to reduce the time taken to recover costs spent on labour and materials as much as possible. Prior to the prompt payment regime being introduced, trade contractors could wait as long as 90 or even 120 days to collect on outstanding invoices. Not surprisingly, construction was one of the slowest-paid industries in the country.
“And in an industry that is almost entirely based on cash neutrality, eliminating delays is key to profitability,” he said.
Leduc explained that the prompt payment tools in place in Ontario are arguably the most comprehensive in place in any jurisdiction in North America, and possibly even the world. Ontario’s regime borrows from elements of the United States, where prompt payment has been in effect since the 1980s, and from the United Kingdom, where contractors have used a system of adjudication to resolve disputes quickly since 1996.
“These tools are available to everyone in Ontario’s construction industry, but they mean nothing if you don’t use them,” Leduc said. “Why would you continue to use a wooden ladder when a scissor lift is available?”
Contractors will have to change their corporate cultures and their internal operations to make full use of prompt payment and adjudication. Those who have done so are absolutely seeing improvements in their cash flows, with one of Leduc’s clients reporting payment in 30 days from public-sector clients and 45 days—where 60 to 90 days had been common.
The general rule: payment in 28 days
In Ontario, the general rule about prompt payment is that an owner is required to pay a general contractor’s invoice within 28 days, with the general contractor required to then remit payment to its subtrades within seven days, and so on down the construction chain. All of this is triggered by a proper invoice remitted to the owner by the general contractor. Invoices are submitted to the owner monthly, unless the prime contract stipulates otherwise, such as when payment is tied to milestone dates. Furthermore, only one proper invoice may be submitted to the owner per contract. That is the invoice from the general contractor to the owner. Subtrades invoice the general contractor only, not the owner.
The day of delivery of the proper invoice to the owner is generally described as day zero in the payment process. From that day forward, a number of actions can be triggered.
Day 14 becomes the deadline for the owner to give the general contractor a notice of non-payment—which can be full or partial—for any disputed work. If the general contractor receives that notice, it has seven days to provide that notice down any subtrades that may be affected by that notice of non-payment. Each subtrade, in turn, has seven more days to pass the notice of non-payment down to affected sub-subtrades and suppliers.
If the general contractor receives a notice of non-payment from the owner, it may refer the disputed matter to arbitration, and must do so within 21 days of receiving that notice of non-payment.
Day 28 becomes the deadline for the owner to pay any amounts not in dispute to the general contractor. The general contractor then has seven days to pay its subcontractors, and the subcontractors in turn have seven further days to remit payments to the next sub-category below them.
Pay when paid clauses—and other issues
Pay-when-paid clauses have long been troublesome for subcontractors whose payment terms are tied directly to the payment of the general contractor by the owner. Leduc suggests that the Construction Act may have eliminated the need for, or enforceability of, those clauses going forward.
If an owner does not pay the general contactor, a type of pay-when-paid regime effectively comes into place. Within 35 days of delivering its proper invoice to the owner and not being paid, the general contractor has two options to resolve any disputed payments. It can either commence an adjudication against the owner or it can pay its subcontractors out of its own pocket.
The Construction Act effectively puts the onus on the general contractor to pursue any monies owed to its subtrades in the event of non-payment, and therefore creates a type of pay-when-paid regime.
Ask questions from the outset
Leduc also advises that contractors and subcontractors put in some work in the earliest stages of a project to understand what is required of them before they submit that first draw application. Putting in the time to submit a draft invoice to the owner or the general contractor to understand what’s needed, for example, is time that can reduce delays when that first invoice is submitted.
Asking and understanding what the payment certifier needs to streamline an invoice is also time well spent in the process of eliminating delays and speeding up cash flow.
It is also important, where possible, to coordinate the delivery of invoices to the general contractor in advance of the date the general is required to submit its proper invoice to the owner.
Taking the time to understand how Ontario’s prompt payment rules not only work, but also work for your business is time well spent. The Construction Act makes tools available for contractors to dramatically shorten the time taken to receive payments. Like any tool, however, they’re most effective when they’re used by skilled operators.
The full video of Dan Leduc’s presentation is available for viewing at www.link2build.ca/resources.