Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue No. 12 - Evidence - February 2, 2017
OTTAWA, Thursday, February 2, 2017
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-224, An Act respecting payments made under construction contracts, met this day at 10:30 a.m. to give consideration to the bill.
Senator David Tkachuk (Chair) in the chair.
[English]
The Chair: Good morning and welcome, colleagues, invited guests and members of the general public who are following today's proceedings of the Standing Senate Committee on Banking, Trade and Commerce, either here in the room or listening via the web.
My name is David Tkachuk and I am the chair of this committee.
This morning marks our first meeting on Bill S-224, An Act respecting payments made under construction contracts. The bill was read a first time in the Senate on April 13, 2016, and I am pleased to welcome its sponsor, Senator Donald Neil Plett from Manitoba, who is now also a member of our committee.
Welcome, Senator Plett, and thank you for appearing before us today as the bill's sponsor, along with Mr. Banfai, a lawyer with McMillan LLP, appearing as an individual today.
Please proceed with your opening remarks. Then we'll go to a question and answer session. Following this, we will briefly suspend to welcome a second panel of witnesses on this bill.
Senator Plett, please proceed.
Hon. Donald Neil Plett, sponsor of the bill: Thank you very much, chair, and thank you, colleagues, for this opportunity.
Many of my remarks today, you may well have heard at least portions of that as I spoke to the bill in the Senate, and I will be repeating some of that. I apologize for those of you who have heard this.
As the chair has said, with me today is an experienced construction lawyer who is instrumental in the drafting process, Mr. Geza Banfai. He will be here to answer any legal or jurisdictional questions that may arise in the questions that you have.
Again, it is a pleasure for me to be here today and to present to you a bill that has been a long time in the making. The chair said April 13, 2016.
As you may know, the biggest issue facing the construction industry in Canada today is the issue of delay in payment. It is difficult for those working in virtually any other industry to fathom not getting paid for completed work without any proper legal recourse. However, this has become the sad reality for trade contractors across the country.
There are systemic delays in remitting payments down the subcontract chain, even when valid invoices have been submitted, where there is no dispute that the work has been performed according to the contract and where the progress claims have been certified.
This problem is not unique to Canada. However, other jurisdictions have enacted legislation to counter systemic delays in making payments to subcontractors. Virtually all U.S. jurisdictions, including the federal government, have adopted prompt payment legislation in private sectors. The United Kingdom, Australia and New Zealand have also enacted prompt payment legislation. It is Canada that is the outlier.
What sets the construction apart from other industries is the construction pyramid structure on large projects. In federal government work, the federal authority is the top of this pyramid. The federal authority tenders the construction work to a general contractor or prime contractor. This is the party who enters into the contract with the federal authority to complete the project.
More often than not, the prime contractor will then subcontract various segments of the construction project to specialized trade contractors. Typically, these trade contractors perform upwards of 80 per cent of the actual construction work. Also, on most of these projects, trade contractors either subcontract from a general contractor or they may sub-subcontract from another trade contractor. As small- and medium-sized business owners will understand, trade contractors' access to bank credit is limited and their dependence on cash flow is high. Trade contractors' revenues are subject to unpredictable delays without any flexibility on their payables.
Payments to the Canada Revenue Agency and to the Workers Compensation system must be paid monthly without delay, and wages need to be paid weekly or bi-weekly. Payment for materials and equipment rentals must be made within 15 to 30 days.
The fundamental cause of the late payment problem is the unequal bargaining power between contractors and their subcontractors. Contractors will force subcontractors to accept late payments as part of the cost of doing business.
Contractors can do this because they control the flow of the work. Most trade contractors depend for their survival on subcontracting either from a general contractor or another trade contractor. No contractor can afford to be struck from the bidders' list.
Public Works has recognized that there is indeed a problem and thus have tried a series of administrative measures in an attempt to solve the problem, but unfortunately none of them has worked as they do not get to the heart of the problem.
For example, contractors are required by Public Works to submit a statutory declaration with each invoice swearing that all payment obligations have been met. There are two difficulties with this remedy. First, these declarations are retrospective. They do not prevent future payment delays. Second, if a payment is withheld as a result of a dispute over performance, a statutory declaration can be submitted, since technically the withheld payment is not a required payment pending resolution of the performance dispute.
Currently, if a contractor is not paid, they have absolutely no recourse. They cannot pull off the job. They cannot collect interest. Their hands are tied. They are some of the hardest working people in our country and they are going bankrupt and losing their businesses. This cycle has to stop.
The Canada Prompt Payment Act contains measures that will finally put an end to this systemic problem when it comes to federal construction work. The bill stipulates that the government institution must make progress payments to a contractor for construction work on a monthly basis or at shorter intervals provided for in the construction contract.
Likewise, the contractor must pay the subcontractor and the subcontractor must pay any subsequent contractor on or before day 20 following the latter of the last day of the monthly payment period or the receipt of the payment application.
The bill also accounts for milestone payments where, if a general contractor enters into a contract with the federal government that authorizes milestone payments rather than progress payments, written notice of any milestone payments must be communicated to all parties down the contractual chain.
In my view, the most significant provision proposed in this legislation is the right for unpaid contractors to suspend work. The absence of this provision has been raised with me time and time again by small business trade contractors. This is an important recourse for trade contractors who have not been paid, and I am thrilled that this right will now be explicit upon passage of this legislation, in addition to the right to terminate a contract or the ability to collect interest on late payment.
The bill also provides for a comprehensive dispute resolution process as well as the right to information for contractors and subcontractors involved in any dispute resolution.
Most construction work that happens in Canada occurs outside of federal projects, meaning that this legislation will only solve a part of the problem. However, provinces are moving forward on implementing similar legislation.
The Reynolds report in Ontario on this topic has recommended that the province enact comprehensive legislation. I was thrilled to see that the recommendations of the commission largely mirror the proposals in this legislation. Ontario and Quebec have both committed to introducing prompt payment legislation in the spring of 2017.
When the United States enacted the legislation federally, it did not take long for the individual states to follow suit. It is my hope that enacting this legislation will have a similar ripple effect on the Canadian provinces, meaning every construction worker in Canada will be paid on time for the work that they have completed.
Colleagues, this is a non-partisan issue. People should be paid for work that they have completed, and they should be paid on time. This is the biggest problem facing the construction industry in Canada, and we finally have the opportunity to fix it. Let's stand up for small-business owners and hard-working Canadians in the construction industry.
Before I conclude, I want to point out that since tabling this bill I have worked with the National Trade Contractors Coalition of Canada to clarify language in a couple of areas, and I will be submitting, before clause by clause so that you have them on time, some very minor amendments that really clarify some of the wording in the bill. Those amendments do not change the substance of the bill but simply clarify a few provisions to ensure certainty in their application. As I said, these amendments will be distributed to members in advance of clause by clause.
Chair, those are my remarks, and I look forward to answering any questions.
The Chair: Did you have comments, Mr. Banfai, or will you just be there for questions?
Geza R. Banfai, Lawyer, McMillan LLP, as an individual: I am just here for questions, senator. Thank you.
Senator Massicotte: Thanks to both of you for being with us this morning. Like all of us, I'm trying to understand what the issue is, so bear with me if the questions are simple.
From my experience, I have been involved more as a developer with many contractors and subcontractors. I think I'm somewhat aware of the issue, particularly in Montreal and Toronto.
I think as you said, Senator Plett, the significant issue is the unequal leverage of a GC compared to the subcontractors. There are 20 subcontractors for every GC, and the cash goes through the GC first before it goes to you.
That is a market issue and will be very hard to correct through legislation, I expect, but I'll come back to the question of how this changes the negotiating power of both parties.
