Copyright Dan Leduc © 2016 Prompt Payment and Premature Aging – 70 Days is the New 30 Days NCHCA Seminar March 1, 2016 Dan Leduc

Introduction:  Who am I?  Format: Questions and Answers; Feel free to ask any question at any time; Ask yourself: what do you want from this seminar?

2. The Context A. Cash Flow in the Construction Most industry’s operate on the following very general parameters:  You, as for example, a manufacturer, determine the market need for a product,  You design that product,  You determine the product’s price in advance of manufacturing the product,  You see your competitor’s prices for similar or same products,  You manufacture the product,  You mark up the product for overhead and profit,  You sell the product.

2. The Context A. Cash Flow in the Construction In construction however:  Someone else determines the market need for the product (building, road, etc),  Someone else designs that product – you have little control and no first hand information about design (unless it is a design build project),  you guess (estimate) the product’s price in advance of manufacturing the product based on someone else’s design,  you never see your competitor’s prices for similar or same products,  you sell the product,  then you manufacture the product,  you get overhead and profit if your guess was correct Therefore, much riskier venture than normal industry – industry is exclusively premised on cash flow.

2. The Context A. Cash Flow in the Construction Industry Profit For the contractors in the room, I do not need to know your profit margins, but let’s look at the industry as a whole:

2. The Context A. Cash Flow in the Construction Industry Profit mid-range?

2. The Context A. Cash Flow in the Construction Industry Your handicapped odds: Contractors are being paid on 60+ day terms, if you are lucky; 71 days is the apparent norm; Average Collection Period (Days) for Receivables Construction Industry compared to All Non-Financial Businesses, (Canada) Based on Statistics Canada, CANSIM, Table No

2. The Context A. Cash Flow in the Construction Industry Contractors only get paid 90% of their invoices… while they do work; and they only get that last 10% after they have completed their work… Contractors are required to pay for your labour weekly or bi-weekly; Contractors are required to pay your suppliers net 30 days and they induce you with 2% discounts if paid sooner; Owners and Consultants are becoming more aggressive on draws and are in tune to front end billing and over billing; Contractors have to remit 13% HST (Ontario, NB), 15% (NS) 5% GST (Alberta) on Invoiced Values despite the fact you may not yet have received payments. Contractors are financing your own work in an industry that is totally premised on cash flow… they are extending credit terms with no terms or compensation… key is to become as cash neutral as possible

2. The Context B. Contract – Timing of Payments

3. The Issue A. Changes to the Construction Lien Act On February 11, 2015, the Ontario Government announced the an “expert review” of the Construction Lien Act. It appointed lawyer Bruce Reynolds as Counsel to conduct the review. In late July, 2015, Mr. Reynolds released a 74 page document titled “Expert Review of Ontario’s Construction Lien Act – Information Package”. The Package details the current dynamics of the Act and 15 issues Mr. Reynolds suggests should be addressed. In Fall 2015, numerous groups made submissions as to potential changes to the Construction Lien Act; Some of those submissions address the issue of Prompt Payment;

3. The Issue A. Changes to the Construction Lien Act To take you through all the proposed changes suggested by the more than 70 stakeholder submissions is clearly beyond the scope of this seminar:

3. The Result A. Prompt Payment However, I would like to introduce you one issue only, namely Prompt Payment; Now the notion of Prompt Payment is not new; 49 US states have it for public sector projects, 31 US states have it in place for the private sector, the US federal government has had prompt payment legislation in place since 1982, the European Union, United Kingdom, Ireland, New Zealand, and Australia all have prompt payment legislation

3. The Result A. Prompt Payment Features:  A monthly payment cycle which would apply to all contracts except those that provide for payments based on milestones;  Regulation of milestone contracts consistent with the principles of prop payment;  Limiting the right to withhold payment to the portion of the work that is actually in dispute;  Disclosure obligations on the part of payers;  Mandatory interest on delayed payments;  Right of a contractor or subcontractor to stop work or terminate the contract that payment is delayed beyond a stipulated time period;  Voiding of paid if paid clauses and explicit parameters in which pay when paid clauses might apply.

3. The Result A. Prompt Payment OMG! What does this mean?  A monthly payment cycle which would apply to all contracts except those that provide for payments based on milestones;  The Modified OPS General Conditions already have a monthly payment cycle:

3. The Result A. Prompt Payment OMG!  Limiting the right to withhold payment to the portion of the work that is actually in dispute;  Kind of already have that in the Modified OPS General Conditions :

3. The Result A. Prompt Payment OMG!  Disclosure obligations on the part of payers;  Kind of already have that in the current Construction Lien Act with section 39:  PART VI RIGHT TO INFORMATION  Right to information;  39. (1) Any person having a lien or who is the beneficiary of a trust under Part II or who is a mortgagee may, at any time, by written request, require information to be provided within a reasonable time, not to exceed twenty- one days, as follows:  from owner or contractor  1. By the owner or contractor, with,  i. the names of the parties to the contract,  ii. the contract price,  iii. the state of accounts between the owner and the contractor,  iv. a copy of any labour and material payment bond in respect of the contract posted by the contractor with the owner, and  v. a statement of whether the contract provides in writing that liens shall arise and expire on a lot-by-lot basis.

3. The Result A. Prompt Payment OMG!  Mandatory interest on delayed payments;  Again, the Modified OPS General Conditions calls for interest on overdue payments:

3. The Result A. Prompt Payment OMG!  Right of a contractor or subcontractor to stop work or terminate the contract that payment is delayed beyond a stipulated time period;  Again, the Modified OPS General Conditions allows a contractor to terminate a contract for default by the Owner, including default in payment:

3. The Result A. Prompt Payment OMG!  Voiding of paid if paid clauses and explicit parameters in which pay when paid clauses might apply.  Does not apply to contracts with the City…. All this to say that if Prompt Payment does come in, it is not the end of the World as we know it…. Most of these ideas are already on the Modified OPS GCs….

Questions? Thank you. Dan Leduc Norton Rose Fulbright Canada LLP Tel: Cell: