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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue No. 13 - Evidence - February 8, 2017


OTTAWA, Wednesday, February 8, 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 4:19 p.m. to give consideration to the bill.

Senator David Tkachuk (Chair) in the chair.

[English]

The Chair: Good afternoon. Welcome, colleagues, invited guests and members of the 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'm the chair of the committee. This afternoon marks our second meeting on Bill S-224, An Act respecting payments made under construction contracts. The bill was read for the first time in the Senate on April 13, 2016, and referred to our committee on November 28.

Today, I am pleased to welcome, in the first portion of our meeting, from the National Trade Contractors Coalition of Canada, John Blair, Chair of the Prompt Payment Committee; Steve Boulanger, Deputy Director-General, Corporation of Master Pipe Mechanics of Quebec; and from the Mechanical Contractors Association of Canada, Del Pawliuk, President; and Dan Leduc, Council Member.

John Blair, Chair of the Prompt Payment Committee, National Trade Contractors Coalition of Canada: I want to extend our appreciation to you folks. We know you're very busy as senators and that there are a lot of things that you're dealing with, so we're going to move as quickly as we can. Chair Tkachuk, thank you so much for your welcoming remarks.

It's my pleasure to be here today. My name is John Blair, and I am the executive director of the Canadian Masonry Contractors Association and the Chair of the National Trade Contractors Coalition of Canada, what we call affectionately the NT triple C. I am the chair of their Prompt Payment Committee. I am here speaking on behalf of all of the people who employ tradespeople, train apprentices and journeypersons, make payroll, pay benefits and pension contributions, and actually do the work.

The NTCCC was established in 2004 to provide an organized forum for Canada's national trade organizations to share information and resources and to collaborate on issues that are of common interest. We have 10 association members, representing approximately 16,000 trade contractors and 400,000 workers or employees across Canada.

Our primary goal has been to address the issue of prompt payment or current lack thereof. I have spoken many times on the subject of prompt payment, covering its global applications, economic impacts, the inequality in bargaining power in the construction pyramid, the downward flow of risk, and impact on workers among others.

We have done our homework, commissioning studies and surveys and research, which collectively arrive at the same conclusion: Prompt payment legislation is needed to fix a major problem in the construction industry.

I believe I can try to distil this down to a very simple analogy. Making a case for the benefits of having prompt payment legislation is somewhat like making the case for why it's good to have oxygen. Just as people need to breathe oxygen in order to stay alive, trade contractors need to get paid in a timely fashion in order to stay in business. With limited or delayed access to oxygen, people gasp and struggle to stay conscious. Their day-to-day activities and their abilities would suffer greatly from that condition. When the oxygen is cut off, they die.

Replace the word "oxygen'' with "cash flow,'' and the same applies to trade contractors. I am here on behalf of thousands of trade contractors in support of Bill S-224, the Canada Prompt Payment Act, and to make the case for what should be a trade contractor's basic business right to be paid for work that has been completed and certified.

Late payment affects this country on many levels: jobs, investment, training, pensions, benefits, higher construction costs and productivity. We are not talking about days late. It is more like months.

It not only has a negative impact on individual firms but on the economy as a whole. I could speak to any one of these issues that fall out of delayed payments at length, going far beyond the time I have been allotted. Yet there are those who are opposed to prompt payment legislation. Their opposition, while framed or characterized with a host of potential problems and difficulties, is more properly explained by what I would call a feudal belief system where those closer to the bottom of the food chain should simply accept their stations and that which is done to them.

It is always interesting to note that no one has made an argument as to why prompt payment legislation is not good. They just don't want it legislated. All around the world countries and states have legislated prompt payment. The question becomes: "What makes us in Canada different?''

It is certainly not because we don't have a problem. We do. It is a problem that can lead not only to unethical activity but a great deal of hardship for the working families and the people operating their businesses.

Canada has always been a quiet leader on the world stage, from our medical and technological advances to the role that we have played as global peacekeepers. On this front, looking at the industry that literally builds this country, we have sorely lagged. The federal government's lead on this issue is critical to overcome the inertia that we face.

To summarize, the construction industry has substantially changed over the last 40 years in process management, policy and structure. Unfortunately, legislated contractual structure has not always kept pace, particularly when it comes to providing some protection to that industry which actually builds: trade contractors and their employees, those least able to negotiate freely for their rights. We are here today to ask this committee and the Senate to right that wrong and support Bill S-224.

[Translation]

Steve Boulanger, Deputy Director-General, Corporation des maîtres mécaniciens en tuyauterie du Québec: My name is Steve Boulanger, and I am the deputy director-general of the Corporation des maîtres mécaniciens en tuyauterie du Québec, a professional association created by Quebec legislation to regulate all plumbing and heating contractors in Quebec. We have approximately 2,550 members.

First of all, I would like to thank the committee for giving us the opportunity to express our views on the bill that is being studied and that we support. The CMTQ is working with the National Coalition of Specialized Trade Contractors of Canada to curb the problem of late payments in the construction sector. I would like to enlighten this committee with some data from Quebec, but based on the exchanges we have had, they most likely reflect what is happening in other Canadian provinces, as well.

In its November 2015 report, the Commission of Enquiry into the Awarding and Administration of Public Contracts in the Construction Industry, better known as the Charbonneau Commission, recommends reducing delays in paying contractors. Specifically, it is recommended that the Government of Quebec adopt legislative or regulatory provisions to propose, as part of a main contract and subcontracts, a standard on progressive production times and payments. In order to reach that conclusion, the commission was particularly concerned about the following statistic, which we supplied to it from a comprehensive survey: 77 per cent of contractors asked reported that they had refused to submit a bid at least once in a given project year because of the anticipated problem of payment delays. In nearly 60 per cent of cases, these were public projects.

A situation like this obviously ends up reducing competition, along with the other consequences, including the potential increase in project costs for the government. As part of a study on the impact of late payments in the construction industry, Raymond Chabot Grant Thornton concluded that the quantifiable economic impact was more than $1 billion a year in Quebec alone. In Canada, the economic impact of late payments becomes simply astronomical for the industry, which is one of the country's economic drivers. According to the data collected, two-thirds of contractors' accounts receivable are 30 days or more, and 20 per cent are 120 days or more. So billions of dollars are owed to contractors, who remain unpaid without justification.

In fact, we have seen that the situation is deteriorating from year to year, which is why we support the Senate's initiative with Bill S-224, An Act respecting payments made under construction contracts, to address an unacceptable situation that jeopardizes the survival of several companies. In doing so, the Senate is a leader in Canada in adopting better business practices that are fair and effective, benefiting both businesses and workers. Thank you. I will be pleased to answer your questions.

[English]

Del Pawliuk, President, Mechanical Contractors Association of Canada: My name is Del Pawliuk, and I am an owner-operator of a medium sized mechanical contracting firm in Sault Ste. Marie, Ontario. I am also the president and chief elected officer of the Mechanical Contractors Association of Canada.

Accompanying me is Mr. Dan Leduc, a lawyer specializing in construction law with the firm Norton Rose Fulbright, a long-standing corporate member of our association. He is here to answer any of your legal or technical questions, which I won't be able to answer.

The Mechanical Contractors Association of Canada, established in 1895, is a national non-profit association representing mechanical contractors across the country engaged in such disciplines as plumbing, heating, cooling, ventilation, air-conditioning, process piping, medical gas, et cetera, primarily within the industrial, commercial and institutional sectors of Canada's construction industry. Basically we make people comfortable.

We are in support of Bill S-224, the Canada Prompt Payment Act. There have been questions raised on why federal legislation is necessary to address the delayed payment issue within Canada's construction industry. Here are some of the questions that have been raised in the past, accompanied by some of our responses to these questions:

One of the comments that we hear frequently is: For construction contracts, the prime contractor must submit with each invoice a statutory declaration stating that all legal payment requirements have been met in that invoicing period, ensuring payment is being made to the first level of subs.

Our response to that is: This is fine, but this addresses payment and not prompt payment. The issuance of statutory declarations by general contractors is not a form of security for prompt payment, and the penalty for making a false statutory declaration rests with the Criminal Code. However, the Government of Canada has never pursued such charges against any general contractor, ever. It has never been done. With the knowledge that there is no real penalty to making a false statutory declaration, the apparent security for payment, let alone prompt payment, is plainly, with respect, non-existent.

Another issue that we hear about is: Contract security is required for every construction contract estimated to be $100,000 or more. This not only protects firms from non-payment. It provides a mechanism to raise delinquent payment complaints with the government.

This may be true. However, contract security has been in place for the past 20 years or more with no real success in securing timely prompt payment for subcontractors. For example, the Public Services and Procurement website sets out the applicable periods for making a claim on a labour and material payment bond.

Those limitation periods, as suggested, advise claimants who intend to take legal action that they must formally notify the principal and the surety. It makes no difference whether they are holdback moneys or of moneys owed. They have 120 days or four months in which to do it, a long period of time to have your money held up.