We had a chance to discuss this yesterday, and my understanding of what you are saying is the issue is not the client, not the government, because there are always a lot of issues, as you know. The client says you didn't do it for plans and specs. There are some delays and disagreements so they don't pay. That's hard to legislate, and you say you're not dealing with that. You're dealing with the client. The federal government does pay the GC as appropriately approved by the parties, including the architect, but you're saying the problem is the GC keeps the cash in spite of the fact he got the cash. Obviously cash is king and he gets interest on it, and he doesn't pay the subtrade, even if the client approved the work.
Having said that, my understanding of the law in most provinces and most American states is that if that occurs the payment that is received by the GC is legally trust funds. It's not his money. He has the legal obligation to pay the subtrades. As all the approvals have been obtained, he has a legal obligation to pay the subtrades. Trust funds are a serious issue. It's not a simple argument, a commercial argument; these are monies that don't belong to him. It's nearly equal to theft.
So behaving in such a way, the GC has done something very wrong morally, which is the argument you made, but also legally wrong, but given his sense of power and given his sense you need him for the next job and that's your livelihood, the market says that subtrades don't have much to do, so they bitch and complain. They don't get paid, but it doesn't change things.
How will this legislation change that relationship and get better results? Already he's in default. Already he's acted illegally and used trust funds for his own purpose, which is a very serious issue. Why would additional legislation correct that already obvious problem?
Senator Plett: Thank you, Senator Massicotte. I was hoping you would ask that question because we did discuss it a little bit yesterday, and I'm happy to explain.
You're absolutely right. When a contractor holds up my money, money that the owner has paid him that is rightfully mine, he is breaking the law.
We are not asking for any monies to be paid that have not been certified. Not only before the owner, before the federal government will pay the general contractor, the architect needs to certify the progress claim; the different engineers need to certify the progress claim. I was a mechanical contractor, so there is a mechanical engineer. He has to certify that progress claim, electrical engineer, so on and so forth.
These are only certified payments that we're talking about. The general contractor pays General Contractor Z for the work that has been certified and completed and Contractor Z decides to either collect some interest on it or use that money to deal on another project. You're right it's illegal and I can take that person to court. After being in court for a year or so, I'm sure by that time he will have paid me anyway, and much as I appreciate people like Mr. Banfai being here today, I don't really want to give them what I should be putting into my bank account to sue somebody for the money that is rightfully mine.
By legislation, rather than me fighting with the contractor and getting a bad reputation with the contractor, this legislation says I can suspend work.
Right now if you aren't paying me and I pull off the job, you can literally hire somebody else, my competition, to come in and start working tomorrow. I think they have to give 24 or 48 hours' notice, and they can replace me on the job and start working on that job. Of course my competition will charge much more for doing that than I would have charged for it because he's now collecting somebody else's money.
So right now I cannot suspend work. This legislation will allow me to suspend the work within seven days. I have to give seven days' notice, but then I can suspend the work and that will stop progress on that job, which will then tell the owner, "Listen, this contractor is not living up to his responsibility,'' and the contractor has penalty clauses that will kick in if he doesn't finish the work on time.
The simplest answer I can give you is that it will allow me to receive and collect interest on any money that has not been paid. So it's in the contract that if a general contractor does this, I do not have to continue to work.
Senator Massicotte: Let me go further with that, and I acknowledge that. But I suspect, Mr. Banfai can clarify, that if that occurred, whereby the subcontractor did not get paid and the GC used the monies — it's trust monies, I think — the subtrade would have the right to withdraw because the contractor is in default of his obligations. Yes, he can hire somebody else, but all those actions are against the contractual obligations of the GC. The problem is, again, he's a big boy. He's going to say, "Well, maybe you're right, but I'll work it out.'' They actually do that.
Am I correct in saying that? In other words, he would have a right to withdraw from the contract because the GC is in default on the obligation. But the standard construction contract does include interest already, but the GC refused to pay for it.
Mr. Banfai: You've raised a number of good issues, senator.
First of all, about the right to suspend, it's actually legally ambiguous in many cases whether a subcontractor who hasn't been paid has the corresponding legal right to withdraw his services or even demobilize from the site. He runs the risk that he himself will be found in breach of his obligation to continue performance of the work.
There are clauses commonly in construction contracts, in my experience, which require a contractor to do exactly that. Notwithstanding the existence of a dispute, he has a legal obligation to continue performance while the dispute is in resolution.
The right to suspend for nonpayment is at best ambiguous, and in my own experience, contractors are extremely reluctant to stop work even in circumstances in which they haven't been paid for months. I recall one instance in particular where I've had to go to some great lengths to persuade a client to do exactly that, where in my opinion he was on solid, solid legal ground, and even in that event he stopped work with great reluctance. So we have that problem.
You began by asking how would this change the relationship, and in addition to what Senator Plett has said, is the behaviour you've described illegal contractually? Well, of course it is. Is it a breach of trust? In federal work that's questionable. The trust provisions that apply in, for example, Ontario's Construction Lien Act don't apply to federal projects. So it's highly debatable whether these trust obligations apply on federal projects. I don't think they do. But that's not really the point.
I think it's pretty clear to the industry that the court system is generally inadequate to the task of enforcing the kinds of legal obligations that we're talking about here. Litigation is too expensive. It's too prolonged. Many people in the industry don't want to go there for very good reasons. As the senator indicated, if I go to court a year from now, I might get the money. I will pay the lawyer a lot of money. I think you're being too optimistic. Litigation, in my experience, is a multi-year endeavour, and meanwhile the victim is out his money.
One of the other things that this bill seeks to do, as does the Reynolds recommendations in Ontario, is to fix that problem by introducing a system of adjudication, which seeks to get quick decisions on an interim binding basis. We can talk about this in detail if you want, but it seeks to avoid this problem of disputes that are prolonged over a long period of time and causing what Reynolds calls a gridlock in the payment flows. It's a rough justice but an effective system for dealing with the kinds of issues which typically arise.
Senator Massicotte: I buy all that. In my experience that's accurate. Look at the current President of the United States bragged about it. Some real estate owners don't pay and don't pay and years from now they get a discount. It's bad practice. The problem is it relates to the relative negotiating power of each party and is dependent on one or future jobs. How does it change that? Adjudication is good, but the big people who are wrong and abuse their rights all the time are forgiven every time because the contractor needs him for the next job. He wants to be in the good books. I know the law is there. I defend it. I was defending it before, but don't you dare do what you're doing or you won't get another job from me. How do you correct that?
Senator Plett: You will not correct threats that any one person will make, but this legislation will allow me to just simply suspend the work. It's written into law now, and so I do not have to start anything. That is the most significant factor. Clearly, every general contractor also wants to maintain a reputation. If two or three contractors started pulling off jobs because a general hasn't paid them for certified work that would be a much sullied reputation. Will this legislation solve every problem? No. It will solve this problem at least to a large extent.
Senator Black: Senator Plett, you should be congratulated on the initiative you've undertaken here, because you've identified a problem that needs to be addressed. I do have some technical questions that I think would best be addressed to counsel, if I could.
What we're talking about here is legislation aimed at creating a remedy, correct?
Mr. Banfai: Yes.
Senator Black: Stripping it all away, it is giving aggravated contractors an additional remedy to whatever they currently have available to them.
Mr. Banfai: Yes, in addition to a right of monthly payment.
Senator Black: Building on what Senator Massicotte has to say, if I'm an aggravated contractor, I could file a lien. Is that effective?
Mr. Banfai: No, not on a federal job you can't.
Senator Black: I can't do that.
Mr. Banfai: You can't do that.
Senator Black: That's interesting. Senator Plett indicated there are certain administrative procedures that I could take advantage of. What are they?
Mr. Banfai: Well, as I recall from his comments, he was talking about the administrative measures that PWGSC was implementing and he mentioned, for example, the use of statutory declarations. The senator accurately summarized the problems with that.
Senator Black: So you believe that whatever those administrative remedies are aren't effective?
Mr. Banfai: They don't work.
