Who Wants Prompt Payment?
Construction industry employees want prompt payment. Spending energy and costs towards prompt payment is frustrating, time consuming and therefore not productive in building a business. It’s hard enough to secure jobs at a price that works. It’s about cash flow. The contractor (general or subcontractor) shouldn’t fund someone else’s project.
The vast majority of owners and contractors honor their contractual obligations and do so promptly. It’s bad business not to. The ones that do not, threaten your business. A hung account receivable could leave a sizable hole in the current asset side of your balance sheet. Suppliers, shareholders, banks and bonding companies could therefore feel the impact.
Your surety leverages support levels based on a number of factors and financial metrics including how much working capital is in your company.
5 Pro Tips
1 A receivable that is well overdue, or due from an entity of questionable solvency may not be viewed as current and thus could directly affect your capacity to access the surety credit you need for your business.
2 View the Surety Broker and the Surety as your partners in the business. Interests are aligned regarding prompt payment.
3 Tender bond documents to an unknown Owner include the “Financing Clause” as standard. The Financing Clause requires the Owner to furnish evidence that they have financing or funds committed to cover the costs of the project, before requesting performance bonds. Expect tough questions. The Surety does not mind being the one to ask. We are in this together and anything that protects you and your balance sheet is good for us as well. And quite frankly an Owner should expect those questions and diligence when awarding sizable construction contracts.
4 If you are a sub-trade, you can query an owner to see if you have recourse to a Labour and Material payment bond that the owner would hold in trust for your benefit. Surety Brokers provide guidance, and having a labour and material payment bond in place provides additional security from a third party surety that payment follows the terms of your contract.
5 What about for non bonded contracts? When contracting with private parties or other contractors you don’t know, your first call should be to your Surety Broker. They are your business advisers in these matters, and are in the business of knowing who is who in the development and building industry. They have the means and the contacts to find out more and can help you before you sign that contract.
In Ontario, there have been some interesting recent developments. Prompt payment or the lack of it and need for it has been in the news a lot lately. Two of the biggest barriers in the construction industry to investment, productivity as well as employment are payment delays and delinquent payers.
On December 5th, 2017 Bill 142, the Construction Lien Amendment Act passed unanimously in the Ontario provincial legislature. This legislation completely overhauls that province’s Lien Act which has been in effect since 1983 and was in need of updating. Here are some of the highlights:
- Creation of new prompt payment rules to give contractors and subcontractors certainty about when to expect payment. Payment protection through the construction chain.
- No exceptions rules to hold back release deadline means a no exceptions rule to when contractors and subcontractors receive payment.
- The adjudication process will now provide an opportunity for resolution of construction disputes without disruption of project schedules. This will likely assist in avoiding costly legal battles.
- Mandatory performance and payment bonds on publicly funded projects over a threshold.
While the bill passage itself is big news, the Ministry of the Attorney General of Ontario will next need to develop and draft the supporting regulations and when that is complete the full ramifications will be clearer to all. There are over 400,000 workers in that Province’s construction sector and they can hopefully soon see the effects of legislation that looks out for them.
Time will tell whether we see this movement expand across the country. Other provinces are watching with interest as they too face similar issues with respect to dated legislation and issues with prompt payment.
Interest rates are on the rise. The timing is good for this legislation to ensure the financing burden is kept where it belongs, and not shifted onto the contractors. Let’s hope it catches on elsewhere.