Building a Federal Framework for Prompt Payment and Adjudication
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Report prepared for Public Services and Procurement Canada Building a Federal Framework for Prompt Payment and Adjudication Delivered: June 8, 2018 R. Bruce Reynolds | Sharon C. Vogel Secretary of the Review: James K. Little EXECUTIVE SUMMARY EXECUTIVE SUMMARY OF ANALYSIS AND RECOMMENDATIONS Canada, like many other jurisdictions around the world, is considering mechanisms to ensure the orderly and timely building of federal construction projects by ensuring that cash flows down the construction pyramid quickly. The review was announced on January 30, 2018. The purpose of the review is to make provide the Government of Canada with a set of recommendations in relation to the implementation of prompt payment and adjudication legislation on federal construction projects. In the federal context, under the Financial Administration Act, the Treasury Board Payment Directive, and the federal government Contracting Policy, there is an ordinary course of payment environment established that can fairly be characterized as fundamentally based upon the core principles of prompt payment. In particular a 30-day from invoice payment cycle, payment of undisputed amounts, and mandatory interest which assists in ensuring that payments are made by the federal government promptly. However, over the course of the stakeholder engagement process stakeholders have raised concerns about the lack of prompt payment on federal construction projects, citing reports prepared by Prism Economics and Analysis, Ipsos Reid (prepared for Ontario trade contractors) and Raymond Chabot Grant Thornton (prepared for the Quebec coalition contre les retard de paiement dans la construction) in relation to payment delays. We have concluded that the existing prompt payment policies and/or proposed voluntary codes are inadequate to achieve prompt payment, particularly at the trade contractor level and below, such that the implementation of prompt payment legislation at the federal level makes sense. From a policy perspective and considering the jurisdiction of the federal government to enact legislation, the reason that the federal government should introduce such legislation is to: a) assure the orderly and timely building of federal construction projects by ensuring that cash flows down the construction pyramid quickly, thereby avoiding the disruptive effects of delayed payment, and potentially non-payment; b) avoiding increased construction costs caused by trade contractors adding contingencies to their bid prices on federal projects to make up for the cost to them of slow payment; and 1 EXECUTIVE SUMMARY c) reducing the risk of disruption on federal construction projects attributable to the insolvency of contractors and subcontractors. We recommend that the above-policy reasons be expressed as the legislative intent behind the proposed legislation. Regarding the content of the proposed legislation, as is apparent from a review of our recommendations set out below, we recommend legislation that is similar in many respects to that introduced in Ontario. Ontario is presently the only province or territory that has prompt payment or adjudication legislation and developing legislation that is aligned across the country, to the extent possible, is important from a policy perspective. We note that Chapters I through VII of the report provide necessary context and our analysis and recommendations begin at Chapter VIII. A summary of our recommendations and their reference location in the report is set out below. In this section: Chapter VIII—Applicability of Legislation Chapter IX—Prompt Payment Chapter X—Adjudication Chapter XI—Key Contractual Issues Chapter XII—Legislative Alignment Chapter XIII—Further Consultation Chapter XIV—Transition and Education Chapter VIII – Applicability of Legislation 1. The federal government should enact legislation introducing prompt payment and adjudication on federal construction projects. 2. The legislation should make clear that the intent of the federal government is to: assure the orderly and timely building of federal construction projects on federal lands by avoiding the disruptive effects, including gridlock, which arises from non-payment down the supply chain; avoid increased the construction costs of construction that result from bidders adding a contingency amount to allow for the risk of late payment, which contributes to the federal government's objective of achieving best value; and, reduce the risk of disruption to federal construction projects because of the insolvency of subcontractors and suppliers. 2 EXECUTIVE SUMMARY 3. The legislation should operate only in relation to matters integral to federal powers. The legislation should be limited to: federal construction projects on lands owned by the federal government, and defence projects. However, the legislation should not apply merely on the basis that the federal government has funded a project in whole or in part or because the federal government has specific regulatory authority in relation to a particular industry. "Lands reserved for the Indians" (recognizing that this language is anachronistic, but is used in the Constitution Act, 1867), we recommend that the ability to include projects on such lands be included within the ambit of a subsequent regulation, if viewed as merited, after appropriate consultation. construction projects that are part of a federal undertaking or of a work declared to be for the general advantage of Canada and in particular: o federal undertakings (as defined in s. 92(10) of the Constitution Act, 1867, e.g. lines of steam or other ships, railways, canals, telegraphs) or o declared by the Parliament of Canada to be for the general advantage of Canada or for the advantage of two or more of the Provinces. projects designated by a Minister on a case-by-case basis at the outset of a project. 4. Federal prompt payment and adjudication legislation should be deemed to apply to all construction contracts that fall within the ambit of recommendation 3, drawing on the definitions of terms like “improvement”, “services and materials”, etc. from provincial lien legislation. 5. Parties to construction contracts should not be permitted to contract out of the legislation. 6. Subject to recommendation 3, prompt payment and adjudication legislation should apply to all federal departments and federal Crown corporations that do federal construction work under their own contracting authority. 7. The legislation should apply to federal P3 projects so long as those projects are federal P3 projects that meet the constitutional requirements outlined above (i.e. matters integral to federal power(s)) with necessary modifications, as implemented under Ontario’s Construction Act. Specifically, the following should be considered: 3 EXECUTIVE SUMMARY the appropriate definitions of the special purpose vehicle (SPV), the project agreement, the design-build contractor and the design build agreement; modifying the applicability of adjudication, including limiting the topics that can be adjudicated and having the independent certifier serve as adjudicator; allowing milestone payments; allowing provisions that impose pre-conditions on the delivery of a proper invoice (e.g. in relation to certification); and requiring the Independent Certifier to be the adjudicator. 8. The legislation should not apply to maintenance and repair work under long term contracts and it should only apply to work that constitutes a “capital repair." The legislation should define capital repair and suggest consideration of the Ontario approach as a basis for that definition. 9. The legislation should exclude fit-up work for leased buildings as described in the Contracting Policy. 10. There should be no thresholds in the proposed legislation. Chapter IX – Prompt Payment 11. Prompt payment should apply at the level of the owner to general contractor, general contractor to subcontractor, and downwards. 12. The trigger for payment should be the delivery of a "proper invoice" as defined by the legislation, subject to certain pre-conditions, as will be discussed below. We recommend that the Ontario definition of a “proper invoice” should be used as a basis for the development of a federal definition. 13. The time period for payment between federal owner to general contractor should be 28 days and the period for payment at levels below the general contractor should be 7 days from receipt of payment from the owner, and so on down the contractual chain. 14. The time period for payment by a federal owner to its general contractor in relation to Substantial Performance of the Work and Final Completion should be 28 days and then 7 days down the payment chain. 15. Parties should otherwise be free to contract in respect of payment terms, but if the parties fail to do so, payment terms will be implied by legislation, being monthly payments. 16. A policy should be developed for construction projects that is not inconsistent with existing policies and allowing the certification of a 4 EXECUTIVE SUMMARY claim as reasonable before "verification", but following the delivery of a proper invoice. Provided this is feasible, the legislation should render a contractual provision of no force and effect that makes the giving of a proper invoice conditional on the prior certification of a payment certifier or the owner’s prior approval. As noted above, the exception to this is in relation to P3 projects. 17. Payers should be permitted to deliver a notice of non-payment within 14 days following receipt of a purported