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Contractor Roundtable, Part 2: Regulations and the underground


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November 23, 2011 by Robert Koci

In April of this year, six contractors from across Canada met with Canadian Contractor staff for a roundtable discussion: Steve Barkhouse, Amsted Consruction Inc., in Ottawa, Pawel Matonog, Archer Construction, of Mississauga, Ont., Dennis Bryant, Bryant Renovations, in Toronto and Mark Hofstee, Rammick Consruction, Guelph, Ont. and John Friswell, CCI Renovations, from Vancouver, B.C. Part of the discussion dealt with the challenge of greater regulation and oversight. Editor Robert Koci moderated the discussion.

KOCI: The H.S.T. was introduced to Ontario and B.C. (since voted down in B.C., Ed). We have increased oversight by the safety community; Ministry of Labour, WHMIS, etc. Worker’s insurance and the CRA are working together to ensure you pay your taxes. It all adds up to, I think, greater costs for those of you who want to be legitimate and a tougher time competing with the underground. I’d like to hear your perspective on all of that.

HOSFSTEE: Well, we do 15 to 20 jobs a year and average size around $50,000. So, most of the customers who are spending that kind of money are not interested in doing cash work simply because they want to have the warranties and the guarantees that come from that. And they want to know that they’re not going to be liable if there’s a problem or an accident on the site. But still, out of those 15 to 20, I’m getting one or two people a year who ask me whether or not we would accept cash for jobs. And, of course, we say no, but obviously there’s people out there who are accepting cash jobs for those size of projects or else they wouldn’t be asking. So, yes, it is still something of a concern, although I don’t see it as a huge concern for my company at our size at this moment.

KOCI: John (Friswell), you’re in B.C. and the HST seems to be more of a controversy. Tell me how it’s affected you.
FRISWELL:    Certainly, our clients, although they shudder and shake when they see the number at the bottom line, are dealing with it and that’s not causing any issues for us. However, the guys that are doing these jobs that are under $50,000 — I have one that’s in our association that I mentor and pass jobs on to that I can’t do. He’s faced with that daily and he’s suffering quite a bit. You’re seeing a lot more of that on the lower end of the scale.

KOCI    Steve, tell us your perspective. I know you had pretty strong feelings about the HST a couple of months ago. What do you think today?

BARKHOUSE:    We’re getting it from the new home builders and I guess we (renovators) are their competition so I can’t blame them. They get a (HST) rebate, we don’t. That’s huge. I don’t want to beat a dead horse—you’ve heard all of the arguments. The underground is taking off with low end (renovations) for us in our area, under $50,000. For me, I’m much like the other gentlemen here; we do larger projects so people aren’t inclined to go underground for a larger project, although I am seeing it. For clients, it’s adds $30,000, $40,000, $50,000, $60,000 onto the cost of the project. That’s a big hit for a lot of people. We’ve seen a lot of (projects) getting put off, a lot of (customers) not doing the projects. I think project management is the way to get around it. I’ve seen a lot of reputable companies that don’t want to go underground going that route. It’s a little grey as to whether or not that’s legitimate, but certainly that’s what they’re doing and it seems to work.

KOCI:    You mentioned something that I wanted to elaborate on, that is the workarounds. It occurs sometimes that the customer will say, “I’ve got an HST bill of $60,000. How about if we don’t do the interior of the house and reduce the overall costs of the renovations to $100,000 and then do $100,000 of the work in cash where the HST doesn’t appear?” That’s one of the workarounds. There may be others, for instance, the customer will simply say, “I don’t want to do certain elements of the design. They will finish the reduced work with you because you will charge the HST and then move to a cash contractor to do the rest. Work that you otherwise would have done had the HST not been there. Let me go to David Litwiller.

LITWILLER:    I haven’t been asked for cash for many, many years. My feeling is that the smaller renovation—$10,000 and under, sort of thing—that’s where most of the cash deals are happening. But I want to ask Steve, how does project management save the customer on HST?

BARKHOUSE:    They’re just paying you HST on your project management fee. Typically, project management is a fee or a percentage at the end so if it’s a $500,000 job and you charge $50,000 to manage the project. They pay HST on that and then they’re paying the subs directly and that’s where they go in cash.

LITWILLER:    Okay, so the subs are willing to work for cash and you just manage the project and you don’t take cash?
Can I just talk for a second on that? You sort of implied that 10 per cent management fee. We, here, are running 24 per cent. That is a cost-plus arrangement with 24 per cent management fee on top.

KOCI:    Okay, I think that’s a different structure. I think when you talk about cost-plus on the one hand and project management on the other. You’re talking about two different payment structures. Am I right, Steve Barkhouse?

BARKHOUSE: Yeah. I did use 10 per cent because I’m not too quick on the math. We charge more than that.

<all laughing>

KOCI: I’m going to ask Dennis Bryant to comment on the regulatory environment he is working in and particularly the HST and the underground economy.