That is just a waiting period. It means that claim has been made. It has been registered. It could take another six months to a year before you see any money.

This doesn't really categorize that we have prompt payment. It's prompt payment, but the real problem is not getting paid. We will get paid eventually but when is the question.

Another comment we have heard is: The best way to ensure prompt payment is for the industry to encourage it among members of its associations. Firms should not sign contracts that result in anything but payment in a prompt fashion. The government's most effective strategy to achieve this objective is to support and work with industry in advancing this agenda.

These are some of the comments that are coming: Industry is aware of and working through the issue and has more efficient tools to address it. Unfortunately, the truth is that the industry has been trying to do this forever, without any success. It simply is not working and will not work in the environment when it pays to delay or withhold payments, the reason being just because they can and you have very few tools with which to go against them.

Other countries in the Western world know this and as a consequence have enacted some form of prompt payment legislation, both federally and state-wide. These governments have shown leadership and fairness. Our question is: Why is Canada alone on this? Is our industry substantially different from those in these countries? Our answer to that is absolutely not. It is all the same.

Another comment that we hear every once in a while is: Working with industry to improve their own contracting and payment standards is a far more effective and efficient approach.

The industry policing itself is not the answer, as one can see by the current payment practices which are eroding our industry. This is the reason we need some form of legislation to ensure stability within the industry. Poor, non-existent payment practices do not help the economy. Firms go bankrupt and are unable to properly manage projects when payment is slow. Technology suffers, apprenticeship programs suffer, and the economy suffers. In general, the lack of prompt payment for goods and services rendered puts a strain on the business, which sometimes leads to bankruptcy or going out of business.

The short story long is this: There is always someone who believes that the rules do not apply to them and that's why we have the issue. The industry and the associations talk about paying on time and everything else, but there's always someone that figures they're above the rules and they don't have to adhere to them.

Another thing that is sometimes brought up is that the industry has already developed standard construction contracts. That is true, but the problem with standard construction documents is that they are simply not used frequently. When they are used, we receive supplementary conditions that basically dilute that contract so that it is meaningless when it comes to payment. There's more in the supplementary conditions amending the CCDC2 contract than there is with the supplementary conditions.

Other potential questions are contained within our written submission to you, but taking our time into consideration we only mentioned a few today just to give you some examples.

These are a few of the arguments you may be hearing. We hope that by raising these potential questions with our answers it will help you in making your decisions on the legislation.

Once again, the Mechanical Contractors Association of Canada is in support of Bill S-224. We know there are some proposed amendments to the bill which may be necessary. We are willing to address these as they come forward with a view to helping make this a very effective and meaningful bill for Canada's construction industry.

In conclusion, we wish to thank the committee for allowing us time to make the case in support of Bill S-224. Passing this bill into law, in our opinion, is simply the right thing to do. Our future as contractors depends on it.

The Chair: Colleagues, you may have noticed last week that our committee grew to 15. We had a packed house at least one day last week. We have 12 here now, which used to be the size of our committee. Please keep your answers and your questions and answers short.

Senator Ringuette: I guess you read the transcript from our meetings last week and you saw where I was heading. The aim should be to get paid and not suspend or terminate your work on site. Hopefully we'll arrive at something that is better overall.

In your comments, Mr. Blair, you said "those who are opposed.'' So far we have not heard anyone at this committee who is opposed, so who are those who are opposed?

Mr. Blair: People may be shy on this one, but maybe I can use a Biblical phrase, if that is okay. Those who operate in the darkness hate the light. They are not coming out with public bravado about their antagonism or their opposition to it. However, the reality is they are working very diligently to ensure that they can confuse enough of the issues.

I have heard issues around constitutionality. I have heard issues with regard to not needing a legislative framework, that we don't need all of these things. The litmus test for us what was going on in Ontario during the first introduction of what was then Bill 69. All of a sudden municipalities were complaining about the timeframes attached to this demand, if you will, or this obligation to make timely payments.

Certain of the bonding companies were concerned that this would raise the risks they would to have to deal with. We will identify them as they become more aware. People are being silent right now but we know they are not acting in silence.

The Canadian Construction Association, CCA, presents itself as the national voice of construction. Interestingly, while they have trade contractor councils, in the end we don't believe they are supportive of this legislation because the issue in our mind is they are dominated arbitrarily by the general contracting community.

Senator Plett: I will be brief. I probably know most of the answers because I worked with these gentlemen in drafting the bill, but I want to clarify a couple of points.

Just in response to Mr. Blair's last comment about the Canadian Construction Association, I will take the opportunity even if they don't want to do it. You rightfully said that general contractors carry a bit of a bigger stick with Canadian Construction Association than maybe the trade contractors. I attended at a very prominent convention last winter with the Mechanical Contractors Association of Canada when a representative from the Canadian Construction Association went on record saying they were supporting this bill. Just in case they change their mind, they were certainly on record at this convention as saying, "Yes, we support this legislation.'' We indeed were thankful about that.

My question will be for the two lawyers at the table. It may be bit in reference to what Senator Ringuette asked about who is opposed. Next week we will be hearing from government officials. Because we have spoken to them we know that they will raise constitutional and jurisdictional issues. They will say that a contract between a general contractor and a trade contractor is a private contract as opposed to the contract between the general contractor and the owner.

I would like our counsel to tell us whether they believe we're on fairly solid ground in saying that these contracts down the supply chain are valid and that constitutionally and jurisdictionally we're on pretty solid ground.

Dan Leduc, Council Member, Mechanical Contractors Association of Canada: As a lawyer I get a front row seat on what goes on in the industry on a daily basis. I practise here in Ottawa, so a lot of my clients do contract with what is now known as PSP. Ultimately when Public Works or the Government of Canada contracts with a general contractor it imposes typically but not universally the same terms and conditions in what we call the prime contract to each of the subcontracts flowing down the contractual chain. It is already impacting the contractual terms of the contract between the contractor and the subcontractor by mandating that those same terms apply and flow throughout.

It is logical because when this gentleman here gets a tender package for the mechanical work on a federal project, he is bidding to the same terms and conditions that are found in that tender package that Public Works or PSP supplies. You're already doing that. Effectively you are mandating that the same terms and conditions apply throughout.

First, where it gets twisted is where ultimately that prime or general contractor imposes in addition its own standard form of contract. That's part of the problem.

Second, you're already impacting the payment security. Remember, there are two different things here. There is prompt payment, which means getting paid on 30-day terms, and there is payment security, which means getting paid period.

You are already impacting the ability of subcontractors to get paid. You are the only entity in the country that issues what are called two-tier bonds. You mandate that the general contractor obtain and provide two types of bonds: a labour and material payment bond and a performance bond. You're the only entity in the country that mandates that the labour and material payment bond be two-tier. That allows a claimant to be not only an entity that has a contract with a general contractor, but one that is even below the subcontractor, what we call the sub-sub. You're already providing some degree of contractual payment security by mandating what is called a two-tier labour and material payment bond.

I have heard different people raise constitutionality questions and so on. I have a problem understanding. I am not a constitutional expert, but you already mandate a lot of the rules that go into the contracts. They are private contracts between a sub and a general, but the terms and conditions are already imposed on that subcontract by the prime contract.

I don't know if that answers your question, but I just don't see why that is a concern.

Senator Plett: Yes, it does, and I will for the committee be supplying an opinion from a constitutional expert on it. Mr. Boulanger, do you want to answer that question as well?

[Translation]

Mr. Boulanger: I have nothing to add to the answer. I think that, in Quebec, there is federal legislation that applies in the case of some contracts. The question has never been raised with me.

What we hear about contractors is that they have to find a way to get paid within a reasonable period of time; otherwise, they cannot stay in business. Regardless of what the contracts contain, the difficulty in complying with them remains. All contractors set out in their contracts payment terms within 30 days. That provision exists. The problem is enforcing these terms and applying them. Obviously, there is always recourse to the courts. However, in Quebec, it takes two to three years for a decision to be made with this kind of recourse, which is why adopting accountability legislation with an adjudication mechanism is important.

[English]

Senator Ringuette: Mr. Leduc, am I to understand that for the greater part of the federal contracts the subcontractors have a form of coverage, but are you saying that coverage reflects what is in this bill or is limited to what is not in this bill?

Mr. Leduc: When you're a subcontractor you have two risk buckets. One is getting paid period, and we call that payment security. Am I going to get paid? Is the solvency of the entity I'm contracting with, the general contractor, good enough? Is it backed up by a labour and material payment bond, for example? That's payment security. That's not this legislation. Let's set that aside.

The other bucket is am I going to get paid on 30-day terms? I'm in an industry that's totally premised on cash flow. I don't acquire assets. I don't sell assets on consignment. I need those 30 days.

It is important that this gentleman here pays his labour weekly, his HST and source deductions monthly, and gets paid on his bills every 92 days on average. That is payment security. We need to make that more cash neutral. We need to close that gap to assist so that they are not financing the work.

Senator Ringuette: Essentially what you're saying is that the 30-day payment is not currently in the Public Works contract, which has the same benchmarks for the general contractor as the subcontractor.

