Prompt payment has come into effect in Ontario on October 1st, 2019. Does everyone understand what it all means and how it works?
One of my connections on LinkedIn brought up how some general contractors were avoiding the new prompt payment terms with a clause in their subcontracts. My initial response was that contractors had to stand up for what they feel is fair, but then I thought is this even allowed?
Have you even discussed it with your clients?
You’ve probably heard about the new prompt payment legislation in Ontario over the last couple of months, but chances are, like me, you don’t fully understand it yet. Don’t worry, you aren’t alone, it only affects contracts that had their procurement process initiated on or after October 1st, 2019. So most contract administrators haven’t even had to deal with the new provisions yet.
Have you researched it?
I’d like to start the conversation about prompt payment with the hopes to empower contract administrators with the knowledge they need to assert themselves in contract negotiations, but also to clarify a few questions I had about the subject. In doing my research I found a really well-written paper by Howard Krupat of DLA Piper, titled Prompt payment and adjudication have arrived in Ontario. It’s extremely thorough and I highly recommend you refer to it for further clarification as I won’t go into too many details here.
Essentially, here’s how Prompt Payment works:
Payment terms start the day the contractor sends the client or the payment certifier a “Proper Invoice”. The 6 required components of a proper invoice are listed in the Construction Act and a summary can be found here in this blog post. Contractors must be allowed to invoice monthly unless there are agreed upon payment milestones in the contract.
Once the client has received the proper invoice, they have 3 options.
Notice of non-payment.
That notice of non-payment must include:
- The amount that is not being paid; and
- The reason for non-payment.
When do subcontractors get paid?
If and when contractors receive payment or partial payment from the owner, they must pay each subcontractor whose amounts were included in the proper invoice no later than 7 days after receiving payment. The subcontractor must then pay any sub they have within 7 days of receiving their portion, and so on.
What if there’s a disagreement?
The big question is, what happens after a notice of non-payment? Well, in the real world, probably just a phone call… assuming the contractor has a decent relationship with the client. Calmly negotiate the items in question, listen to the other person, and explain your rationale. Any items that remain on the invoice must be paid using the original invoice date. Which means the invoice would have to be paid within the original 28 day period.
What if the owner doesn’t pay?
The Construction Act allows for a new adjudication process during a disagreement. A mechanism intended to prevent long and expensive court proceedings. If you get to this point, it’s probably a good idea to seek legal advice from a construction lawyer. I won’t go into more detail here which could just bore you. Check out DLA Piper’s article mentioned above for more detail.
Can the payment terms be changed in a contract?
Now, going back to my original concerning question. Are you actually able to “contract out” the new prompt payment guidelines and adjudication process?
The short answer is no, it is prohibited to do so by the Act. This was a huge relief for me. Knowing this new legislation cannot be changed and is enforceable through the adjudication process levels the playing field. Otherwise, I don’t think anything would change.
What have you done to prepare?
With that being said, whether you’re a contractor, a payment certifier, or an owner; are you prepared for this massive shift? Do you have new procedures and systems in place to deal with such rapid payment requirements?
Yeah, I know, it’s a lot. Although it may seem difficult for contract administrators to manage prompt payment, I believe there are a few things you could do to make it easier. I’ll be sharing these on my next blog post.