Gear up for ‘prompt payments’ in construction on October 1

Published in The Lawyer's Daily May 03, 2019 | By Ladislav Kovac

The Construction Lien Act (now the Construction Act) received significant amendment last year. Those changes were the subject of a flurry of attention which has come and gone. We are now at the calm before the storm.

The second round of changes are coming into force on Oct. 1, 2019, and institute the “prompt payment” regime. This change is not only of importance to real estate developers, but also to institutional owners such as non-profits and condominium corporations.

This regime implements a new requirement applicable to all construction contracts requiring that payments be made within a specified time frame and is something that most owners will not be used to. Owners need to prepare and be advised on the changes now, so they are not caught off-guard when they are implemented.

At its core, the prompt payment regime requires that payment is made to a contractor 28 days after the contractor provides the owner with a “proper invoice.” In addition, payment must be made in full unless an owner advises the contractor with a non-payment notice 14 days after the proper invoice has been received.

Although this appears relatively simple and straightforward, it has profound implications for an owner's business operations.

The first and most significant implication of this regime is that it is blazingly fast for the construction industry.

Right now, on a large project, invoices go through multiple stages of review: they are collected, reviewed by an owner, submitted to a payment certifier for further review, forwarded on to lenders for review prior to payment, and may even be subject to further review by other interested third parties. The review process needs to be co-ordinated, and owners will need to make sure they structure this co-ordination when they initially plan their project. Historically, payments in the construction industry moved at a glacial pace.

Under the new prompt payment regime, everyone involved in the review needs to be satisfied within the 14-day period that there will be no issue with the payment, because if the owner does not provide a non-payment notice within those 14 days, full payment of the invoice must be made. This is made all the more onerous as holidays and weekends are not excluded from the count. The new regime will move at blistering speed.

It is strongly recommend that owners attempt to ensure that their lenders and any interested third parties be required to identify any issues with an invoice within a 10-day period, failing which those parties can no longer raise those deficiencies.

Owners should also consider what they need in a “proper invoice.” As the proposed regulations remain outstanding, we don't yet know what the full requirements for a proper invoice will be. The Construction Act does give some of the more usual requirements of an invoice, such as the date, the contractor's name and the amount payable, but leaves much of the rest for an owner to determine with its contractor.

One notable exclusion is that prior certification by a payment certifier or an owner's prior approval cannot be made a requirement of a proper invoice, save and except in certain limited circumstances.

Owners should take the time now to come up with a list of requirements which they need to fund an invoice (for example, supporting invoices, statutory declarations, Workplace Safety and Insurance Board (WSIB) certificates, cost estimates) and may wish to create a pro-forma invoice in advance so that nothing is missed.

Failing to follow the prompt payment regime entitles the contractor to interest on any outstanding payment, and where invoices remain unpaid after adjudication, entitles the contractor to suspend their contract. For these reasons, it is important to ensure that an owner is aware of and plans for the prompt payment regime.

Slow processing of invoices can be particularly problematic when dealing with these institutional entities, and as such these institutional entities may be the most prone to interest charges if they have not prepared for these changes.

There is some protection for absent-minded owners — a grace period, of sorts — as the prompt payment regime is grandfathered so that it does not apply to contracts entered into before Oct. 1, 2019, or contracts resulting from a procurement process started prior to Oct. 1, 2019, and any related subcontracts.

Where this is the case, owners should ensure contractors and subcontractors are aware that their particular contracts are not subject to the prompt payment regime to avoid disputes in future.