Mr. Leduc: It is. That's what Mr. Boulanger just said. Everybody operates on 30-day payment terms. The reality is that it's not happening. The money is not flowing through quickly enough.

Senator Ringuette: Public Works is not following up on the terms of the contract.

Mr. Leduc: I don't think it needs to. It needs to impose, and here we have legislation that would, that the parties to the contractual chain are all on 30-day net terms.

Senator Enverga: Normally when you do a bid, there is some risk. To what extent do subcontractors and contractors include a margin to cover the risk of late payment?

Do you think there would be savings for the contractors? Do you think those savings will eventually trickle down to the government and then to taxpayers?

Mr. Leduc: I have no reason not to believe that because right now they are financing the work being performed on Public Works jobs by the fact that they are getting paid on 90-day terms but are paying everybody else on 30-day terms. They are in a net deficit the whole duration of the project, so they have to rely on some kind of a credit facility being available to them, for which they are paying a premium. If they were paid on net 30-day terms the same as they're paying everybody else, they would be in a cash-neutral situation. Then they don't need to rely on my credit facility, the cost of borrowing is zero, and my price becomes more competitive.

The Chair: I would think that's reflected in their bid.

Mr. Leduc: In the price. It turns right around and assists more competitive pricing by contractors. They don't have that additional risk item on overhead.

I have to carry my RBC credit facility because I will have to finance this work.

Senator Enverga: Would you say it's a win-win situation for the government and contractors?

Mr. Leduc: I would hope so. I would expect pricing to be that much more competitive and you will invite more bidders because they will know that you have mandated 30-day payment terms.

I'll sign up for that or I can do a private project where I will get paid on 120-day terms. Obviously I'm going to do more work for the federal government. You'll get more competitive pricing.

Senator Moncion: What is needed in legislation right now to change behaviour? You're asking for 30 days. I am not necessarily sure it will correct the problem because of the requirement to get paid within 30 days. Progress reports need to be provided, and the 30 days start counting from the time the progress report is handed in. If the progress report takes 90 days to come in, the 30 days starts counting once they have the report.

I want to understand what is needed that is not already there to change the behaviour?

Mr. Leduc: Apparently, there was a time in Canada in the 1960s and 1970s where construction companies were getting paid on 30-day terms. That included a payment certifier going through a whole process and so on. I hope in this day and age with the technology we have that would be even faster.

Ultimately, you have a group of people who are not party to a contractual chain, namely consultants, who have to go through a payment certification process. It is a form of quantity survey to make sure the work they are invoicing has actually been done. That sits on a consultant's desk and then goes to a sub-consultant. That process is a problem in and of itself. We can't control that here and now.

Everyone is mandated to 30-day terms. You give the contractor the ability to say, "It is seven days and I haven't been paid.'' Then Public Works or PSP can turn to the consultant and say, "Hey, I've got to pay these people in 30 days. Pull yourselves together. Get this done in a faster process.''

I grew up in this industry. My father was an electrical subcontractor in the city. He did lots of work with what was then known as DPW. He got paid on 30-day terms. Why aren't we doing that now? Ultimately, there are a lot of reasons why we're not. We don't want to talk about them outwardly, but I don't see the mechanics of getting it done as a hindrance.

You have to arm the contractors with some form of leverage, whether it's quick adjudication or the ability to demobilize as an ultimate threat. With a contractual, legislated, mandated 30-day period, at least they can hang their hat on that and make those decisions. Give them the ability to make decisions.

Senator Wetston: I want to follow up on the last question. You seem to be reluctant to say what has happened. What has happened? Were there culture changes?

Mr. Leduc: And you want a short answer.

Senator Wetston: I'll take any answer.

Mr. Leduc: I appreciate what you're asking. Let's do some large math. If you have a national general contractor doing $750 million worth of work a year and ultimately 80 per cent of it is done by subcontractor because they don't self-perform a lot of their work, they are bringing in $62 million on a monthly basis.

If the general contractor who is getting paid $62 million on a 30-day term sits on it for 30 days and invests it in a GIC at three points or in a mutual fund at seven points, after 30 days it will be generating hundreds of thousands of dollars. The ultimate conspiracy theory is saying that is what is going on.

The payments aren't coming down and flowing through. Somebody is sitting on money for a long period of time. That money is generating income for somebody. If someone asked me to hold $62 million for 30 days, I would say, "Okay, what should I do with it?'' I will put it into something that is interest-bearing. I will do something with it.

We have very sophisticated investors now. I'm not saying this is happening, but I hear things and I see things. There is no benefit for somebody to pay you on 30-day terms. They would rather sit on your money until you complain and then they will pay you.

If I don't pay my Rogers bill in 30 days I get a text message saying I have 10 days to pay it or they will cut off my service. Why don't we do that for contractors when the numbers are much larger?

The Chair: Obviously at some time in the past one contractor delayed payment, didn't pay, and nothing happened, right? He could delay it another month and still nothing happened. Public Works didn't say anything. No one said anything. The only people screaming at him were the people who billed him, so he got away with it.

Mr. Leduc: It became an industry norm.

The Chair: If you don't shoot the guy they are all going to end up doing it, right? You have to deal with it at some point.

Mr. Leduc: You can take an analysis of other industries and aged receivables as against the construction industry.

The Chair: That was an exaggerated punishment but you know what I am saying.

Mr. Leduc: I appreciate that. Something dramatic happened in 2008-2009. When you look at Stats Canada analysis of aged receivables of the construction industry against all other non-financial industries, the divergence starts in 2008- 2009. When we hit a recession these gentlemen were so happy to have work that they didn't complain. The numbers started going from 52 days to 60, 70, 80 and 90 days. You can see it yourself on the StatsCan site.

Something then happened, in my mind, and I think it was: "We're just so happy to have work that we're going to shut up, do our work, not complain too much, and operate on 90-day terms.'' It has reached a point now where it has become a norm. It's a corporate culture that is feeding on itself, and they are paying the penalty.

Senator Wallin: My question is on this same issue. I guess part of the problem is that inside the construction industry you have the general contractors who, for lack of a better term seem to be the bad guys or the subs that aren't. I don't know, but there are all these references to people's behaviour, what their motivations may be and why they are not coming out publicly and talking about it. Your conspiracy theory makes perfect sense, given the financial circumstances.

You keep making reference that the industry encouraging among its members and its associations prompt payment is not working. The industry policing itself is not the answer, as one can see by current payment practices which are eroding the industry. Are you talking about the general contracting side of the industry and not the subcontracting side?

Mr. Leduc: Actually the payments start with the owner. If Public Works can assure us that they are paying the general contractor on 30-day terms and letting people know when they are making that payment, then the issue is not there, obviously.

Senator Wallin: Then the issue is not there. Is that correct?

Mr. Leduc: I don't know. I know that Public Works does not pay on 30-day terms. I've seen it. I have issues with it. That's how I carry on my business. Public Works is not paying on 30-day terms, as a general rule, and that could be because the outside consultant they contracted with is not certifying payment quickly enough.

Ultimately, there are no bad guys per se. There is a bad problem. I'd rather focus on the problem than on the people. I can't legislate against the people. I can legislate against the problem and I can promote legislation against the problem.

Senator Wallin: You're saying that it's some kind of systemic problem because you have the Criminal Code. It's hard to legislate against bad or immoral behaviour. There are already punishments there. I'm just trying to get at —

Mr. Leduc: What the core problem is?

Senator Wallin: Yes.

Mr. Leduc: The core problem is people are signing contracts and not following their own contracts 30-day terms. People are not facilitating the fact, as they should be, that there is no downside.

Senator Wallin: Do you think that is more government than general contractors?

Mr. Leduc: I think it's everybody. It's engineers and architects. It's the whole industry.

Senator Wallin: And the consultants?

Mr. Leduc: It's got to start somewhere, and it starts with the people who finance these projects. On this level it would be the federal government. What a great place to start. The people who have the gold make the rules. We're asking you to make the rules. You have the gold; you are the payer.

Mr. Blair: It would be very wrong to isolate one group or individual and say that they're the problem. I believe 1982 was the introduction of what we called "condition precedent'' or "paid when and if'' clauses.

It became an introduction. It came through the general contracting community in Ontario. That became a new norm, and everybody was guessing what the courts would do about it. Does that mean a condition? Does that mean you get paid even if the other person didn't? How does that work? That would be the first point.

The second point is there are good general contractors who understand the relationship that they need to have with their trades. There are some that do this because they understand that the efficiencies of their work are very much contingent on the people doing it.

Another really important part of this is that there is an economic benefit for you folks as the government that you are not deriving. Before I decided on the bliss of being the executive director of our group, I was a trade contractor for 25 years in the masonry industry. I can tell you unequivocally that contingencies have been added to bids to address what Dan talked about: the fact that it's going to take us longer. There is a risk there now. Even though the documents may say that everybody is supposed to be good at what they do and abide, the real fact is they're not.

