The lag between a subcontractor completing its work on a project and the subcontractor being paid has been a longstanding source of tension in the construction industry. In the past, subcontractors typically had to wait for the contractor to be paid by the owner before money would flow down to them and, even then, there was no guarantee that they would be paid within weeks or even months of completing work on a project. Adding to the tension was a desire to preserve the working relationship with the contractor, which sometimes prevented subcontractors from pursuing what they were owed. On October 1, 2019, the prompt payment and adjudication provisions of the new Construction Act came into effect. The provisions establish a new dispute resolution process, adjudication, and contain strict timelines for payment, which aim to ensure that those who provide services or materials to a construction project are paid on a timely basis.
The prompt payment timelines are triggered by the contractor’s submission of a “proper invoice” to the owner. Unless the contract provides otherwise, proper invoices must be given to the owner on a monthly basis. Upon receipt of a proper invoice, the owner has twenty-eight calendar days to pay the contractor in full. After being paid, the contractor has seven days to pay the subcontractors whose work was included in the proper invoice and so on down the chain. At each level, a party can give a Notice of Non-Payment to the party it owes payment to. Such notice must specify the amount being disputed and provide all the reasons why payment is not being made in full or in part. Disputes that are the subject of a Notice of Non-Payment can be referred to adjudication. Provided no Notice of Non-Payment is issued, it would take no more than forty-two days for payment to flow down the chain from an owner to a sub-subcontractor. Some in the industry are hopeful that the new regime will increase transparency and help to mend the relationship between contractors and subcontractors by ensuring timely payment of invoices; others are less optimistic.
There have been questions about how suppliers fit within the new regime. Suppliers are not defined in the Act. A subcontractor is defined in the Act as “a person not contracting with or employed directly by the owner or an agent of the owner but who supplies services or materials to the improvement under an agreement with the contractor or under the contractor with another subcontractor and includes a joint venture entered into for the purposes of an improvement or improvements”. Based on this definition, suppliers can be subcontractors for the purpose of the Act and there is no reason why prompt payment would not apply to them. Therefore, if suppliers are contracting directly with a contractor, then the trigger for prompt payment obligations runs from the date the contractor’s proper invoice is received by the owner, which will presumably include amounts owed to suppliers under that invoice.
However, the Act allows a contractor and subcontractor to agree to payment timeframes which do not necessarily match the contractor/owner payment timeframes. If a contract between a contractor and an owner stipulates that proper invoices are to be submitted monthly or some other lengthier period, which is permissible under the Act, and the subcontract between the contractor and the supplier states that invoices are to be paid in fifteen days or some other shorter period, which the Act also allows, the prompt payment rules will not mean that the contractor only has to pay the supplier once it receives money from the owner. This could result in a situation where the contractor is obligated to pay the supplier out of pocket.
To avoid or reduce such tension with suppliers, contractors should attempt, as much as possible, to align payment periods up and down the chain. This is likely a feasible solution for smaller suppliers, but where the contract is with a specialty supplier or a larger player in the industry, such parties may use their bargaining power to negotiate for shorter payment periods. As prompt payment now applies to all contracts entered into on or after October 1, 2019, unless a procurement process for that contract was commenced before that date, contractors should keep these considerations in mind when working with suppliers. The position of suppliers in the prompt payment regime will become more clear as this issue is litigated.