BRYANT:    Well, I would agree with a lot that has been said—it’s the smaller jobs. The interesting thing is the HST is added to the cost but it adds up to about 2.5 per cent (if you consider the elimination of the PST on materials purchases), so for larger jobs it doesn’t really make any difference at all.

MAN:    That’s because you’re backing out the previous PST?

BRYANT:    Yeah, well, everybody is, I presume.

BARKHOUSE:    Maybe not.

BRYANT:    As far as cash jobs go, yeah, about once a year I get somebody that wants to do that, usually it’s somebody like a lawyer.

<all laughing>

BRYANT:    It’s really surprising the ones who want to do cash.

MATONOG:    I felt that the cash question is sometimes a test of how professional you really are.

BRYANT:    The important thing about regulations is that they’re clear. And right now in Toronto there’s a whole schlmozzle going on around zoning. There’s a real issue with regulation gone bad, as it were.

KOCI:    Tell me about that.

BRYANT:    Well, for instance, a job that we had that went through Committee of Adjustment last April, that was a year ago, and was approved, and in the fall they wanted to re-review it and they wanted to charge us more money and we had to go through a re-review and now some things that were okay in April are no longer okay because there are some new by-laws. It was just costing us huge amounts of money because it’s not straight. And just this past week we thought it was going to be straightened out at City Council and it wasn’t, even though the sub-committee who has to do with development in Toronto said that we should rescind that by-law and it’s still in the nether worlds and it’s resulted in something like 694 OBM appeals because of this. So, anyway, it’s a regulation where there’s been a real problem. It’s not that the regulations are necessarily bad, but it’s this whole way it’s been implemented or not implemented.

KOCI:    Mark Hosfsee, are you seeing issues around permits or regulations with these issues, are they becoming more complicated, more of a challenge, are they becoming easier for you?

HOSFSTEE:    Well, It’s actually becoming easier for me as I develop a relationship with the building department in Guelph. It’s pretty small, they only have three plans examiners and so I know them all pretty well and we work well together over the issues that we have with our permits. So that end of it is actually getting easier as I become more experienced and as they become more experienced and as we decide to work together.

KOCI:    David Litwiller, what are the regulatory issues regarding building permits and things like for you in Calgary?

LITWILLER:    Well, I share some of the stories when I’m sitting on Canadian Renovator Council. In Calgary, we’re getting a building permit in two or three weeks, and a development permit in six or eight weeks sometimes. I’m finding Calgary is very quick in response and easy to deal with. No real issues as far as I’m concerned. You might get the occasional guy that wants to bull-headedly pursue a really odd or awkward building and that kind of thing — sure, he’s going to have some problems — but no problems here, as far as I’m concerned.

KOCI:    Let’s go to John in Vancouver.

FRISWELL:    We deal with about five different municipalities and we have varying degrees of success with all of them. Vancouver, as many of you may or may not know, has got its own building code and its own direction so it can be very cumbersome. Permits at my local here, we can get them over the counter for some of the smaller renovations and I could spend up to 10 weeks at places like West Van and Vancouver. The other thing that’s really big that’s really hit the Canadian Renovators Council, for us, that’s probably our major thing right now is asbestos removal. We’re huge into that now and every job that we do now has to have that comprehensive environmental report and then we have to bring in the hazmat guys pretty much 50 per cent of the time so it’s increasing our costs. It’s not happening everywhere in Canada, so it’s a concern for us.

BARKHOUSE:    John, isn’t there something about lead paint that you’ve got to deal with now on every job also?

FRISWELL:    That’s coming down the pike. It’s big in the States right now but, so far, it hasn’t hit us.

KOCI:    Lastly, let’s just quickly talk about the WSIB. The WSIB in Ontario has an $11-billion dollar unfunded liability that they are trying to deal with. There’s a very high expectation that the burden of that debt will fall on the owners of the companies that are now collecting WSIB or paying WSIB, on behalf of their employees. It’s a real challenge here. It’s not as much of a challenge in other provinces as I understand it. They have a much smaller or no unfunded liability at all. I’d like to hear the good news, perhaps, from other provinces first. Let’s try John again. What’s your Workers’ Comp situation there in B.C?

FRISWELL:    Well, as you say, the Workmen’s Comp are the ones that are pouncing on this asbestos right now, so it’s a huge issue for us. Other than that, they are starting to set up satellites, they’re going after building permits and they’re starting to come on to the jobs to look at what’s going on and who they can make a bunch of money on for fines and they are fining hugely right now, too. And they’re adding to their pot. I don’t think that these guys are suffering at all out here.

<all laughing>

BARKHOUSE:    Don’t encourage them to do it here.

KOCI:    Let’s go to Calgary and what’s the Alberta situation like?

LITWILLER:    I’m not aware of any issues, problems coming with WCIB. I know that my little company, I think I’m paying 2.8 or 3.2 per cent Workers’ Comp.

KOCI:    David, (on conference call) I have to tell you that the jaws just dropped in the room here. Dennis and Pawel, what do you pay?

BRYANT:    8.71 per cent.

MATONOG:    Bill 119 that’s being introduced January 1st, is that introduced everywhere else, too, or is it just Ontario?