Senator Black: That's exactly what we want to know. What about the remedy of injunction? Would that be available to a subcontractor?
Mr. Banfai: Well, injunction is an equitable remedy. It is designed to prevent harm or mandate behaviour.
Senator Black: But not to be paid.
Mr. Banfai: It is very expensive to get, and legally it's more complicated than an ordinary action. Injunctions are rarely used in construction.
Senator Black: Is that right?
Mr. Banfai: Yes, and for very good reason. They're simply an inappropriate resolution to the kind of problem we have.
Senator Black: So there is a basket of remedies, but basically they are not effective. We need another tool. That's what you're saying to us.
Mr. Banfai: Yes.
Senator Black: I don't understand. What if there is a legitimate problem with performance? I'm a painter and I paint the wrong colour. I still want to be paid. If you don't pay me for the wrong colour, I'm going to walk off the job. How do we deal with that issue?
Senator Plett: I think I explained that. This is for certified work. So I'm the plumbing and heating contractor. The mechanical engineer has to certify the work. If he doesn't certify the work or she doesn't certify the work, I've got no claim and the owner will not pay the general contractor.
Senator Black: That's helpful. Thank you very much, senator.
Can you generally characterize the economic consequences to Canada of this problem?
Senator Plett: I think we have, and I had that number. I don't have it with me here right now, but I did have that number when I made my comments in the chamber. I think we have somewhere around 1.25 million people working in the construction industry today. A family company just closed their doors in your province of Alberta. This is a family in the construction industry. They closed their doors in Alberta last week and laid off 150 people. Those are the economic consequences.
Senator Black: Because of this type of problem?
Senator Plett: Because of this type of payment problem.
Senator Black: I want to understand the colour and the magnitude here. Is this a rare problem? Is this a regular problem?
Senator Plett: It is not a rare problem at all, Senator Black. Trade contractors are typically running shops that they may employ 10 or 15 or 20 people. Their cash flow is limited. Typically in construction, the person who makes the biggest mistake at the tender stage is the one who gets the job, so he's starting off behind the eight ball in trying to make money. Then the architect or engineer has missed something and the contractor must find a way to make that up. At the end of the day, when he's found a way of doing all this and having a few dollars left over, he has to fight for that. We're going to hear from people in the supply industry. The supplier then wants payment after 30 days. Workers' Compensation says you pay. My employees expect their paycheque every second Friday, or whatever the arrangement is. So, no, this is not a rare problem at all.
Senator Black: That is what I wanted to understand. Thank you very much, senator.
The Chair: To clarify, if you go from a contract with Public Services to a general contractor to a plumber, what happens? Is it rare or does it happen that the Government of Canada itself — Public Services — doesn't pay? What takes place then? What if they are late in payment and instead of 30 days they may take 45 or 60 days?
Senator Plett: Senator, they are also part of this legislation. If the work has been certified, they are obligated to pay as per the contract once the work has been certified; it's the same as a general contractor.
However, I do want to state emphatically that the culprit, typically, in this issue is not the federal government. I really believe that they are paying 90 per cent of their bills on time.
The Chair: Within 30 days?
Senator Plett: Yes, or whatever the contract says. It might be milestone payments, but they pay as per contract.
The Chair: I have a long list of questioners here, and we have another panel coming up, so govern yourselves accordingly, senators.
Senator McIntyre: Thank you both for your presentations, and thank you, Senator Plett, for sponsoring this bill. I have two short questions, mostly for clarification purposes.
As I understand, the bill accounts for milestone payments. On that issue, am I correct in understanding that the government institutions and supervising contractors and subcontractors could only make those milestone payments in relation to their subordinate contracts, if permitted by the prime contract with the government institution?
Mr. Banfai: That's the idea.
Senator McIntyre: In other words, it must be permitted by the prime contract?
Mr. Banfai: Yes.
Senator Plett: And everyone needs to be notified down the contractual chain. If the prime contractor is signing a contract that has milestone payments, everyone down the contractual chain needs to know that prior to them signing their contracts.
Senator McIntyre: The bill also allows contractors to collect interest on a late payment. Do government institutions currently pay interest or damages for delayed payments to construction workers?
Mr. Banfai: I don't know.
Senator Plett: In my experience, Senator McIntyre, I have been told by government officials we don't pay interest; we collect interest if you don't make your payments to the Canada Revenue Agency on time, and so on. It was more in relation to that. This, again, would apply more to the general contractor or a subcontractor. This is not necessarily just a general contractor that is the culprit here; it may be a mechanical contractor who is not paying his insulation contractor, so it could be anywhere down the chain.
Senator McIntyre: The important point is that the bill corrects that situation.
Senator Plett: Yes.
Senator Marshall: I know the legislation provides for remedies, but is the primary objective to get the bills paid on time?
Senator Plett: That is correct.
Senator Marshall: Senator Plett, in your opening remarks you spoke about how the government has put in certain administrative procedures to try to fix the problem, but they haven't. This question is probably for departmental officials, but I will ask you.
Can they tell you, now, how many payments go over, and provide statistics regarding how long it takes them to pay the bills once they are certified? Can they say, "We paid 90 per cent of the bills 180 days after certification''? Are there any precise statistics? If the objective is to get people paid on time, you would almost need to have something in place to measure it. How bad is the problem? How extensive is it now?
Senator Plett: Thank you, Senator Marshall. As I said, typically, the government is not the culprit. They pay most of their progress claims on time, I believe. The culprit is down the contractual chain.
I can't give you what the government averages, but I can tell you the average of what payments are made. In 2007, the average duration of a receivable in the construction industry — it was already bad then — was 62.8 days or 9.97 weeks. By 2012, that average had increased to 71.1 days, or over 10 weeks. The Ontario average is 63 days; the Quebec average is 79 days, and it goes on. In Alberta the average is 78.6 days.
Senator Marshall: So it is measured.
My last question is with regard to the interest and is a follow-up to something Senator McIntyre asked.
Regarding the rate prescribed by regulation, what were you expecting to see in the regulations? That could range from 0.25 per cent, or 0 per cent, to 10 per cent. What were you looking at?
Mr. Banfai: It is up to the regulation, obviously.
Senator Marshall: What would you like to see?
Mr. Banfai: I would guess that a regulation would probably be crafted to tie an interest rate to the prevailing bank rate, which is what is done under Ontario's Courts of Justice Act, for example. The interest rate fluctuates with the bank rate.
Senator Marshall: It says that applies if the construction contract does not provide for a rate, so regardless of what rate is specified in the construction contract, you would like to see that rate paid. If it is a rate of 24 per cent, you would like to see the 24 per cent paid?
Mr. Banfai: If the construction contract stipulates a rate, that should govern. If it does not, the regulation should prescribe, effectively, a default rate.
Senator Moncion: I have two quick questions. First, this legislation would correct or allow interruption of work. That's what you were saying, so how does this legislation correct the situation where the GC, or general contractor, gives the work to another subcontractor just to get the work done?
Senator Plett: They would not be allowed to do that under this legislation. If my company suspends work, the general contractor cannot replace me. This has to be dealt with. That is what this legislation deals with, if I understand your question correctly.
Senator Moncion: Yes, but it goes further. How are we going to prevent that from happening? People in construction know other people that can do the work. There is nothing that prevents them from going to another provider and saying, "This guy is not doing the work. I have to finish this job so I can move on.'' How does this legislation correct a situation like that?
Mr. Banfai: It doesn't. In the circumstances you have outlined, senator, if someone has failed to pay a subcontractor and the subcontractor has properly suspended in accordance with the statute, the general contractor then goes out and gets somebody else to do the work. In my view, then, that general contractor is running a very serious risk of being found liable not only for the unpaid bills to the subcontractor that suspended his work, but also for damages for breach of the subcontract, the damages consisting of that subcontractor's lost profits for the balance of the work.
