Introduction to Canada's Prompt Payment Act: Senator Plett
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I am proud to introduce Bill S-224, The Canada Prompt Payment Act.
There are two major problems in federal construction work in Canada today when there is no dispute that the work has been performed according to contract.
First, there are delays by federal authorities in processing valid invoices for construction work.
Second, there are delays in remitting payments down the sub-contract chain when valid invoices have been submitted. These payment delays are not occasional, they are systemic.
The problem is not unique to Canada. However, other jurisdictions have enacted legislation to counter systemic delays in making payments to subcontractors. The U.S. federal government, every U.S. state with the exception of New Hampshire, the United Kingdom, Ireland, Australia and New Zealand have all enacted prompt payment legislation. Canada is the outlier.
The payment delay in the construction industry is systemic, largely because of the construction pyramid structure. The complex structure of contracting and sub-contracting sets the construction industry apart from almost all other industries.
In federal government work, a federal authority is at the top of the pyramid. The federal authority tenders the construction work to a general contractor or a trade contractor who becomes the prime contractor. For the vast majority of projects, the prime contractor will subcontract various segments of the construction project to specialized trade contractors.
On large construction projects, these trade contractors perform upwards of 80 per cent of the actual work. Also, on most large projects, trade contractors either sub-contract from a general contractor or sub-sub-contract from another trade contractor. As is common in all small and medium-sized businesses, trade contractors’ access to bank credit is often limited and their dependence on cash flow is extremely high.
Trade contractors’ revenues are subject to unpredictable delays without any flexibility on their payables. Payments to the Canada Revenue Agency and the workers compensation system must be paid monthly, without delay. Wages must be paid weekly. Payment for materials and equipment rentals must be made within 15 to 30 days.
This is the most common cause of business failures among trade contractors in Canada. And what is most unacceptable is that this is happening on Crown land or federal projects. This bill will tackle the issue of construction on federal government projects.
It is my hope that the enactment of this legislation will have a ripple effect on Canadian provinces, meaning every construction worker in Canada will be paid on time for the work that they have completed.
The fundamental cause of the late payment problem is the unequal bargaining power between contractors and their subcontractors. Contractors force subcontractors to accept late payments as part of the costs of doing business. Contractors can do this because they control the flow of work. Most trade contractors depend for their survival on subcontracting either from general contractors or from other trade contractors. No trade contractor can afford to be struck from a bidders’ list.
Most trade contractors are small employers, the majority employing fewer than 20 workers. Trade contractors often commit all or most of their resources to a single project. In these circumstances, there are serious consequences when there is an increase in cash-flow risk. A three- to four-month delay in making a payment, when a project is absorbing all or virtually all of a trade contractors’ business resources, puts the survival of the business at risk.
The Canada Prompt Payment Act contains measures that will finally put an end to this systemic problem. The bill stipulates that the government institution must make progress payments to a contractor for construction work on a monthly basis, or at shorter intervals provided for in the construction contract.
Likewise, the contractor must pay the subcontractor, and the subcontractor must pay any other subcontractor, on or before the 20th day following the later of the last day of the monthly payment period or the receipt of the payment application. The Act accounts for milestone payments, where, if a general contractor enters into a contract with the Federal Government that authorizes milestone payments rather than progress payments, written notice of any milestone payments must be communicated to all parties down the contractual chain.
The most significant provision set out in this legislation is the right for unpaid contractors to suspend work. The absence of this provision has been raised with me time and time again by small business trade contractors. This is an important recourse for trade contractors who have not been paid, and I am thrilled that this right will now be explicit upon the passage of this legislation, in addition to, the right to terminate a contract or the ability to collect interest on late payment. The bill also provides for a comprehensive dispute resolution process as well as the right to information for contractors and sub-contractors involved in any dispute resolution.
People should be paid for the work that they have completed, and they should be paid on time. This is the biggest problem facing the construction industry in Canada and we finally have the opportunity to fix it. Let’s stand up for small business owners and the hard-working Canadians in the construction industry.
