Hon. Donald Neil Plett moved second reading of Bill S-224, An Act respecting payments made under construction contracts.

He said: Honourable senators, I am proud to rise today to speak to Bill S-224, the Canada prompt payment act. There are two major problems in federal construction work in Canada today. First, there are delays by federal authorities in processing valid invoices for construction work when there is no dispute that the work has been performed according to contract. Second, there are delays in remitting payments down the subcontract chain, again when the work is not in dispute and when valid invoices have been submitted. These payments 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 and every U.S. state, with the exception of New Hampshire, have adopted prompt payment legislation in the public sector. The United Kingdom, Ireland, Australia and New Zealand have also enacted prompt payment legislation. Canada is the outlier.

The payment delay in the construction industry is systemic largely because of the construction pyramid. The complex structure of contracting and subcontracting 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 example, the party that enters into a contract with the federal authority to complete the project according to the plans and specifications.

For the vast majority of projects, the prime contractor will subcontract various segments of the construction project to specialized trade contractors. On construction projects, these trade contractors often perform upwards of 80 per cent, and sometimes more, of the actual work. Also, on most construction projects, trade contractors either subcontract from a general contractor or a sub-subcontract from another trade contractor.

As is common in all small- and medium-sized businesses, a trade contractor's access to bank credit is often limited, and their dependence on cash flow is extremely high. This means that the trade contractor's revenues are subject to unpredictable delays without any flexibility on their payables. Payments to 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, colleagues, is without question the most common cause of business failures among trade contractors in Canada. Senators, this is happening across the country. What is most unacceptable in my view is that this is happening on Crown land or on federal projects. This is where we have the power to intervene.

This bill will tackle the issue of construction on federal government projects. The provinces are making some headway. The Charbonneau commission recommended prompt payment legislation in Quebec; and the Reynolds report, which we can expect in the coming weeks, will likely recommend similar legislation in Ontario.

When the United States enacted the legislation federally, it did not take long for individual states to follow suit. It is my hope that the enactment of this bill will have a similar ripple effect on the Canadian provinces, meaning every construction contractor in Canada will be paid on time for the work 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 a general contractor or from another trade contractor. No trade contractor can afford to be struck off the bidders' list.

There is a disturbing trend in the construction industry that is putting hard-working Canadians out of work. The average duration of receivables in the construction industry is significantly higher than it is in any other industry and is increasing. In 2007, the average duration of a receivable in the construction industry was 62.8 days, almost 9 weeks. By 2012, the average duration had increased to 71.1 days, more than 10 weeks.

Most trade contractors are small employers with the majority employing fewer than 20 workers. Trade contractors often commit all or a large portion 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 contractor's business resources puts the survival of the business at grave risk.

The impacts of delayed payments are obvious for trade contractors. However, the negative consequences for the federal government and our overall economy are profound. Employment is lower because the amount of operating expenses that a trade contractor can support with a given amount of working capital has been reduced by the increase in payment risk.

Also, some trade contractors off-load their payroll risk by increasing the number of self-employed, independent operators in their workforce. This has reduced source deductions and increased the likelihood of earnings being under-reported to the Canada Revenue Agency.

Additionally, increased payment risk has led to a chilling effect on the hiring of apprentices, as trade contractors are less willing to make long-term employment commitments that are required to recoup an investment in apprenticeship training.

Federal government construction costs are higher because trade contractors have incorporated into their bids a factor to reflect the risk of late payment by general contractors.

The spread of late payment practices has put competitive pressure on others to adopt the same opportunistic conduct. The result is an erosion of standards and an undermining of the level playing field which is essential for a healthy market.

Public Works has recognized that there is indeed a major concern and thus has tried a series of administrative measures in an attempt to solve the problem, but unfortunately none of them have worked as they do not get to the heart of the issue.

For example, contractors are required by Public Works to submit a statutory declaration with each invoice, swearing that all payment obligations have been met. There are two difficulties with this remedy. Firstly, these declarations are retrospective. They do not prevent future payment delays. Secondly, if a payment is withheld owing to a purported dispute over performance, the statutory declaration can still be submitted since technically the withheld payment is not a required payment, pending resolution of the performance dispute.

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 twentieth day following the latter of either 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 payments.