Legally, the general contractor runs a serious risk of having been found to have repudiated the subcontract by getting other forces in, particularly if the general contractor did that in the face of the processes and remedies that are prescribed in this legislation that were otherwise designed to deal with the very problem that caused the nonpayment, if there is a real problem. For example, if there was a legitimate dispute, or even a quasi-legitimate dispute, between the general contractor and the subcontractor, the legislation contemplates a system of adjudicating that dispute in a very short period of time.
If, in the face of that remedy, which is clearly available, the general contractor ignored it, terminated the subcontractor and brought in somebody else, in my view that would be a very risky move for the general contractor.
Senator Moncion: I agree, but if you want the job done, some will say, "Well, I can fix this down the road, because by the time it gets to court and is disputed, it might be a long time.
You were saying earlier, Senator Plett, that a lot of these disputes are corrected outside of the legal system, if I heard you correctly. There are arrangements that are being made between these people at some point. They work things out.
Mr. Banfai: Your question is a really good one because it gets at something that we haven't really talked about here yet and that is how legislation like this changes behaviours. There is what is written here, and then there is the response of people, knowing that the law says what it says.
The evidence that I have read, particularly in the U.K. where they have had a system of adjudication, to cite that example, for almost 20 years now — and this is anecdotal — has been that, where people know that if they don't behave themselves and deal with their issues in a timely, responsible fashion, within 30-days there is going to be somebody deciding this one, they behave differently.
Senator Moncion: Yes, I agree.
Mr. Banfai: To my mind, that is perhaps the most powerful impact of legislation like this. It isn't so much what is written on the paper, it is how it influences behaviours in a positive and constructive way.
Senator Moncion: If we want to influence behaviours, can we put something in the legislation that will incite people to change behaviour? If you don't put those 30-day clauses in, you will see this wheeling and dealing going on, and it's not necessarily going to correct the problem.
Mr. Banfai: The legislation does contain a number of things that incite the kinds of behaviours you are talking about: first, an obligation to pay monthly; and, second, an obligation that, if you are going to short pay someone downstream of you, you must give very prompt and timely notice of that, an obligation to pay amounts not in dispute, an obligation to pay interest on overdue payments, a right to suspend, a right to terminate, in extreme cases, a system of adjudication.
My concern about going much further is that you begin to bump into the principle of freedom of contract, and that's a difficult subject.
Senator Moncion: It is.
Mr. Banfai: My own view, for what it's worth, is that the legislation achieves a very nice balance, actually, between the freedom of people to contract with one another on terms that they mutually agree upon and some basic rights and obligations that should govern all contracts.
Senator Moncion: What are the measures in place to keep the government from allocating contracts to general contractors who don't pay their people? Is there something in the legislation there that will prevent government staff from allocating these contracts again to contractors who don't pay?
Mr. Banfai: There is nothing in the legislation that prohibits the government from contracting with a deadbeat general contractor. One would hope that the officials would naturally seek to avoid that because there are certain practical difficulties when you are contracting with what I would call a deadbeat. Your jobs don't get done on time. You are constantly dealing with complaining subcontractors and suppliers who are complaining that they don't get paid. The jobs are not done to a good, high standard; the costs of administration go through the roof. In my experience, there is a natural sort of way of dealing with that problem that you don't need to legislate.
Senator Plett: For many tenders, you actually need to qualify in order to bid on the work. I think that, in very short order, you might not be a qualifying contractor anymore.
Senator Wetston: You have covered a lot of territory, and I know we don't have much time. I was actually going to pursue the behavioural issue. I think you have pretty well addressed that issue. The point that I would raise is that it's probably easier to legislate bad behaviour, but it's really hard to legislate good behaviour. You probably responded to that, and I just wanted to pursue that a little bit with you. I think you describe it as a good balance. Obviously, people should get paid for the work that they do. We expect that. We have remedies to deal with that. You've talked about some of them. They are often protracted, and access to justice is challenging.
In achieving this balance, where does the government fit into this in the sense that they see all of this activity occurring? Obviously, pursuing this bill is important from that perspective, but, when they see this kind of activity, is their only response legislation?
Mr. Banfai: Well, I don't know if their only response is legislation, but certainly, apart from everything else that we have talked about this morning, legislation like this, in my view, signals, in a concrete way, leadership by the government, in this case the federal government, on an issue that, as the senator mentioned, is notorious now across the country. There is a culture of slow payment that has set into the industry, and we are trying to fix this.
The federal government, being Canada's largest public owner, is in a unique position of leadership on this issue. This kind of legislation, I think, feeds into that role as a leader in effecting change in this culture of slow payment.
Senator Wetston: I take it that is part of the reason that Quebec and Ontario are potentially considering similar legislation?
Mr. Banfai: Yes.
Senator Ringuette: Where is Senator Plett?
Mr. Banfai: We have lost our witness temporarily.
Senator Ringuette: Maybe he doesn't want to answer my question.
The Chair: Hopefully that is not the reason.
Senator Ringuette: Hopefully so because I wanted to make a comment that, although I don't share many of Senator Plett's opinions, I certainly share his support for prompt payment of Canadian workers wherever they are.
The Chair: He must have heard you.
Senator Ringuette: I have to repeat myself, Senator Plett. I was saying that, although I differ from your opinions on many issues, I don't differ with regard to the need for our workers to be paid. For our workers to be paid, the employer needs to be paid for the work done. The main objective here is prompt payment.
We have to bear in mind the issue of suspending or terminating work, and I think that is not the ideal situation. But there are three different options in your bill. The first one is to suspend until there is payment. The second one is to terminate the job, and the third one is to go to the dispute resolution, which, from my perspective, should be the first venue to engage in.
Mr. Banfai, although you have indicated that the dispute mechanism that you are proposing in this bill has a timeline, there is no timeline in the bill. I'm concerned about that because it could take anywhere from 6 months to a year to 2 years to 5 years. That is a concern because we will have one shot at this issue for maybe the next 5, 10 years. Yes, we need to have the federal government and federal legislation play a leadership role in it. Why can we not have a very specific and tight timeline with regard to the dispute resolution mechanism?
Mr. Banfai: You raise a good question, senator. It is certainly not the intention to allow or contemplate the kind of prolonged dispute resolution that we presently have in the ordinary courts. We are trying to fix that problem.
The draft that is before you presently, you have noticed, leaves these details to be dealt with by regulation. That's quite deliberate because the mechanism to work out how an adjudication system might work is itself quite complex. Reynolds in Ontario addressed the same question and came to the same conclusion. He is advocating a system of adjudication but leaves the details to be worked out by regulation.
You began your question, though, with something that the draft doesn't include but perhaps should. Namely, that is tying a right to suspend or terminate to the dispute resolution and forcing people to go through the dispute resolution adjudication mechanism first. That is a good point. I note that Reynolds in Ontario has recommended just that; that the right to suspend happens only after an adjudication decision.
Senator Ringuette: Yes, and I read the document twice to make certain and thoroughly understand the recommendation that they have put forward to the Government of Ontario. They are recommending a specific timeline with regard to the process, as per their study, what happened in the U.K., Ireland, Hong Kong, et cetera. In the study they did across the countries that have such a mechanism, the process is anything between 10 days and four months, which can be reasonable to settle these types of issues. For Ontario, they are specifically recommending a maximum 40-day process.
Why can we not tighten up the opportunity for subcontractors to be paid? Instead of suspending and being replaced by another subcontractor or terminating, if the option for adjudication would have a strict timeline to provide prompt payment, prompt resolution of the issue, wouldn't that be better for the industry?
Mr. Banfai: I have made the note. I think that's a good point, senator. It's worth considering.
Senator Ringuette: I would be happy to work with Senator Plett and with you, sir, with regard to putting this forth. Being a 30-year parliamentarian, most of the legislation we see once every 10, sometimes 20 years to review. My perspective — and you have been working on this for a long time — is that we have to get this right with the best option possible for the subcontractors and the workers.
