Everyone gets paid once the client pays

By Steve Ryan

Most of us accept the notion that contractors, sub-contractors, suppliers etc.… should be paid for the work or product they provide. There can be a lot of confusion though, around when everyone is entitled to receive payment. Since everyone’s compensation ultimately comes from the client, who should have to wait for the client to settle up before getting paid themselves? Some general contractors have an express “Pay when paid” clause in sub-contractor agreements to state that everyone gets paid only after the client pays their corresponding invoice. Others may not formalize the policy in contracts, but they operate that way all the same.

If you are a sub. That’s not good for you. If you are a GC, you may feel it is essential so you don’t carry all the costs when clients are slow to pay. Either way, the practice has become contentious enough in the construction industry that laws are being written (re-written) to try and establish boundaries.

Few laws can be explained in a single page and this is no exception. Moreover, each province is taking its own approach so explanations get even more complicated. But change is coming and if waiting for payment (or holding off making payment) is a fact of business life for you, you should check with your lawyer to find out where things are going in your area.  Without getting into detail, we can alert you to how past practices are being regulated, and sometimes outlawed.

Forgive us for using Ontario for our examples but in this case, the province does seem to be leading the way.   Ontario Bill 142 was passed in 2017 with prompt payment regulations taking full effect in October 2019.  The lawyers seem to think this will bring dramatic change so here’s what they expect.

-Project owners have 14 days from the time they receive an invoice to make formal statement for why they are withholding payment. If they don’t make a formal statement of non-payment, then they must pay within 28 days from date of issue.

-Within seven days of the receiving the owner’s payment, GC’s must pay sub contractors.

On the face of it, unless a client makes a formal statement that they contest an invoice, GC’s are legally entitled to payment within 28 days of delivering an invoice.  Sub-contractors are entitled to payment within 35 days (28 plus seven) of when their work was incorporated into an owner invoice.

-A provincially appointed adjudicator can now make legally binding orders for owners to pay. Invoices that were not formally contested in that 14-day window but remain unpaid should now receive the adjudicators order to pay.

We have yet to seea what happens in practice. How long will that adjudication process take and how much money needs to be at issue for this process to be relevant? The big question is how much teeth will adjudicator decisions have to force owners to pay.

If you are a GC in Ontario, then you have some adjustments to make.  Whether or not you see the formal processes working for you be aware of two things.

• Most of your collection challenges are rooted in vague or evasive excuses, or simply due to disorganized clients who can’t bring themselves to write the cheque. None of that has legal standing and you will have an expedited legal route for demanding payment.

BUT

• You need to manage the process because unless a client has formally contested your invoice, you cannot legally delay paying your sub’s just because the client didn’t pay. Where the client does make a formal objection and withholds payment the GC is obliged to take action on that complaint and/or pay the sub’s and suppliers within 35 days of the original invoice date.

These provisions take effect on Ontario for contracts entered into after October 1, 2019. Other provinces are in varying stages of implementing similar regulations. One interesting point to note even though it may not affect residential builders. The federal government is also imposing prompt payment regulations for public works projects, essentially commanding themselves (and other levels of government) to stop stringing their contractors along. We have been essentially shamed into taking action by other countries that simply won’t stand for it.

For most residential contractors, the biggest obstacle to success is rooted in being unaware or misinformed regarding the basics of running a business.   They have the skills to run building projects.  Not so much for running their business.  MMI Professional Services is committed to the success of contractors by helping them develop the business and management skills they need .  For information on ways to run a better building business contact the writer at steveryan@mmiproservices.com