I am proud to introduce Bill S-224, The Canada Prompt Payment Act.
There are two major problems in federal construction work in Canada today when there is no dispute that the work has been performed according to contract.
First, there are delays by federal authorities in processing valid invoices for construction work.
Second, there are delays in remitting payments down the sub-contract chain when valid invoices have been submitted. These payment delays are not occasional, they are systemic.
The problem is not unique to Canada. However, other jurisdictions have enacted legislation to counter systemic delays in making payments to subcontractors. The U.S. federal government, every U.S. state with the exception of New Hampshire, the United Kingdom, Ireland, Australia and New Zealand have all enacted prompt payment legislation. Canada is the outlier.
The payment delay in the construction industry is systemic, largely because of the construction pyramid structure. The complex structure of contracting and sub-contracting sets the construction industry apart from almost all other industries.
In federal government work, a federal authority is at the top of the pyramid. The federal authority tenders the construction work to a general contractor or a trade contractor who becomes the prime contractor. For the vast majority of projects, the prime contractor will subcontract various segments of the construction project to specialized trade contractors.
On large construction projects, these trade contractors perform upwards of 80 per cent of the actual work. Also, on most large projects, trade contractors either sub-contract from a general contractor or sub-sub-contract from another trade contractor. As is common in all small and medium-sized businesses, trade contractors’ access to bank credit is often limited and their dependence on cash flow is extremely high.
Trade contractors’ revenues are subject to unpredictable delays without any flexibility on their payables. Payments to the Canada Revenue Agency and the workers compensation system must be paid monthly, without delay. Wages must be paid weekly. Payment for materials and equipment rentals must be made within 15 to 30 days.
This is the most common cause of business failures among trade contractors in Canada. And what is most unacceptable is that this is happening on Crown land or federal projects. This bill will tackle the issue of construction on federal government projects.
It is my hope that the enactment of this legislation will have a ripple effect on Canadian provinces, meaning every construction worker in Canada will be paid on time for the work that they have completed.
The fundamental cause of the late payment problem is the unequal bargaining power between contractors and their subcontractors. Contractors force subcontractors to accept late payments as part of the costs of doing business. Contractors can do this because they control the flow of work. Most trade contractors depend for their survival on subcontracting either from general contractors or from other trade contractors. No trade contractor can afford to be struck from a bidders’ list.
Most trade contractors are small employers, the majority employing fewer than 20 workers. Trade contractors often commit all or most of their resources to a single project. In these circumstances, there are serious consequences when there is an increase in cash-flow risk. A three- to four-month delay in making a payment, when a project is absorbing all or virtually all of a trade contractors’ business resources, puts the survival of the business at risk.
The Canada Prompt Payment Act contains measures that will finally put an end to this systemic problem. The bill stipulates that the government institution must make progress payments to a contractor for construction work on a monthly basis, or at shorter intervals provided for in the construction contract.
Likewise, the contractor must pay the subcontractor, and the subcontractor must pay any other subcontractor, on or before the 20th day following the later of the last day of the monthly payment period or the receipt of the payment application. The Act accounts for milestone payments, where, if a general contractor enters into a contract with the Federal Government that authorizes milestone payments rather than progress payments, written notice of any milestone payments must be communicated to all parties down the contractual chain.
The most significant provision set out in this legislation is the right for unpaid contractors to suspend work. The absence of this provision has been raised with me time and time again by small business trade contractors. This is an important recourse for trade contractors who have not been paid, and I am thrilled that this right will now be explicit upon the passage of this legislation, in addition to, the right to terminate a contract or the ability to collect interest on late payment. The bill also provides for a comprehensive dispute resolution process as well as the right to information for contractors and sub-contractors involved in any dispute resolution.
People should be paid for the work that they have completed, and they should be paid on time. This is the biggest problem facing the construction industry in Canada and we finally have the opportunity to fix it. Let’s stand up for small business owners and the hard-working Canadians in the construction industry.