Senator Plett: Thank you, senator. As Mr. Banfai has suggested, he has made a note. Why don't we discuss that, and maybe even over the course of the weekend, have discussions with you? I fully support what you are saying. We want to get it right. Certainly in light of the Reynolds report and recommendations, we need to get it right without delaying this too much longer, so thank you.
Senator Enverga: Thank you for your presentation. Most of my questions were answered, so I would like to congratulate you and thank you for sponsoring this bill.
Senator Plett: Thank you very much.
Senator Day: I have listened to Senator Plett's presentation of this legislation in the chamber, and I am glad we are having the hearings now to clarify some of the doubts that I have.
I think, Mr. Banfai, you touched on part of my concern when you started talking about the marketplace. Most of us in this room would tend toward a free market system, and see government interfering with that free market system only in instances where it's necessary to determine a somewhat even playing field.
We are all familiar with organized labour and the fact that at one time unions were not allowed. But it was deemed because there is such an imbalance that freedom of association and the forming of labour unions allowed for that balance to be created and a set of rules all grew up around that. Are we in a similar situation here where there is such imbalance that we need to define a scheme that will help change the attitudes and the way the marketplace is functioning?
Mr. Banfai: I think so. When you look at the statistical evidence of how payment delays, number of days outstanding ARs has been growing in recent years, particularly compared to other industries where it has remained relatively constant, coupled with the survey evidence and anecdotal evidence, one is driven to the conclusion that there is something wrong with the market.
The senator has talked about the inequality of bargaining power that exists, which I agree with. I think there is an inequality of bargaining power. Yes, I think we do have a kind of structural problem with the economy — at least the economy of the construction industry — that needs correction through legislation like this.
Interestingly, most other common-law jurisdictions in the world seem to have come to the same conclusion along the way.
Senator Day: I think that is convincing, when you see provinces and other countries coming forward with similar types of legislation, that there is obviously something going on here that needs to be rectified. I think that is why Senator Plett has presented this.
Mr. Banfai: Absolutely.
Senator Day: Then I started asking, could we achieve the stop work aspect? Senator Plett said that is an important part of this and Mr. Banfai, you described it like a strike. The company can still continue to operate but it's risky and there are potential fallouts from that. In the same way here, if a subcontractor withdraws, the contractor can continue the business but there are a lot of risks involved that may persuade that contractor not to proceed.
That's one of the provisions, but I was wondering about milestone payments. Is there a problem with normal contract provisions in standard contracts? Especially in the federal government, there are a lot of standard contracts now. Is there a problem with the provision for milestone payments in the existing scheme of things?
Senator Plett: Senator, there is no issue that we see with milestone payments being part of a contract. The bill then enshrines in legislation that a contractor needs to tell a general contractor who needs to tell all the people down the line that there are milestone payments. It might be a job that you simply pay upon completion of this much of the work; a quarter of the work is done and you get a lump-sum payment. That's fine if that's part of the contract, and everybody down the chain knows that's part of the contract, as opposed to thinking "I'm getting paid in 30 days'' and then 30 days later, that person realizes there is a milestone payment and realizes they're not getting paid for another three months.
So the milestone payment isn't the issue. The legislation doesn't speak against milestone payments. It simply says that everybody needs to know prior to signing the contract that there is a milestone payment.
Senator Day: If somebody contracts contrary to the contract that he or she has, that is going to pose a problem for that person anyway. Regarding dispute resolution and demand for payment provisions, are all those things necessary as a result of the stop-work provision in here? What has triggered a whole scheme when you were looking at one aspect of all of this?
Senator Plett: I think I'll let Mr. Banfai answer that. Clearly, all I cared about was that people get paid on time, whatever mechanism that we can use to do that. We all know that there will be lawyers involved at some point in this dispute, so we should at least have some help in making sure things are drafted properly. As Senator Ringuette has already pointed out, there may be just one issue that can be prevented by not putting the cart before the horse.
Aside from that, I'll let Mr. Banfai answer further if he wishes.
Mr. Banfai: I'm not sure I understand your question fully, Senator Day.
Senator Day: We've run out of time, so I'll be asking this again, I'm sure, but the real essence is this: If what we were looking for was the right to stop work without exposing the subcontractor to potential breach of contract for stopping that work, do we need to define an entire regime that talks about dispute resolution, progress payments and how you make your demand for payment? Do we need to do all of that?
Mr. Banfai: With respect, I think the premise of your question is off. We're looking for clarification on the right to suspend work, but I would not say that that is the primary objective or the only objective. We're looking for an obligation to make monthly payments.
Coupled with the other remedies, it is a holistic set of obligations and remedies that, together, are designed to expedite cash flow down the construction pyramid and ultimately change what I've called this culture of slow payment. It's a set of rights and remedies. I think it's a mistake to focus only on one to the exclusion of the others.
That's what I would say to you in response.
Senator Day: The subcontractor is financing the project here.
Mr. Banfai: The subcontractor is financing the project.
The Chair: Thank you, Mr. Banfai and Senator Plett. Your testimony was really interesting and very good.
We are continuing our examination of Bill S-224, and I'm pleased to welcome our second panel. From Canada's Building Trades Unions is Christopher Smillie, Policy Analyst, Government Relations and Public Affairs, Canada's Building Trades Unions; from the Canadian Institute of Plumbing and Heating, Ralph Suppa, President and General Manager; and from Canadian Roofing Contractors' Association, Bob Brunet, Executive Director.
Thank you for being with us today. Please proceed with your opening remarks, beginning with Mr. Smillie, to be followed by Mr. Suppa and Mr. Brunet. Keep it short and succinct, and we'll have a lot of time for questions.
Christopher Smillie, Policy Analyst, Government Relations and Public Affairs, Canada's Building Trades Unions: I asked my daughter on the way to work this morning what I should say at this committee, and she said, "Nothing that's not on the page.''
I would like to say good morning to the chair, honourable senators and fellow witnesses — today, our contractor partners. We're happy to be called upon to talk about this legislation. We think it will set an important precedent in one of Canada's most important industries.
Construction represents more than 11 per cent of GDP; it changes month-to-month. It employs over 1.3 million Canadians, an important slice of Canada's middle class.
The building trades in Canada represent approximately 500,000 members in every province and territory. Just to provide a bit of context, we're still experiencing pesky unemployment in our sector. Regional and cyclical challenges exist, but it's still too high in some areas.
Our members are eagerly awaiting the large infrastructure program as a way to stimulate the economy and get back to work. This bill and this committee's work might be important in that context.
The federal government has stood alongside our members on a number of important issues, and, as the country's top purchaser of construction services, the federal government can show leadership in how they deal with prime and trade contractors across the economy.
In construction, just to give you a bit of context, all activities and the money revolve around bids, market forces and people. Most everything is organized by craft. Electricians rely on electrical contractors to win bids from general contractors, and the general contractors win bids from the purchasers of construction.
Members from our hiring halls get dispatched when a signatory trade contractor wins a bid. Usually, our members find out the day the work begins or maybe the day before. The member goes to the job site, does a safety course or briefing and starts beginning the end of his work there. All work in construction is temporary and transitory. Usually, members work for four or five or more contractors in a six-month period. So getting paid, the topic of today's discussion, is important.
Our unions generally do a good job, partnering with our employers, to ensure a smooth process for the worker in terms of paycheques and the pooling of benefit plans, but if our employers don't get paid by their customers, the risk to workers increases significantly. If trade contractors don't get paid as per their contract, it stresses the system, and paycheques could be in the balance.
The ability of workers to go back in time and fight for wages not paid by an employer is limited at best. It worsens even further if that contractor hasn't been paid or if that contractor is bankrupt.
There is some protection in federal law for workers currently, under the Wage Earner Protection Program Act. If your employer files under the Bankruptcy Act, this process is slow, and you certainly are not first in line for the proceeds of the liquidation. This program maxes out at approximately $16,000 per worker, minus 7 per cent.
