Editorial: You are not a bank
Patrick FlanneryFeatures Business Intelligence
Judging from the correspondence from our legal columnist, Deryk Coward, getting paid in full and on time is a major challenge for many people in our industry. At least we can take some cold comfort in the knowledge that we are not alone. According to a recent survey of Ontario construction subcontractors, almost one in five are carrying receivables over 90 days old.
One in five invoices that are outstanding for more than 30 days are also outstanding for more than 90 days. Two thirds of invoices outstanding for more than 30 days are still outstanding after 45 days. Across the country, the average collection period for completed work in the construction sector has risen from 58 days in 2002 to over 70 days in 2012. By comparison, average payment periods in other businesses have remained roughly flat at about 45 days. The studies were commissioned by Prompt Payment Ontario, a lobby group seeking action from the provincial government to remedy these issues.
That’s what your customers are up against, and you know that if they aren’t getting paid, you aren’t getting paid. The root of the problem is a creeping acceptance of longer and longer payment delays fueled by large general contractors and property developers playing competitors off against each other in order to hold their money longer. This effectively generates a discount for the contractor – in effect, they are using their subcontractors’ capital to leverage their projects. Bet you didn’t know you were a bank in addition to being a rental store.
The erudite Mr. Coward has recommended construction liens as a way to secure some claim to the proceeds from a construction project. They are indeed one of the few legal vehicles open to contractor suppliers, but in Ontario and probably in other parts of the country the system is fatally flawed. Property owners predictably do not like liens being filed against their property and subcontractors fear getting blacklisted if they take that step. In Ontario, the filing deadline for a lien is 45 days after the completion of work. Referring to the typical payment delays above, most subcontractors in Ontario are resigned to waiting 60 days or more for payment. At the 45-day mark, they aren’t even viewing the payment as “late.” By the time they realize they might have a problem collecting, it is already too late to file.
Prompt Payment Ontario is a group with some of the largest construction associations in Canada as members. They participated last year in a review of Ontario’s Construction Lien Act, which was broadened into a larger inquiry into what the government should do to smooth the flow of cash down the construction industry vertical. They have recommended instituting an arbitration process that will enable disputes to be resolved quickly and payments released, with the understanding that both parties will have ultimate recourse to the courts as they do now. Systems like this are in place in other parts of the world, and have enjoyed great success. Indeed, Canada is one of the few places in the world where no specific legal requirement exists for timely payment of completed construction contracts.
Late payment in the construction industry is something that negatively affects all of us, everywhere in the country. The Ontario government has the report of the commission assigned to review its rules – it remains only to be seen what it will do with it. Maybe the rental industry in Ontario and around the rest of the country should lend its voice to the rest of the construction trades asking for a fair and equitable system of ensuring prompt payment.
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