The bill also provides for a comprehensive dispute resolution process, as well as the right to information for contractors and subcontractors involved in any dispute resolution.

I was thrilled when Patrick Brown, the Leader of the Official Opposition in Ontario, endorsed this legislation last week, stating:

If you do the work, you should get paid. It is for this simple reason, I unequivocally support Senator Plett's prompt payment bill.

For years, I have advocated for prompt payment at both the federal and provincial level, and I am happy to see another piece of legislation introduced at the Parliament of Canada.

There are 400,000 Ontarians earning their living in the construction industry, yet many of the small and medium- sized family-owned contractors who employ these people are not getting paid for several months after the fact for completed construction work.

Senator Plett has my full support on this bill, and I look forward to working with industry, workers, small and medium-sized businesses and stakeholders to continue tackling this issue at the provincial level. 

I thank Patrick for his support and look forward to the progression of this initiative at the Ontario provincial level.

Colleagues, this is a non-partisan issue. 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 for hard-working Canadians in the construction industry.

I look forward to your support and sincerely hope you will join me in passing this legislation so we can study it thoroughly at committee.

I thank members of the trade contractors for being here today. Please join them and me in room 160-S from 5:30 to 7:30 for some hors d'oeuvres and a drink. Thank you very much.

Hon. Céline Hervieux-Payette: I just have a few technical questions.

Senator Plett, for how many years have contractors from different trades been coming to your office to raise this matter of delayed payments? They come to see me, too, as well as other senators. For how many years have you been hearing about this problem?

Senator Plett: Thank you very much, senator, for that question. Indeed, I have myself been in the construction industry since I took over from my father in 1987 and then turned the company over to my sons in 2007. I'm a small trade contractor and have been for most of my life. During that period of time, I spoke to trade contractors wherever I was, and I had the same problems that these people have. I've been in the Senate for almost seven years, so that's the length of time that they have been approaching me here in the Senate.

Senator Hervieux-Payette: Having been in the caucus that formed the majority and the government, did you make that recommendation to your leader, or did the balanced budget agenda take over from your recommendation?

Senator Plett: Thank you, again. As you know, I did start an inquiry on this during the last Parliament. Yes, I have been talking probably not directly with the leader but certainly with the Minister of Public Works in the previous Parliament. We were working on getting proper legislation done. Senator, you have introduced many private members' bills and, as you know, it's not that easy to get them going. I started working on this in the last Parliament, and fortunately with the wonderful help of our law clerk and the staff in the Senate, we have finally reached something here that I think is very good for all contractors.

Senator Hervieux-Payette: Before you go to committee with your bill, I would encourage you to do research into how long this has been going on. I was on the other side and never heard about this because payments were made on time. When did this habit begin of not paying the bills on time? We need to see where the pitfalls are and find out how this happened for so many years. How many billions — not millions — of dollars were not paid in due time? Coming from SNC, I know that paying on time is absolutely critical. And I vowed to support them, but I was not forming the government; you were.

Senator Plett: Of course, Senator Hervieux-Payette, this problem has been there for much more than 10 years. Prior to that, you indeed were part of the government, and this problem existed at that point. This problem existed in 1987 when I took over from my dad.

One of the biggest problems that my father had when he was running our company was the collecting of bills. Dealing with private individuals is one thing, but when a government, either provincial or federal, doesn't pay on time, that's entirely another matter.

Therefore, senator, you were very much part of a government that had this problem as well.

Hon. Elaine McCoy: Would the senator take another question?

Senator Plett: Yes, senator, by all means.

Senator McCoy: Thank you. Just for the sake of the institution, I want to ask a very simple question: Have you checked with our Senate Ethics Officer to ensure that you have no conflict of interest in this matter?

Senator Plett: Thank you for the question. No, I have not, but I have absolutely no vested interest in any business that does any construction work at this time.

Senator McCoy: Does your son have an interest in it?

Senator Plett: My sons do have an interest. I do not believe they're doing any federal work at this point. But on your recommendation, senator, I will make sure.

Senator McCoy: You're very courteous, senator.

The Hon. the Speaker: Are honourable senators ready for the question?

An Hon. Senator: Question.

An Hon. Senator: Adjourn the debate.

(On motion of Senator Fraser, debate adjourned.)