So a framework to avoid all of this and to ensure that the "money system'' above the worker is fair, transparent and efficient so that everybody can get paid is a laudable goal. When someone, take for example a government, purchases construction, there is usually, as we've heard this morning, a long chain of subcontracting, and each of these companies is reliant on progress payments and money to move. The only people who have little recourse or ability to do anything about it are the workers.
In the U.S., I believe there's a 28-day window, if my math is correct, on federal government jobs or agency jobs after an invoice is submitted by the general contractor before a trade or a sub or a sub-sub gets paid. That system has been around since, I think, the early 1980s.
As to the EU, we talked a little bit about that earlier. They went a step further and enacted a 60-day program in the private sector, so not just federal government or EU jobs.
At the end of the day, programs like these don't just protect the government, the contractor or the subcontractors, they provide assurances to the workers who actually build the projects. They support reliability so that wage earners know that wages are indeed going to be paid.
Bill S-224 could lead to some improvements at the federal level and encourage provinces to take a look at the systems and protections in place in their jurisdictions. There have been some attempts in this country in this regard, and I know that's moving forward.
So if I had a magic wand on this bill, I would suggest a friendly addition to create directly something for workers, a process of communication or a process of appeal or a process of filing directly between the wage earner and their representatives and the purchaser of construction. So, if I were the federal government and building a big project or maybe just funding a third of it or a half of it, as generally occurs, I wouldn't blink an eye at making sure that the workers who are working on that site are actually getting paid, no matter if they're my direct employees, as the federal government or the subcontractor's subcontractors' employees. I wouldn't hesitate to institute this policy if it were an infrastructure jointly funded by other levels of government as well. So, if the federal government is paying a third of a major infrastructure project, why wouldn't the federal government want to know what's happening on that job site?
This would be a very important verification step for contractors and subs as well, and this could be worked into the procurement regulations behind the bill, as was discussed by a gentleman earlier.
So those are my prepared remarks. I'm happy to answer any questions that you might have once the rounds begin. Thank you very much.
The Chair: Thank you, Mr. Smillie. Next, we have Mr. Suppa.
Ralph Suppa, President and General Manager, Canadian Institute of Plumbing and Heating: Thank you, Mr. Chairman, and thank you for this opportunity to be a witness before this prestigious group. And good morning to everybody.
My name is Ralph Suppa, and I am the President and General Manager, Canadian Institute of Plumbing and Heating. We were founded in Montreal in 1933, and we're a national not-for-profit trade association, representing over 270 corporate member companies. We are the manufacturers, wholesale distributors, manufacturers' agents, and allied companies who manufacture and distribute plumbing, heating, pipe valves and fittings, waterworks and other mechanical products. We represent an institute that generates over $6 billion annually and employs over 20,000 Canadians.
The Canadian Institute of Plumbing and Heating would like to go on record supporting Bill S-224, the Canada prompt payment act, and we congratulate Senator Plett and the National Trade Contractors Coalition of Canada for their work on this file.
Late payment is a serious impediment to all of our members, making a trying economic condition even more difficult and, in some cases, forcing companies to lay workers off. We believe that the payment status quo is not working. We also specifically support the provision that would bind the federal government to pay its bills for completed, certified construction work within 30 days of it being certified as complete. We particularly support the same 30-day requirement down the contractual chain, as outlined in the bill.
The institute also believes that the payment status quo is not working, with payment not being passed on to the trade contractors promptly and without hassle, causing serious hardships throughout the distribution channel, from trade to wholesale distributors and, ultimately, to their manufacturer partners. Wholesale distributors are dependent upon cash flow to maintain a healthy balance of providing products and services and ensuring manufacturers' payment. If a contractor is forced into an on-hold position, it has a detrimental effect on the company being able to continue business on any other projects they are involved in.
Generally speaking, the larger mechanical contractors tend to order product in large quantities, and then the wholesale distributor releases product as they need it. Wholesale distributors incur significant carrying costs when products are delayed as they often buy early in order to guarantee product availability when required.
Next, the distributor invoices the contractor at the time of shipping the product. Standard industry payment terms are 2 per cent 30 days or 2 per cent 15 month following. If you factor in the current 90 or 120 days that has become the norm and that wholesale distributors have to pay their manufacturing partners on an average of 30 to 35 days, they also incur financial costs due to the extension of these terms.
The overall cost to wholesale distributors includes warehousing and inventory holding costs. Delays in shipping product to the construction site for any reason will impact this. Extension of financial terms costs: Because of a non-prompt payment, the variance between the wholesale distributor payment to the manufacturers and the payment for mechanical contractors can be upwards of 90 days.
Delays in construction create havoc on product specification changes to projects as engineers are more like to change the specification if time allows the opportunity.
Subsequently, the wholesale distributor can be left holding purchased product for a period of time. They cannot return the product to the manufacturer. They incur significant restocking charges from the manufacturer, which mechanical contractors rarely agree to pay, and it has been deemed obsolete or discontinued in the time of the lapse, leaving 100 per cent of the financial burden to the wholesale distributor.
Changes to project timelines are challenges to track and prepare for amongst all other daily business requirements as there is a significant amount of invested time in human capital that is required for project management.
With the passage of this bill, a more concise and structured payment schedule process will assist the contractor and the wholesale distributor in more efficiently coordinating product installation and delivery. In consultation with our members and based on the above issues, we estimate that the financial impact to our members because of non-prompt payment can be upwards of $25 million annually.
In conclusion, while prompt payment legislation is needed in all Canadian jurisdictions, this is an important first step in improving cash flow on all federal projects by legislating that contracts issued by the Department of Public Services and Procurement and Defence Construction Canada include prompt payment provisions for all contractors to whom work is awarded.
This would reduce prices for taxpayers through more competitive bids, improve project completion timelines and lead to an increase in hiring. It is also clear that the benefits of the Prompt Payment Act would not only be felt in new infrastructure and construction projects, but also on projects to retrofit or upgrade existing infrastructure to high levels of energy efficiency. Upon the passage of this bill, it is our hope that the legislation will act as a catalyst and positive example for all of the other 13 Canadian jurisdictions.
Mr. Chair, the Canadian Institute of Plumbing and Heating is in support of the bill with a view to helping make this a very positive, effective and meaningful bill for Canada's construction industry. Thank you for this opportunity.
Bob Brunet, Executive Director, Canadian Roofing Contractors' Association: Thank you, Mr. Chair. Good morning, everyone.
My name is Bob Brunet, and I'm the executive director with CRCA, the Canadian Roofing Contractors' Association. CRCA was established in 1960 and is a national not-for-profit trade association representing roofing contractors from across Canada.
CRCA members are roofing contractor companies actively engaged in the Canadian ICI — or the institutional, commercial and industrial — roofing and related sheet metal contracting business. Our members are also companies involved in manufacturing or supplying of materials and services used in the roofing and sheet metal industry.
CRCA is supportive of the National Trade Contractors' Coalition of Canada, who are championing Bill S-224 along with Senator Plett. Trade contractors are the businesses that train apprentices, employ journeypersons, make payroll, pay benefits and pension contributions and actually do the work. CRCA supports Bill S-224, the Canada Prompt Payment Act.
As a professional association manager, I'm not a contractor. Entering the construction industry was an eye-opener and required an orientation period. As a consumer like many of you here, I am very good at purchasing finished products. That is, I go to a store, I buy a finished product like a TV or clothing. The transaction is quick: I select the item, pay for it and take it home. I also purchase services like hydro, cellphone usage and credit through credit cards.
With these services, what happens if you don't pay your bills within the first 30 days? We incur interest charges. If we continue not to make payments after 60 to 90 days, we incur more interest charges and possibly suspension and cancellation of the service until payment is made.