Ii is important in our view that you put in the transparency and the accountability, and Public Works is going to derive an economic benefit. One thing that doesn't come out is that the number of trades that are bidding and capable of bidding the projects is diminishing in an exponential way.

The number of people who can take on the Parliament Hill projects of $70 million or $80 million worth of restoration work is an ever-declining number. It is not because they don't have the skills. It is because they don't have the cash. They don't have the ability to manage it.

We have the reports. We wanted to make sure we had an objective, empirical way of doing it. Clearly, in our view, the federal government is not deriving a benefit that it naturally should on behalf of taxpayers and everybody else, because people are putting in contingencies to address that they may not get their money in a timely fashion.

Senator Wallin: You will have resistance from the people who are making money while holding the cash.

Mr. Blair: Exactly.

Senator Black: Thank you, gentlemen, for helping to clarify what is an important problem that we need to consider. I have a couple of questions that I would like your guidance on, as I try to settle on what is the most effective route.

I take from the line of questioning that my colleague Senator Moncion commenced that you have an arsenal of weapons now that will give you the ability to walk off the job, not perform the work and not be replaced. That's the weapon you want and you think will solve the problem.

Mr. Pawliuk: I would like to answer that as a contractor. The last thing any contractor wants to do is walk off a job.

Senator Black: I accept that.

Mr. Pawliuk: That would be the last resort we would ever use, because we would lose money doing it. In order to get the greater money, we have to have that expense.

Senator Black: I accept that, sir.

Mr. Pawliuk: We really need a quick resolution or adjudication process where there is a period of 30 days, once a problem arises, when we can make a claim on it. An adjudicator comes on board and resolves the issue between the two parties in two weeks or something like that, that we can live with.

The problem now is that the tools are there to collect your money. I went through a case which Mr. Leduc represented me on. I was owed $620,000 by a mechanical contractor. I was acting as a sub to another sub. We collected our money, exactly what was owed to us.

However, Mr. Leduc is the only winner. I paid him over $100,000 to collect this money. It took four years. That company ran with our money, over half a million dollars, for four years. We never got a penny of interest because we settled at pretrial. My decision was not to go to trial because the costs would go exponentially higher.

Senator Black: I'm very sympathetic. I understand your position completely, but I want to answer effectively what this legislation does. It gives you the opportunity.

Mr. Pawliuk: Exactly.

Senator Black: You may not want to take it, but it gives you the opportunity to stop work without being replaced. That's the weapon.

Mr. Pawliuk: Exactly.

Senator Black: It's important that we understand competing interests here. I understand that we're going to hear from a contractor tomorrow and I think we should hear from the bonding industry.

When you were asked a direct question, and it was a great question, about who was opposed to it, you were vague in your answer. Tell us who is opposed to this. Who doesn't think this is the right thing?

Mr. Blair: Senator Wallin said it very well. The people who are making money by managing other people's money now are opposed to it, and that's unequivocal.

Senator Black: Those are general contractors.

Mr. Blair: Yes, and at the end of the day the other side of it is that there are people in public office who don't want their world affected by that adamancy, that efficiency and that accountability.

Senator Black: What does that mean?

Mr. Blair: The Charbonneau Commission dealt with issues of trust and accountability and identified an inordinate amount of control. It was a concern because if you're the person controlling the funds you have an inordinate amount of weight with the other people that you're dealing with. It's the nature of it.

If I can come back to another point, the efficiencies are very real. When we have a system of accountability and attachment we should understand what happens when a trade contractor is not getting his money. He doesn't announce to the general contractor or to the owner that, by the way, he is slowing everything down, but I can assure you he is going to mitigate the damage he's experiencing and he is going to slow it down.

Senator Black: I understand the problem. My question was related to who else should we be hearing from.

Mr. Blair: I think the municipalities. It will happen at the provincial level. They have expressed a deep concern about being required, if you will, or requisited to have to move in this direction. I don't understand why.

Senator Black: That's interesting.

Mr. Blair: They have gone on record before what was the Reynolds commission, which just presented the testimony of various groups. The Ontario General Contractors Association are good people, but in the end they're not supportive of a legislative solution.

Senator Tannas: Senator Black referenced bonding and that we have somebody coming to testify from the bonding industry. Is that right?

The Chair: I don't think we do.

Senator Tannas: Let me ask you then about bonding. Have any of you been given any sense from your bond issuers how much your work programs could be expanded if this legislation were passed?

Going back to your statement about not having the cash, what kind of capacity would you be able to take on? You don't have the cash and the bonds guys are all looking at your cash. Are those two connected, or is it simply your own internal working capital and not an issue with bonds?

Mr. Pawliuk: The bonding people decide how much bonding you can do by how liquid your company is. They want to see so much money in assets and so much in liquidity.

It is all at risk. Every time I have to sign off with the bonding company they want your kids, your house and your cars: they want everything. I used to get the cold shoulder for a month in my house because I had to sign the house over as collateral for bonding. Prudent people never go to those lengths to put everything on the line. At least I don't think they should. I'm a bean counter by trade.

You have to manage the risks, and that's what the bonding companies are doing. They want to see as much liquidity in your company as possible, so that if you default they have the money coming in. They won't be out money. They're going to get it from your house, your cars, your properties, or whatever. That's what they're looking for.

If we are collecting money quicker we have more liquidity because we're not borrowing from the banks. In retrospect, a question was asked as to why we were going to longer payment terms. When interest rates back in the 1980s were 14, 15 and 16 per cent, there is no way people could wait 90 days. We as contractors would have all been bankrupt. The cost of borrowing money right now has come down and we can swallow some of this. We have to work. If we irritate a general contractor too much or another sub that we work for, we can't get any work. In order to survive I need to have my people working.

Mr. Leduc: It would benefit the bonding industry. There are two types of bonds. Generally there's a performance bond and a labour and material payment bond. The labour and material payment bond is payment security. That's not what is involved here, but on the performance bond side the subcontractors provide the performance bond. If they're being paid on 30-day terms they're much more cash neutral. They are much healthier. The chance of insolvency is much less and therefore the chance of having to call on that performance bond is reduced. The surety association should be happy with that, I would think.

Senator Tannas: My point is that they should provide every contractor with a larger capacity, a larger work program that they would be prepared to provide bonding for.

Mr. Pawliuk: That's exactly how it works. The more liquid you are and the more assets you have, the higher your bonding limits are.

Senator Plett: Senator Black has been trying hard to get you to commit to the problem that people are. Most of us realize why you don't want to point fingers, and I accept that.

The people who are the problem clearly are not here testifying. They're the problem. That's why they're opposed to the bill. Why would somebody who is not paying their bill want to come here and testify that this is a bad bill?

"Why don't do you think it's a bad bill?'' "Well, because I don't want to pay my bills.'' Would you concur with that?

Mr. Leduc: Do you know who is part of the problem? These people are part of the problem as well. They are the nicest people in the world. You want to do business with these people. They pay everybody on 30-day terms and accept payment on 90-day terms. They're part of the problem.

If you want to focus on the problem, we can't self-regulate ourselves in the industry because we're all super nice. We're all trying to take advantage. It's very competitive. "I can't trust him; he's a competitor.''

Senator Wallin tried to ask that. The problem is throughout the industry. It's endemic to the industry right now. You ask me to pinpoint somebody. It's generals. It's subs. It could be sureties, I don't know. It's owners. It's engineers. It's consultants. It's everybody.

Senator Plett: Did you want to answer that, Mr. Boulanger?

[Translation]

Mr. Boulanger: In order to shed some light on the situation in Quebec, I can tell you that the entire construction industry, so subcontractors, sureties and general contractors, agrees with a bill on quick payments.

Lastly, I very much liked Mr. Leduc's remarks that the legislation should not be aimed at a group of individuals, but rather seek to counter an overall problem.

The current bill also contains elements that will benefit general contractors. Take the provision on the deemed approved payment claim, for instance. It is an advantage for general contractors to receive this money. They want to make payments as quickly as possible if they are paid, because the sites will work well. They will be able to deliver on time with acceptable quality, even better than expected.

I think that, from the perspective of the entire construction industry in Quebec, it is a very positive bill that addresses a global problem. However, there are some contractors who do not want to have rules imposed on them.

[English]

Senator Plett: Senator Moncion raised the issue that this won't solve all the problems. We still have architects and engineers who do not always approve progress claims on time.

You have access, Mr. Pawliuk, to finding out when the general contractor has been paid in most cases. In your opinion is the lack of certification the major problem or is it simply lack of payment after the certification?

Mr. Pawliuk: Sometimes one is more than the other. It just depends on the people we're dealing with. We have situations back home where it is the engineers who drag their feet. In other cases it is the general. Even if somebody is working as a sub to a sub, it could be the prime subcontractor that's lagging.

It's people. It makes no difference where you go or what. It's the individual people who decide that the rules don't apply to them or whatever.

There are good general contractors that pay on time and we enjoy working for them. I won't bid on the work of some engineers in our area because I won't make any money on. There are general contractors I won't bid on either because I know it's going to take me three, four or five months to get paid.