KOCI:    No, it’s just Ontario. Tell us about Bill 119 and its impact here, Pawel.

MATONOG:    Every sole proprietor and president and, really, the executives will have to pay on their own income the 8.71 per cent. I believe it’s up to $76,000 worth of income. And one executive out of every corporation, my understanding is that one executive can opt out of paying under the assumption that they never actually visit a job site. So you have the choice.

KOCI:    Well, what about that? I know that in Ontario one of the frustrations of WSIB is that you have to pay 8.71 for the secretary that sits in your office and never visits the site as well as the guys that are on site. Is that the same in Calgary and in Vancouver?

MAN:    It is in Vancouver, yeah. We’re aghast that we just crossed the 4 per cent mark. So I don’t feel so bad anymore.

<all laughing>

MATONOG:    The roofers and the concrete forming guys are paying here, I think, 18 or 19 per cent.

Friswell:    Wow…

KOCI:    David, what do you pay in Calgary?

LITWILLER:    The roofers are about 20 per cent. Same thing.

KOCI:    What about you, though, what do you pay?

LITWILLER:    My own? I’m right in that 2.8 or 2.2 per cent, somewhere in those ranges. Also, as an owner of the company I have elected to not cover myself under Workers Comp. So I personally am not covered.

KOCI:    Anybody else want to weigh in on WSIB?

BRYANT:    Well, another thing about it that just drives me crazy is, I get a credit, and they send me a cheque because I’ve overpaid in some way. Then the next week they’re telling me I owe them money and they’re going to fine me ‘cause I’m behind.

BARKHOUSE:    And with interest!

BRYANT:    And interest. And then a few months later they send me another cheque because I’ve paid too much and then I… I have absolutely no idea how this is brought about, what is the meaning of all this. I take the money, okay. Then I have to give it and it’s really frustrating.

KOCI:    Steve, do you find that same thing happens to you in Ottawa.

BARKHOUSE:    We have a huge deficit (in Ontario) and we are charged 8 to 12 per cent. We can’t make a claim at the WSIB because we can’t afford the penalty. So no one makes a claim. It’s poorly run, it’s mismanaged, they’re just losing money because they’re spending it. It’s painful to hear you guys are running a balanced budget at paying two or three per cent. And it’s just increasing the gap between us and the underground.

BRYANT:    WSIB costs are more significant in terms of people going in the underground than the HST. It’s a lot bigger number.

KOCI:    It’s a scarier thing, too. A tax is tax and we know what the amount is even if it’s a lot. The WSIB seems to be a big question mark because you don’t know if a guy’s going to fall off a ladder on your site tomorrow and you’re going to be back-charged for the costs of his rehabilitation, etcetera, etcetera. I mean, you just don’t know. It sounds to me that the WSIB, as you suggest, Dennis, their accounting is not necessarily predictable. Is that a fair assumption?

BRYANT:    It’s not understandable. It’s predictable because you know what they’re going to take.

BARKHOUSE:    Just when you (think) you understand it—because it’s a very, very complicated formula with a huge number of variables—they change it. My point is it’s this, it’s an insurance policy, plain and simple. It acts like an insurance policy, it is an insurance policy. There are insurance companies that will offer insurance policies. We should have the option to use them.

MATONOG:    Yeah. I think it would be more acceptable if it was a level playing field. I guess that’s part of the reason that Bill 119 was introduced here. If everybody would follow the same rules and would have to make the same payments, it would be easier. But this is, as Dennis mentioned, this is really what’s driving the underground economy.

BARKHOUSE:    Not only do you not have to pay the same but the guy that chooses not to pay WSIB and go underground, if his guy falls and gets hurt, you pay for him, too.

HOFSTEE:    That’s right. He’s still covered.

MATONOG:    So why would you pay if you didn’t have to?

BARKHOUSE:    Exactly.


Robert Koci

Robert Koci

Rob Koci is the publisher of Canadian Contractor magazine. rkoci@canadiancontractor.ca Tel. 647-407-0754
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2 Comments » for Contractor Roundtable, Part 2: Regulations and the underground
  1. Christine Tripp says:

    I just finished this article and was thrown by Steve Barkhouse’s comment about clients getting around paying HST by hiring cash subs! I can only imagine the reno nightmare amassing a group of subs working illegally. Plumbers without permits, electrictians not allowed to take out permits and unauthorized to bring in a hydro company to disconnect/reconnect the service. The last thing anyone would want is to try and “manage” a crew working illegally and no good Electrical, HVAC, gas/heating or plumbing contractor would risk their business for any job large enough to need a manager like that.

    • Robert Koci says:

      I will confess running a crew like that is not that hard. You have to remember, most of the guys working cash are licensed and doing legit work. They are just topping up their regular pay with some work on the side, or when things get slow. They are not bad at what they do. They are actually pretty good. And the fact that they are exposed legally makes them safer to work with, because they are extra careful not to get hurt. For very little risk, you can cut your costs by half. That’s pretty tempting.