In the construction industry, trade contractors are given plans and specifications to provide an estimate on the finished product that was designed by someone other than you. They are asked to submit an estimate on the time, the materials and the cost to build a complete building or a portion, such as a roof or HVAC system. The terms of the contract, if you are successful in your estimate, are dictated by the owner or general contractor. In essence a trade contractor sells their product and then manufactures it, subject to someone else's schedule and you get overhead and profit if your estimate was correct.
In the construction of a typical building, trade contractors may be responsible, collectively, for as much as 80 per cent or more of the total work to be done under the contract. Success for trade contractors depends on getting paid promptly by either the owners or general contractors.
Whether or not trade contractors get paid, their invoices keep coming and must be paid. During the normal course of business, trade contractors must continue to pay upfront costs related to a particular job. These costs continue whether or not you get paid and include things like equipment leases; materials; employee salaries; health, dental and pension benefits; CPP and EI; employer health taxes; harmonized sales taxes; property taxes; Workers Compensation; heat and hydro, and the list goes on and on.
In the construction industry, it often takes more than 80 days for trade contractors to get paid. And once you do get paid, it will most likely be only 90 per cent of our invoices. The other 10 per cent is deemed a holdback and this is only paid once the entire onsite work — not just your work — is deemed fully complete.
Many of our members have receivables that are over 90 days and this can seriously hurt their cash flow. It is too easy to tell trade contractors to go and access their line of credit to help with cash flow from your financial institution. However, most financial institutions will only recognize and extend credit on accounts receivables that are less than 90 days.
The issue is not necessarily only about general contractors not being paid by owners in a timely fashion. It is also about general contractors not paying the subcontractors or the trade contractors promptly for service they performed on a project. This happens when both parties are satisfied with services delivered, but payment is nonetheless unreasonably delayed.
Trade contractors should be paid for work that is certified complete in a timely fashion. Delays in payment have many negative consequences for small businesses, workers, families and owners, including the federal government. Employment is lower because the amount of operating expenses that a trade contractor can support has been reduced by the payment risk, and fewer apprenticeships are created because of a lacking willingness to make long-term employment commitments that are required to recoup those investments in apprenticeships.
Payment risk leads trade contractors to make fewer investments in new machinery and equipment, reducing the long-term productivity in construction and raising costs overall.
Construction costs may be higher because trade contractors may have incorporated the risk of late payment by general contractors into their bids, driving prices higher.
Costs are also higher because increased payment risk reduces the amount of work trade contractors can afford to take on, thus reducing the bidding pool for the projects.
Prompt payment legislation in Canada will provide contractors with the tools to ensure that their businesses can remain competitive and productive, and will also encourage a much-needed culture of prompt payment that is presently absent.
Prompt payment is about doing the right thing. Why should Canada be so different that we do not need prompt payment legislation? The United States, Ireland, Australia and New Zealand have enacted some form of prompt payment legislation. Trade contractors in these countries are operating more efficiently than in Canada.
In conclusion, we wish to thank the committee for allowing us time to express our support for Bill S-224. Passing this bill into law, in our opinion, is simply the right thing to do.
Senator Ringuette: Thank you for being here. I saw you in the gallery with the previous panel, so you know my priority concern with regard to making sure that there is prompt payment.
What I'd like to ask you is with regard to the scope of the bill. The scope of the bill is with regard to the federal government and Crown corporations. That leaves all the other federally regulated entities. We're hoping that the provincial governments will enact similar legislation, but if I look at the discussion going on in Ontario right now, it's not only for the Ontario government contracts; it's for the entire industry. It's for the private sector inclusively.
With regard to the scope and the fact that we need to get this right and we want the federal government to play a leadership role, should the federal entities that are included in this bill not also include all federally regulated entities? You have Air Canada, Via Rail and a whole slate of federally regulated entities that would not be covered by this bill and would also not be covered by any provincial legislation down the road.
The Chair: Does anyone want to answer it?
Mr. Brunet: I think we have to start somewhere. Getting the federal government to support this bill and get it into place will hopefully bring many others to the table, and make the changes and adapt to them.
In the provinces, I do know that Alberta Infrastructure has an active prompt payment legislation on their contracts. Their contracts specify a maximum of 30 calendar days after the initial receipt of the application for payment. They also say that the general contractor must confirm that they have paid their subcontractors within 10 days of receipt of their payment. They are also committed to publicizing the date of payment so that the subcontractors and suppliers will be aware of when the prime or the general contractor was paid. The general contractor will no longer be able to hide and say, "I didn't get the money.'' It will be publicized. The provinces are starting to introduce this.
Senator Ringuette: To wake up?
Mr. Brunet: Yes.
Mr. Suppa: I also support those comments. As a national trade association, we are supportive of federal work. One of our key goals, not only with this provision but also with standards that relate to our industry, is that they be uniform and harmonized across the country. The only way we will be competitive with other countries is by harmonizing and doing those kinds of things. I think the scope covers off what we are trying to do. I support my colleague's comment because this is a great start.
Listening to the deliberation this morning, there is a lot of passion to do the right thing to get it done right. We appreciate that and applaud your work.
Mr. Smillie: I spoke to a couple of people in different industries about this idea. Everyone's eyes light up because everyone wants to get paid, be it in the private sector, the public sector, small business or large business.
My one concern about your positioning is that it's a huge bite to take. To apply this economy-wide would be very difficult. Even for all federally regulated industries, it would be a massive project to undertake.
I agree with my colleague that it might be good to start small. How could we not support making sure everyone gets paid, but from a theoretical perspective it is very difficult to institute that economy-wide. I like the direction of your question but I think it would be a massive undertaking to go forward on that.
The Chair: We have laws now where people have to get paid. We can't shoot people for not getting paid so we have a legal process, which complicates matters because everyone has rights.
Senator Ringuette: The issue is the subcontractors are caught in this grey zone. There are regulations that they have to pay their employees but there is nothing for them to be paid.
There is a slate of infrastructure projects across the country and the federal government, in many cases, will be involved at 33 per cent — and, when Parliament is at 33 per cent, then the municipality or the local region is at 33 per cent, too. We are talking about a lot of construction work in a short period of time and a lot of money. How can we make sure that, with the granting of federal funds, prompt payment is part of the condition for the funds to flow to the two other entities? How do we make sure that happens?
Mr. Smillie: Briefly, the best way would be that Public Works and Treasury Board would be required to require this of any project that federal funding is facilitating. If Treasury Board and Public Works say that any federal dollar involved in an infrastructure project across this country is subject — you are not supposed to use props in politics — to these set of rules, and one of those rules is prompt payment on any site that federal dollars flow on, then those are the rules. It would require will on behalf of Public Works and Treasury Board to institute that sort of rule in any project that the federal government is involved in.
My understanding is that this bill would only apply to projects which may be 100 per cent funded by the federal government, of which there will be very few. I am very supportive of extending that even further to other financing partners.
Senator Ringuette: Perhaps it should indicate or say "complete'' or "partial'' because we have seen legislation where there is a requirement, regulation or legislation. Even if it was "partial federal participation in a project,'' that could work. I want to have your opinion. We are looking at a lot of dollars and a lot of construction work. Are we missing an opportunity to make this happen here?
Mr. Smillie: I would certainly come back and testify on that subject alone, yes.
Senator McIntyre: Thank you for your presentations. My question is more of a follow up from Senator Ringuette's question.
The legislation covers contracts and the subcontracts of those contracts with the federal government. Other construction projects fall under the purview of the respective province or territory. That said, I understand that other provinces such as Quebec and Ontario have been addressing the issue of delayed payment. Am I correct to say, then, that there is a real urgency here that this bill be passed so that other territories and provinces follow suit to correct this situation? Mr. Suppa, you raised that issue in your brief.
Mr. Suppa: We are very supportive of that. I think it starts here. We will play a key role as a not-for-profit trade association because we believe in getting that message out to our members and their customers. That's a key role we need to play and also to work on behalf of the Government of Canada and our allied partners through the coalition to start working with the provinces to implement the same procedures that have been put in place in Ottawa. We are fully supportive of that.