Senator Wetston: Senator Plett, I now you're going to be bringing a constitutional expert to speak to the committee.

Senator Plett: It will be an opinion. He's out of the country, but I'll bring an opinion.

Senator Wetston: The only reason I asked is because remedies are important. I know an adjudication process is contemplated. I recognize that you might be contemplating somebody who could adjudicate binding resolution.

Without putting words in your mouth, you would probably prefer not to have legislation but you feel you need to have legislation, if I can say that. The only reason for that is that you get into issues around effective legislation and effective remedies. Legislation is important, but the remedies are probably more important because then it will not be worth what you're attempting to achieve.

As I understand it, we don't have any clarity around what a dispute resolution process might like look. Do you have more clarity on what that might be? Obviously, the government would have to enact legislation to support that.

Your timeframes for getting paid are pretty tight. I'm not suggesting they're not appropriate. I understand the rationale for it. What if the dispute resolution process doesn't materialize in a way that you hope? What then?

Mr. Leduc: You already have, with your standard acquisitions clauses and conditions, some of the most beautiful verbiage in dispute resolution. It's prose. It looks really good on paper. The process in hand, though, doesn't work because it is going to take a couple of weeks to move from Public Works to the Department of Justice. It takes another two weeks for a Department of Justice lawyer to get in contact with me, if I'm acting on behalf of someone. By the time we decide how that protocol will play out we're into months two and three. Lawyers are part of the problem as well as the process. Again, your standard clause on dispute resolution is beautifully written. It looks really good but it's not just working.

The adjudication process would be construction specific. It's meant to move along that process in a much more informal manner, if I could put it that way. We're happy. We don't need viva voce evidence. We can simply make a written submission, knowing full well that there might be some opportunity to appeal it. Whether it's a judicial review or some other available appeal, ultimately we want a quick resolution because it's a cash flow issue. We don't want to have to go into arbitration, choose an arbitrator and move that process along because that is going to take months and months unto itself.

It is an alternative to what we have currently to try to shorten that process. It's being used in the U.K. Everybody is borrowing the U.K. model. It seems to work there; ultimately it is working there.

Senator Wetston: Would you have the stats from the U.K. to demonstrate how it's working? Could we get some of that information?

Mr. Leduc: I could get that to somebody, yes.

Senator Wetston: It might be worthwhile.

Mr. Leduc: Actually, the Reynolds report has hundreds of pages on adjudication.

Senator Wetston: I'm an Ontario senator, so it's useful to look at that report.

Mr. Leduc: It's online. It goes through it in detail.

Senator Black: As we prepare for next week's constitutional discussion — of course everyone is excited about that — people tend to always dismiss constitutional arguments, but that's how things are framed here. Is the fundamental argument against your position that this whole thing is property and civil rights in the province and therefore not the federal government's territory? Is that the nub of the argument against your position?

Mr. Leduc: We don't know the particulars of the argument against. From the construction industry perspective we have lien rights from the provincial regime. The moneys flowing down are impressed with a trust. You still have the bonds and so on. They're armed with a lot more tools in terms of payment security. That's why as compensation the federal government has two-tier bonds.

You are already imposing the constitutionality of how you govern what is in a contract between a sub and a general. In fact you allow a lot of subs to incorporate pursuant to the Canada Business Corporations Act. Their actual existence and ability to contract are generated by the federal government.

They said there might be a constitutional question, and I'm at a loss.
We have spoken internally. When it first came up I said there must be something Treasury Board has in the Financial Administration Act that doesn't allow certain things to happen. I can't find it. When somebody lets us know what the constitutional issue is, we will be happy to respond. We're kind of in a vacuum right now. I don't appreciate what it is.

The Chair: From our point of view everybody who has self-interest in this knows about these hearings. If there are issues, if they don't support the bill or there's a constitutional question, they have full opportunity to come here and bring it forward. Otherwise we're just guessing what other people might say. With that, I thank my colleagues for coming here today. It was a pretty spirited discussion.

We are continuing our examination of Bill S-224, An Act respecting payments made under construction contracts. I'm pleased to welcome, in the second panel, from the Canadian Institute of Steel Construction, Edward Whalen, President and CEO; from the Canadian Automatic Sprinkler Association, John Galt, President; and from the Electrical Contractors Association of Ontario, Dan Lancia, Jeff Koller and Bill McKee.

Gentlemen, thank you for being with us today. Please proceed with your opening remarks.

Edward Whalen, President and CEO, Canadian Institute of Steel Construction: My name is Ed Whalen, President and CEO of the Canadian Institute of Steel Construction. The CISC is the voice for the entire steel construction supply chain, including steel mills, steel warehouses, service centres, steel fabricators, erectors, detailers, suppliers, engineers, architects, builders and other stakeholders. Our members are both union and non-union and include the unions themselves.

Our industry represents well over 120,000 people across Canada working in offices, manufacturing plants and on construction sites. We produce, supply and erect in the Canadian market but also around the world. In Canada, fabricate and build all types of structures, such as heavy industrial steel structures for the oil and gas industry in Alberta and Saskatchewan, steel aircraft hangers for defence construction, steel bridges such as the federal Champlain Bridge in Montreal, and commercial institution buildings of all sizes across the country.

The steel industry is 100 per cent supportive of Bill S-224. We need payment legislation with teeth, and we need it now. We are encouraged by and supportive of the amendments that set a defined period for adjudication and feel a payment period from the general contractor to its contractors should be the same as the government has with the general contractor.

The trend of delayed payment and non-payment is rampant, increasing in my opinion, and totally out of control in Canada. Why? Because it can.

There are no negative consequences for the payer to delay payment, while there are no remedies to quickly and cheaply mitigate a condition of non-payment or delayed payment for the payee. In our belief Bill S-224 does exactly this.

Does prompt payment legislation work? You bet it does. You just have to look at the U.K. model, for example, identified in the Ontario Reynolds report as having an exceptional record for ensuring prompt payment within the construction industry. With their time-based adjudication system, it has an outstanding record of resolving disputes in a timely fashion and keeping the project on track.

Over one-quarter of our industry's receivables are classified as non-payment in the over 60-day category. Banks deem accounts receivables over 60 days to be uncollectible, therefore affecting our industry's ability to borrow, meet payroll, purchase material, and pay subcontractors and other expenses.

Delays in payment at the top create a wave of payment delays down the entire supply chain. Delays in payment negatively affect input costs and bid prices. Increased costs also have a negative impact on the ability of Canadian companies to compete against foreign companies internally and globally.

A recent statistic stated that for every $1 Canadian companies invest in productivity, the U.S. is investing $8 U.S. Not surprisingly the U.S. has prompt payment legislation federally and in most states, providing an environment where money is flowing through the economy and companies have access to their money for investment.

In Canada, our industry is competing against other countries and many of them have prompt payment legislation. Not having prompt payment legislation here while most of the Western world has it is putting Canadian companies at a competitive disadvantage.

As the steel industry looks for the best markets to participate in, risk is one of the primary factors. The shifting of Canadian production away from Canadian projects to global markets where legislation for prompt payment is more favourable is now becoming a major consideration. This shift away from the Canadian home market is a detriment to local competition, availability of expertise and bid prices.

If companies don't have the money they are legally owed in a timely manner, there is no money to invest in productivity improvements, equipment, lean manufacturing, training apprenticeship programs, carbon reduction and energy efficiency. There is no money for salary increases, company pension plans or other health benefits. The standard of living we are used to in the middle class begins to erode.

Bill S-224 costs the Canadian government and taxpayers nothing: no grants, no loans, no money for employment or other start-up schemes. If you factor in the costs of reduced competition, increased bid prices, business failures and unemployment, Bill S-224 will reduce government costs, benefiting all Canadians while making our construction industry more competitive.

Bill S-224 will free up millions of dollars, provide companies with working capital, secure existing jobs, create new jobs, stimulate investment and get the construction industry back on its feet. If the government is looking to the construction industry to help rebuild its infrastructure, stimulate the economy, put the middle class back to work and create a vibrant environment for entrepreneurs, then prompt payment legislation is a must.

John Galt, President, Canadian Automatic Sprinkler Association: I am President of the Canadian Automatic Sprinkler Association, but I also serve as a trustee on our sprinkler industry pension plan. It's a national plan. I also serve as a trustee on the training plan, and we also have welfare plans too.

I want to come at this subject from the perspective that addressing this culture or this behaviour is degrading in that it is getting worse and worse. I would also like to tell you that we're a relatively small trade in the construction industry. We come in near the end of a project. We tend to be a sub of a sub, so when you hear that expression that tends to refer to my members. Very often the timely flow of cash is important.

My fellow tradespeople will elaborate on a lot of things. I'm going to deal with a real-life example that serving as a trustee we see often with small contractors and sometimes large ones too. The great multitude of small contractors across Canada is faced with the problem of managing their cash flow because of lack of prompt payment. As a result they have to choose what to pay. We hear this is a problem with different Canadians.

Small contractors generally meet their payroll. The individual gets paid every week and assumes that so are his benefits. In actual fact what often happens, as is frequently the case, is that benefits are not kept up. They are the things that lag, along with pensions and these things that we as trustees wearing a different hat see regularly or monthly.

A real-life example that took place last year was that of an employee with the Province of Ontario in southern Ontario who contracted cancer. He was diagnosed and prescribed to take a certain number of drugs. The good news was that his benefit plan covered those drugs. That was excellent news.

However, his benefit was refused because the employer had not been paying it. He had been paying him weekly, his payroll, but had not been paying into the benefit plan. The term we use is that he was out of benefit and didn't get access to it at a very critical time.

To a lesser extent, this happens with children who go to the dentist, need glasses and various things that welfare and benefit programs cover, which we're all familiar with. They have that immediate response. We hear about it immediately.

Just to touch for a quick moment on pension plans, when a couple sits down to plan for retirement there is a perceived benefit that they are to get. They will phone up the plan provider and they will find out what that pension benefit should be. They know what they are going to live on and how to set up a budget. Often it's lower than expected. Why is that?

When we look at the history of the individual he was working regularly and steadily for 25, 30 or maybe more years. He has holes in his employment, these three, four or five months where the employers he was working for didn't make contributions to his pension plan, along with perhaps the other plans. Most often the other plans all get ignored. At the end of the day when the actuary does his work and all the fine-tuning, that benefit the he is to receive is less than he would have otherwise had.

Fundamentally, make no mistake. Managing cash flow has very severe unintended consequences, not just for companies but for the people who work for them. Prompt payment legislation is the only solution. The only thing that addresses that fact is some financial disadvantage for those holding the money that outweighs not paying it promptly.

When we look at this across Canada it's not a problem just for companies. It's a problem for everyday Canadians. Indeed it is a problem, therefore, for all of Canada.

Jeff Koller, Executive Director and Board Member, Canadian Electrical Contractors Association, Electrical Contractors Association of Ontario: Some of my remarks today will perhaps complement and address some of the questions raised by the previous panel. We believe it's an issue that is critical to the construction industry, to economic development and to job creation across Canada. The issue of delinquent payment in the construction industry is systemic, rampant and more often the norm than the exception.

My name is Jeff Koller, executive director of the Electrical Contractors Association of Ontario which represents approximately 800 electrical contractors who employ 17,000 members of the International Brotherhood of Electrical Workers, or IBEW. With me is our president, Dan Lancia, who is also the owner of an electrical contracting business, and Bill McKee, our former treasurer, long-serving board member, member of the Electrical Contractors Association of Ontario, ECAO, and owner of an Ottawa-based electrical contracting business that has experience doing work for the federal government and its agencies.

Collectively, ECAO is a member of the Canadian Electrical Contractors Association which represents 8,000 electrical contractors across Canada who in turn employs 70,000 licensed qualified electricians. CECA is a member of the National Trade Contractors Coalition of Canada, whose primary purpose is to persuade the Canadian government to do the right thing in addressing the growing problem of delinquent payments to those in the construction industry.

The construction industry employs more than 1.2 million Canadians, representing 7.1 per cent of the workforce that in turn accounts for 6 per cent of Canada's gross domestic product, which is worth about $73.8 billion.

Construction is a primary driver of economic growth in Canada. More than 80 per cent of the construction is performed by trade contractors such as the gentlemen sitting with me and the people that they employ. More often than not trade contractors are made to wait several months to be paid for work that has been satisfactorily completed, while having to maintain their own weekly payroll obligations, as well as pay federal, provincial and municipal taxes, health and welfare benefit plan remittances, pension plan contributions, workmen's compensation remittances, and myriad other bills and obligations that come with running a business.

Construction trade employers, even though they account for more than 80 per cent of all construction activity, are often subcontractors to a prime or general contractor who was hired by the project owner or developer, in this case the federal government and/or its agencies. As such, they have payment terms and conditions imposed on them over which they have little or no control if they want the work.

Historically, employment in construction has been more sensitive to the ups and downs of the economy. This is something that Dan Leduc alluded to previously. This held true in 2009 and 2010, following the recession or the downturn in the economy at the start of 2008 and carried through 2009. Employment decreased 1.6 per cent overall, while employment in construction fell 5.7 per cent.

In 2010, when the economy saw signs of improvement, employment in all industries grew at a pace of 1.4 per cent, while employment in construction advanced 4.9 per cent. The point is construction as a sector is an important driver of the economy.

Our request is simple, that you endorse the legislation before you, Bill S-224, and refer it back to the Senate floor for third reading and passage so that it may proceed to the House of Commons for debate and passage into law.

This is a matter of fairness, equity and giving the trade contractors of Canada who employ so many and can contribute so much to the economy a fighting chance to keep their businesses viable and solvent.

You have examples here in Ottawa of long-standing, established businesses representing investments of life savings that have gone bankrupt because of delayed payments for satisfactorily completed work. There was an article in the Ottawa Citizen on December 11, 2015, that chronicled some of the problems with Lansdowne centre. It was entitled "Lifting Lansdowne's veil: Lawsuits tell story of escalating costs, unpaid bills, business failure.''

This should not happen and would not happen if legislation existed to compel businesses to conduct themselves honourably and equitably, but not everybody does. That legislation is for another level of government, where it affects the private sector.

The point is the problem is continuing to grow and becoming worse. It's endemic in construction. It's not tolerated in any other industry. Delinquent payment in the construction industry starts at the top of the payment pyramid and has a huge ripple effect down to the subcontractor at the bottom.

The legislation before you affects only federal procurement projects where the federal government and its agencies and commissions are the developers or purchasers of construction.

Unfortunately, federally procured construction projects are as slow to pay as any private sector developer, particularly when third party project management companies, such as Brookfield Global are brought into play. Mr. McKee can address any questions about that.

You see a construction site with perhaps 300 workers on it, a big sign for EllisDon or PCL, and you assume all 300 people work for that company. In reality, only a handful are direct employees. The rest are subcontractors or trade contractors that are doing the work. You have electrical, plumbing, masonry, foundation and steelwork subtrades employed by the general contractor to make that project a reality.

Delinquent payment impacts the contractor's ability to grow his business by preventing him from hiring new employees or apprentices. It impacts investment in new machinery and equipment. It impacts the contractor's ability to bid work because his or her cash flow is stretched too thin.

Critics who have attempted to introduce prompt payment legislation in the past have suggested that such legislation would drive up the cost of construction particularly in the public sector when the opposite is true.

Late payment risk, not prompt payment, is what drives up the cost of construction as contractors have to factor the risk of late payment into their bids. Shrinking the pool of eligible, qualified and reputable contractors drives up the cost of construction, not prompt payment.

Ultimately, it impacts the solvency of businesses which we're seeing more frequently and in growing numbers. A vast majority of jurisdictions in the developed world have prompt payment legislation in place for the construction industry, recognizing the value of its contribution in driving job creation and economic growth.

The federal U.S. government, 49 U.S. states for public sector projects, 31 U.S. states for private sector construction, the United Kingdom, Republic of Ireland, countries in the European Union and New Zealand all have prompt payment legislation in place, many of them for 10 or 20 years and some for as many as 30 years. Why don't we?

The principles of prompt payment are simple: pay for certified, completed work, not work in dispute, within approximately one month, not three months, four months or longer.

Attached to our written submission as an appendix is a letter from a contractor based in Yukon that describes his attempts to collect payment on a federal project servicing remote border crossings for over a year.

Senator Day: On certified, completed work, Mr. Koller, all of the contracts would make provision for someone such as an engineer or architect to certify that the work has been completed.

Mr. Koller: Yes.

Senator Day: The situation you talked about was certified, completed work but it still took over a year to get payment.

Mr. Koller: That's my understanding.

Senator Day: We would have to look at that. Why wouldn't they have done something to prompt the payment if the work was certified as having been completed?

You used the terms quickly and cheaply, Mr. Whalen. You're hoping for legislation to achieve quick payment at a reasonable cost. The reasonable cost would be the alternative and the alternative would be the court situation, I presume.

Mr. Whalen: The only remedies the trade contractors and the inputs going into a construction project have are what was described by the last panel. It takes a very long time. It takes many months and you have to get lawyers involved. That process is not cheap.

This process is experienced in other parts of the world. We keep coming back to the U.K. example because it works excellently. Their system of government is very similar to ours. You can get through the adjudication process in a very short period of time using an industry expert. You get in, you get out, and the project moves on.

We need to be paid quickly, and there is nothing available to us at the moment to get that done.

Senator Day: Don't you have arbitration, adjudication provisions in your contracts now?

Mr. Whalen: Yes, and that will not take place in 120 days or half a year. The system we have currently requires a long, drawn-out legal approach. The companies may not be able to survive that length of time, through no fault of their own.

In order to have a system in which young entrepreneurs can see that this is an industry where they should put their skin in the game, a better process is required for the success of not only this generation but the next.