Senator Enverga: Thank you for your presentations. I understand that normally subcontractors include the margin for the risk of late payment. Mr. Suppa, you mentioned that this would reduce prices for taxpayers through more competitive bids. Mr. Brunet also mentioned that construction costs are higher because trade contractors may have incorporated the risk of late payment.
With all this, if this bill is passed, how many percentages of savings could the government realize? Do you have an idea of how much savings the taxpayers will get?
Mr. Brunet: No, I wouldn't. I would hazard to guess at it but I think it is for the benefit of the taxpayers. I think what happens with the subcontractors or the trade contractors is if they know a general contractor has payment issues or has a reputation for payment issues, they may bid higher or they may choose not to bid at all, and that would reduce the bidding pool. Obviously, if the bidding pool is reduced, you may not be getting the best price as the federal government or as any other entity.
Mr. Suppa: I think that was also echoed earlier this morning. It is about the jobs as well. If those jobs are lost, there is no additional business being generated. I gave you that number of roughly $25 million annually as to what the impact is to my industry. The way we came up with that number was we are a $6-billion industry. Conservatively, about 10 per cent of that is government jobs. Then we worked it back in terms of carrying costs, and so on. If that money is not in the channel, that is just my sector of the business. I think there was a number of a quarter of a million or higher in terms of money not being found within the channel.
It gets even more complicated when, as an industry, we start to see more retrofits in government buildings to more efficient products. Why would we price them higher because of the late payment when we have the capability to do that now within a reasonable time frame?
I can't quantify the cost, but it is large in terms of potential impacts to consumers.
Senator Moncion: My question is about delays. You were saying that 90 days is closer to the time frame that is used now for contractors to make these payments. Earlier, Senator Plett said that in 2007 these numbers were at 62.8 days; in 2012 they went up to 71.1 days; and in 2015, or since, they have gone up to 80 days.
I take into account that contractors and subcontractors all want to be paid and they all want to pay, and the government pays. What is causing these delays and why are some of these people not getting paid?
There is a connection between the financial crisis and the access to funds to pay. Since the financial crisis, what we have seen in the financial industry was financial institutions withdrawing from providing funding for the construction industry or managing risk more. Is there a connection between the access to financing for contractors or subcontractors to be able to pay, just to look at this whole thing? For me, most contractors want to pay their people and most contractors want to be paid. Is there another underlying problem here?
Mr. Brunet: I would say no. The big problem is for the trade contractors to get the money from the general contractors. Once the trade contractor gets the money, they are also responsible to pay their subcontractors, the people that they have hired if they don't have enough workers to do specific jobs as well. The onus is on the trade contractors to get the money from the general contractors.
Right now my understanding of the federal contract that exists is that the government will pay the general contractors within 45 days. Under Bill S-224, we are looking to get that reduced to 30 days and also have payment terms from the general contractors to the trade contractors which will help alleviate some of that situation.
However, as Mr. Banfai said earlier, it may be 90 or 120 days, and the trade contractors may still have to resort to litigation to get that money.
Senator Plett: Briefly, Ontario and Quebec have clearly indicated that they want to follow suit. I appreciate Senator Ringuette's support of this legislation and some of her comments that she made now as well as earlier. Clearly, we will be working on one of the concerns that she raised, which I think was legitimate. She has raised some more now about why don't we increase the scope of this legislation.
The fact that Ontario and Quebec are planning on following suit would lead us to believe that with the federal government, Ontario and Quebec, certainly as far as government work, we are going to hit two thirds or three quarters of all government work in Canada just with those two provinces and the federal government. So it's a huge step.
Do you not agree that this is a great first step and that we should simply move ahead as quickly as we can with this legislation and be the leader in this and have the provinces follow suit and that eventually — hopefully sooner rather than later — all construction industries will be doing this?
Senator Ringuette: What about the rest of Canada? What about the other provinces?
Senator Plett: If I can finish the question. If we would see that three quarters of Canada is doing this, would you not agree that probably the Province of Manitoba would follow suit because there are a lot of contractors close to the Ontario-Manitoba border that would say that maybe I am better off working in Ontario, and that Manitoba would want to follow suit?
Mr. Brunet: I definitely agree. With the major infrastructure spending the federal government will be undertaking in the near future, the opportunity for the federal government to become the leaders here is the key. You mentioned Quebec and Ontario, I know that prompt payment legislation is being reviewed in B.C., they are starting the movement; in Saskatchewan there is a group created that is pushing for it as well; and as well in Nova Scotia. I think a lot of them are waiting for the first one to appear and then a lot of them will follow suit.
Mr. Suppa: I echo the comments of my fellow colleagues. I am a nationalist. I love my country of Canada. I do understand the issues of federal and provincial partnerships, but it's a huge step when you have two key provinces that have supported the great work that has been established here. You have to start somewhere. The other provinces will follow suit.
To give another example based on my background where we have dealt with other issues, we have wonderful standards in our country and we have wonderful plumbing codes, but the plumbing codes in each province are implemented at different times. We are trying to work toward timely automatic adoption, which means the code comes out every five years. We want each province to come out 12 months within the publication of the code.
Right now we have three years, two years, six months; we are all over the map. We started with two key provinces, and we are starting to see some traction across the country.
We have some examples where those partnerships work. Let us build on it. It will happen. This is a great start to what you have now and you should be applauded for that.
Senator Day: I understand that your life would be easier if this legislation were passed, Mr. Brunet. I would like you to focus on what we are trying to solve. As I understand it, the relationship between your members and the contractors that they may be signing with, or another subcontractor, is all defined by contract at the present time; am I correct on that?
Mr. Brunet: Yes.
Senator Day: Do you have a standard contract with all the clauses in it that you think should be there that you recommend to your members, to each of you?
Mr. Brunet: There is a standard contract. I think they call them CCDCs. They are put out by the Canadian Construction Association. A lot of contracts adhere to that. You have to be careful because there are a lot of documents annexed to that agreement, and without the use of a lawyer, understanding the ins and outs of those contracts is very difficult.
Senator Day: So we are looking to this legislation to solve that problem?
Mr. Brunet: I am hoping that this legislation, yes, will solve a lot of that.
Mr. Suppa: The plumbing and heating industry is based on relationships between distributors and mechanical contractors. When a wholesale distributor has to cut off a mechanical contractor because they have been good customers and they can't pay because they haven't been paid, it causes conflicts. We have to balance that relationship with the prompt payment legislation. I think this act will cover that.
When you have the balance of business relationships with an act that will strengthen it, and as mentioned before, bring more structure, I think you have mission accomplished.
Senator Day: But the business relationship is defined by a contract now. You can put in there whatever you want, but are you saying that's too close a relationship and you want some legislation that is more arm's length so you can maintain your relationship?
Mr. Suppa: I am saying the bill is focused on prompt payment for people to get paid. I believe this will accomplish that. I think you are going deeper in terms of contractual arrangements. They have their own contracts. I don't get involved with that part of the business. If everyone down the chain is being paid on time, I think that is a healthy success.
Senator Day: Let me finish off, then. With the standard form contract, you can provide for a specific period of time for payment. You can provide for interest in there if there is late payment. You can make all those provisions in that contract, but you are saying that that relationship with that contract is not enough, you need legislation.
Mr. Brunet: I would have to say yes. Legislation is a key part of it. The contract is one facet of the relationship, but you need the legislation. You need the teeth to help the trade contractor if there is an issue.
Senator Day: Mr. Suppa, do you have anything further on that?
Mr. Suppa: I would support that comment as well.
The Chair: Thank you, Mr. Suppa, Mr. Brunet and Mr. Smillie, for your testimony and for answering the questions so well. We appreciate it.
(The committee adjourned.)