We have some companies that can't find buyers for their business. It's time for them to move on. They would like to sell their business. Individuals working within the company don't want to put their own money in. No one wants to buy their business because the risk is so great right now.

Mr. Koller: Mr. McKee could give you some real world examples of the cost of pursuing litigation to try and get paid.

Bill McKee, Board Member and President, Carleton Electric, Electrical Contractors Association of Ontario: I had the misfortune of having a contract with a Crown corporation. Basically, it took me seven years and about $300,000 worth of legal fees, and I didn't get to court. I settled before court. This Crown corporation had no interest in settling.

I can tell you the cost of the impact that single job had. It was for several million dollars. At that time I was doing about $10 million to $12 million a year in business. My sales in the year I didn't get paid were down to $8 million because I just couldn't afford to finance any work. The work I did take on was very poor work because I couldn't afford the bonding and the costs associated with the better quality work.

Senator Day: Mr. McKee, that's very helpful. Thank you for giving us a real life example. Was there an arbitration or mediation clause in your contract that you decided not to follow?

Mr. McKee: I would have loved to have followed an arbitration clause, but this particular agency just wouldn't hear of it.

Senator Day: It was optional and both parties had to agree.

Mr. McKee: That is correct.

Senator Day: You didn't agree at the time the contract was signed that the dispute would be sent to arbitration.

Mr. McKee: No, it had to be mutually agreed to.

Senator Day: In Bill S-224 there is an adjudication process. That is in legislation, but I'm wondering to myself why you couldn't make provision for an adjudication process that works equally well in a contract. It could be the same one, saying that you would follow this in contract as a normal relationship between the parties.

Mr. McKee: In this case you would never have thought it would head in this direction.

Senator Day: The problem is you didn't make provision because you didn't think you would have a problem, and then when you had a problem it was too late.

Mr. McKee: That is correct.

Senator Wetston: You are suggesting a clear market failure to this committee and perhaps to anybody who is listening. I'm always interested in trying to understand the rationale or what is occurring when there is a market failure.

We have heard from other witnesses. Obviously you make a compelling case that there is a problem and a compelling case that other jurisdictions have addressed this issue because they must have had the same problem or a similar problem. I know the Reynolds report addresses a number of these areas.

You may have heard my question to the last panel. I am always concerned about remedies. By way of example, I take it that Public Works is the primary owner. They would contract with the general contractor who would then contract obviously with subcontractors and down the chain.

Mr. McKee: Not necessarily. I do an awful lot of general contracting and contracting directly with Public Works.

Senator Wetston: You might do it directly as well.

Mr. McKee: That's right.

Senator Wetston: Have you had the same problem with Public Works?

Mr. McKee: The average receivable dates for Public Works are 130 or 140 days. I have had one over a year.

Senator Wetston: I guess you're saying there is a problem there as well. We understand the certification process and what has occurred there. What I'm getting at is: If that is the case, do you think there is an alternative that could be led by government in the form of some kind of dispute resolution process that they could advance? Because they think there is a market failure, my term, it might not require legislation but could give you the remedy you are really looking for. It seems much of this is emanating in the federal space from federal contracts. Do you have any thoughts about that?

Mr. Koller: The Reynolds report for Ontario actually contemplates expedited adjudication dispute resolution as part of the legislation. It's our view that if you're going to have any kind of dispute resolution or something that says you pay in 30 days, it has to be legislated because standard contracts get altered. People don't follow them. If it's not legislated, people will find a way around it.

The Chair: Mr. McKee, when you were having these problems with Public Works and they were paying in 180 days or three months, was the work certified and then you waited that long?

Mr. McKee: No, that was from final billing. My company does approximately 900 to 1,000 jobs a year, anywhere from $5 million down to $700 to $800 service calls. Previously SNC-Lavalin was the caretaker of Public Works business and now it's Brookfield Global. That's where the problem lies, with the surrogate for Public Works.

The one case I didn't get paid for a year was an emergency service call for the RCMP. There was a problem with their overhead line in the middle of the night, and it was a whole year before I got paid for that particular project.

The Chair: Could you just explain that relationship with Brookfield Global or SNC-Lavalin? What is that?

Mr. McKee: I've been in the industry for 53 years basically in this area. I have seen the whole gamut of what has taken place in the Ottawa area with the federal government. At one time the federal government used to look after all their own contracting. They had an A&E section and basically contracted out. Then about 15 years ago they decided to put that out to tender and have a third party look after the work. At first it was just Brookfield Johnson LePage that became the contracting authority. Then SNC-Lavalin took over for eight years and now it's with Brookfield Global.

Although Public Works gets involved in projects over a million dollars, anything under a million dollars is put out to Brookfield Global. My understanding is that when a project comes out for tender there is money put aside for it from the federal government. Brookfield Global actually has the money for the project, but it takes us as contractors sometimes 140 days or 150 days to get paid. We have very little recourse.

The Chair: You wouldn't know if any servants got let go when they contracted it out to a private firm.

Mr. McKee: I think there were quite a few.

Senator Enverga: My question is more or less the same as I asked the other panel. We understand this bill will be very welcome in your industry. It will help our local workers, for sure.

At the same time this is a potential savings for our taxpayers. Would this be a win-win situation for both the workers and the government?

Mr. Koller: Absolutely. As Mr. Blair said previously for the previous panel, you as a government are not deriving full value for the construction projects you put out to tender because contractors bidding on that work have to factor the risk of late payment into their bids.

Mr. Whalen: They are not just factoring in the risk. The fact that they don't have their money, their input costs are going up. They cannot give you a better price because they don't have their money from previous jobs for other things. The whole package together costs taxpayers for the projects. It also costs taxpayers for employment insurance when companies go down and all the spin-off negative effects that result.

Senator Plett: Clearly over the last few days of testimony I feel it is obvious that many of my colleagues are amazed and have trouble believing that you are waiting that long for your money. Fortunately I don't have to wait that long for my cheque. I appreciate that it comes on the last Monday of the month and gets deposited directly. Certainly it used to be that I had to wait that long. I feel that people are bewildered.

How long do other industries wait? Is this an anomaly that the construction industry is waiting longer than other industries? Would you comment on that?

Mr. Galt: It is an anomaly in the construction industry, but those manufacturers and suppliers of services that support us are dragged into this too. Earlier you heard from a group that represented those people. Yes, it is construction, tradespeople, trade contractors, and all that go into building Canada.

As we said, there's very little when you look at the total dollar volume that a general or prime contractor has in the game, but he has all the control.

Mr. Whalen: All of the supply chain in the steel sector is not to the construction sector. The expectation of the steel folks in the construction industry is that you will pay in 30 day and if you don't pay in 30 days they are not going to do business with you anymore. Those providing materials, supplies and services in other sections than construction are not putting up with it. That's having a negative impact on the availability of materials, let alone prices.

Senator Plett: Mr. Whalen, I'm assuming you may have talked with people on the Hill in the last few days. Certainly there were people in the industry who were. The government, as most governments do, suggested a nice long, slow process of maybe forming a working group and trying to work our way through it with different formats.

You tweeted, Mr. Whalen, and I'm just reading this now: "If it is not enforceable, it is not a solution. Would you elaborate on that and tell me how you feel about the government's ideas of getting another working group going to talk about this and maybe the problem will go away?

Mr. Whalen: The ultimate problem is that we're not getting paid in time. If some process takes 120 days or longer then it's not the solution. We have expectations from our suppliers that they want to be paid in 30 days. We're running up our lines of credit. The banks are on our backs. They're ready to pull the pin.

You wouldn't get this many trade contractors in front of this Senate committee unless this was very serious. Hundreds of thousands of Canadians are at risk. Thousands of companies are at risk through no fault of their own.

We need a solution so that our guys can minimize the risk in one draw. Then they can make a business decision. At the moment it's one draw, two draws, three draws, four draws, and then unbeknownst to them the bank is on their back. They can't collect but everybody is looking for money.

This isn't a joke. We need immediate solutions. Is there some other possible ways to solve this problem? The rest of the world said no. They all came down to the same common denominator, and that was legislation.

Why are we trying to reinvent the wheel? We have something sitting right in front of us. We can work on additional solutions later. Do you want these companies going down through no fault of their own?

We're trying to make a living, to keep the economy going and to employ people. We're trying to build things, not feed the lawyers lots of money. All those legal fees and expenses come out of our bottom line. Right now our bottom line is nothing. Anything which delays payment and takes away from our ability to survive is money gone. We need a bit of profit in order to survive, and you're not giving it to us.

Senator Plett: Does anyone else want to weigh in on this?

Mr. Koller: If I don't pay my phone bill, my heating bill or my cable bill, I know I'll get cut off.

Senator Smith: Mr. McKee, you've been in the industry for many years. In your knowledge of the business, when did the government start using SNC-Lavalin and people like Brookfield? What were they selling to the government 15 years ago? I know it's a timeframe, but why does the government have to utilize third parties? Why can't they do the actual management and payment themselves?

Mr. McKee: They were and they were doing a very good job of it. They were sold the bill of goods that this was going to save an awful lot of money. They could get rid of their architectural and engineering sections. They could get rid of project management and the planning section and give it all to a third party, which was SNC-Lavalin at the time. Then SNC-Lavalin would farm out the engineering and put 20 per cent on top of the cost the government had just given away to them.

Senator Smith: I hope prompt payment is an obvious solution. The government has the bodies. They must be able to develop the expertise they used to have to able to do this function, which should be a savings if they did it internally. Would that not be the case?

Mr. McKee: I would have thought so.

Mr. Whalen: That doesn't solve the problem of money not going down the food chain. That is one part of the issue.

Senator Smith: This is what I said earlier. It's not debatable. We all understand that. I was part of a small business. We were stringing out our suppliers because we were getting strung out by our customers. It's a mentality that has to change. No one is debating that. Maybe there are some options the government could take to improve its own productivity aside from prompt payment. This might be one of them.

Senator Campbell: Senator Plett is absolutely right. I can't believe what I'm hearing here, quite frankly. What has disturbed me the most today is the government is implicit in this. This really ticks me off. This idea of forming another committee is a classic government process.

The government should take care of it and get rid of this 20 per cent on top for SNC-Lavalin. I don't think you're ever going to get rid of them now, quite frankly. Who says that SNC-Lavalin gets 20 per cent, receives money upfront and doesn't have to cough it out until who knows when down the road? If we started with the government, would this then spread to the rest of the industry?

Mr. Koller: I believe it would. If the federal government sets the example by enacting federal prompt payment legislation, the other provinces working in tandem right now to get prompt payment legislation passed on their own will all fall into line.

Senator Campbell: But you have a government who is going to pass a bill to make themselves pay their bills.

Mr. Koller: It sets an important example.

Senator Campbell: I don't really care whether they like it or not, but there should be a huge outrage. They have your money. They are sitting on it for six months and getting two points on it. Then they stick it to you even longer.

When I went to university, it was like 30, 60 or 90. You never went over 90 because by the time you got over 90 you were paying a big premium to string it out. Now you're saying there isn't even a timeframe on it.

Mr. Galt: We have talked about how the evolution, how this has grown. You have heard what previously used to be 45 became 60 and 68 and then 80 and 90.

Senator Campbell: That gives you some idea of how many years ago I went to university.

Mr. Galt: We have contracts in writing saying we're going to put 120 in the contract because that seems to be the industry norm. That I saw from Eastern Canada.

This is something that is getting worse. Why? Behaviour will do it. Without consequences, without teeth, without enforcement, as Ed has said, you get to the point where you say, "Let's see how far we can push it. Let's see what they will take.'' You have vulnerable individuals with small trade contractors across Canada.

The best examples are the big projects with the big contractor, but look at the multitude of small prisons and jails and all the different things that go on across our country. Look at what happens there. This is where it's really rampant.

We have to reverse this culture. We have to change the behaviour.

Senator Wetston: I promise my homework will be to read the Reynolds report. I have to look at that as an Ontario senator. As we continue our discussions here I think it's becoming more important to do that.

It's not uncommon for government to outsource a lot of its services. It has been pretty fashionable in the last number of years, and that is what has occurred here, obviously.

My general belief is that most businesses will respond to incentives. I'm not able to come to a point of view of what those incentives might be, other than what you say, Mr. Whalen, that legislation is the only thing. I've never considered legislation to be an incentive but it seems to me that this is what you're describing.

I've been thinking what those incentives might be. You've heard me and others like Senator Day talk about alternative ways of achieving that. We live in a federation with a combination of federal and provincial authority. We'll eventually talk about that. I'm a lawyer, so I always like to talk about constitutional law.

Putting that aside, we need to understand when you describe this issue. You talk about prisons and others institutions potentially run by federal or provincial governments, depending on what we are looking at. Is this also a significant problem in the real estate industry or in other major areas where contractors have a significant role?

We talk a lot about the federal role and the private sector. I'm from Toronto so I understand what's going on there. Can you help me with that, or is this in the Reynolds report as well?

Mr. Whalen: I can answer some of that. I'll defer to some of my colleagues to support me. You have the same players in private jobs and federal works. The issues we have federally are the same we have in private. The payment periods are as bad and as long. That's why we are dealing with it not only at the federal level but at the provincial levels.

What are the ramifications of this? I'll give you a steel example. I have two projects that we could bid on. I've one project that I know will pay quickly somewhere that's not in Canada and I have a federal project. Of the one not in Canada that is subject to prompt payment legislation versus the one that I may not get paid for in 120 days or170 days, which one will I pick? Which one will get the best price?

We have the steel industry now deciding if we will even bother with this work. We're not in the business to be a bank but Canada is expecting us to be.

Senator Day: We heard from witnesses in last week who general contractors and subs. I was looking for my notes but recollection is that they said the federal government is not at fault. The federal government is paying promptly but it's down the line where it gets held up by the general, et cetera. Are you saying something different or can we reconcile these two?

Mr. Whalen: What I'm saying is that on federal projects and private projects payment is a disaster. The prompt payment legislation addresses it from the very top to the very bottom. That is the only solution that anyone has been able to come up with. It is now globally accepted that the prompt payment scheme being presented in Bill S-224 will ensure people who are paying promptly now have no problems and the companies that are not currently paying promptly will have to start coming into line.

Senator Day: I ask a specific question. The federal government is the owner of the property and is getting some work done. Is the slow payment at that owner level, or is it starting down the line a way?

Mr. Whalen: From a steel perspective our relationship is with the GC. All we know is that the payment terms in our direct relationship with the general contractor are well beyond when we submitted our invoice. What you heard today from another gentleman who deals directly with the Government of Canada is that the payment terms are not great.

Mr. Galt: If I heard correctly it was in the 90 per cent range that the federal government pays. That leaves a lot in the 10 per cent that don't. We have outlined different scenarios of who represents the government, but the bottom line is that we would not all be united. We're all volunteers. There is no one paid here except we get our same paycheque back home.

We created this group for one reason. It was because there was a real problem we could not solve problem in all the relationships we've had for decades and decades with those who control the money.

Mr. McKee: In days gone by when the federal government controlled everything, everything was done through Public Works A&E. They would tell the different clients that a contract was done and they're going to get paid. The payment was done through Public Works.

One of the problems now is that the individual client, whether it is Health Canada or some other department, wants to hold on to the money. In a lot of cases they make excuses not to pay.

The biggest problem comes around March 31st when all of a sudden the contract doesn't get finished until April 15th and there is no more money left in the budget.

Those are all problems that hasten the fact that as contractors we don't get paid on time.

Mr. Koller: Mr. Lancia would like to say a few words about his own experiences with payment delays, not specifically with the federal government, but to help put things in context in terms of the systemic problems for the construction industry?

Mr. Dan Lancia, President, Electrical Contractors Association of Ontario: You have basically heard most of it. We have done work for general contractors in the past and have waited on payments for well over 180 days. I have actually waited for three years to get paid for one project that I knew they were paid for.

It's a systemic problem in our industry. I don't do any government work. I do private sector work. It's systemic in private sector. When dealing with general contractors, they hold on to your money.

From what I understand now, they've actually hired money managers to manage my money and not give it to me. That's becoming so much of a problem I have actually decided that I don't like working for general contractors anymore. For that reason we may be slowing our business down a bit by not taking on so many projects and not hiring as many people as we usually do.

I am tired of being a bank. I am tired of having the bank call me. I am tired of having suppliers call me. I am just tired. I have been in the business for 28 years. It has been a great business.

Within the last 15 years the whole business has changed. We used to do multi-million dollar jobs on a handshake. You can't do that now because you can't trust the new players in the game. There's no loyalty anymore; there's nothing. The business changed 15 years ago and it's just getting worse trying to get paid.

Senator Day: Mr. Lancia, I see the name EllisDon all over the place. Are they project managers or general contractors?

Mr. Lancia: They are project managers. They're not general contractors. They claim to be general contractors, but they're project managers.

I invite you all to go to their office. I think it's in London. You could meet their staff to find out exactly what they do, who they are, how many project managers they actually have, who are money financers, who are junior lawyers and things like that because that's who they hire. It's a big problem in our industry.

You mentioned, senator, something about dispute resolution. Try putting the dispute resolution into a contract with a general contractor. It will never happen. Maybe it happens in a fantasy world but never in real life. They would rather hold you out to dry, take you to court and let you suffer for three or four years, figuring you're going to let your claim go for $1million dollars or whatever and walking away with your money.

The Chair: Thank you very much, gentlemen.

Before you leave, colleagues, tomorrow we've have Steven MacKinnon, Parliamentary Secretary to the Minister of Public Services and Procurement; witnesses from Public Services and Procurement Canada and from the Department of Justice; and a general contractor from Aecon Group.

Thank you very much, gentlemen. It was definitely a learning experience for all of us. At times it was rather emotional testimony. We very much appreciated it.

(The committee adjourned.)