Canada Gazette, Part I, Volume 157, Number 8: Federal Prompt Payment for Construction Work Regulations (Criteria, Time Limits, Interest and Circumstances)
February 25, 2023
Federal Prompt Payment for Construction Work Act
Department of Public Works and Government Services
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the Regulations.)
The Federal Prompt Payment for Construction Work Act (the Act) received royal assent on June 21, 2019, as part of the Budget Implementation Act, 2019, No. 1. The proposed Federal Prompt Payment for Construction Work Regulations (Criteria, Time Limits, Interest and Circumstances) [the proposed Regulations] would complement both the Act and the Federal Prompt Payment for Construction Work Regulations (Dispute Resolution).
The construction industry in Canada is a significant employer and driver of the Canadian economy. Approximately 7.5% of Canada’s gross domestic product is related to construction, and the industry employs an estimated 1.5 million people.
In 2016, at the 50th annual joint meeting of the Canadian Construction Association and the federal government, industry stakeholders raised the long-standing issue of payment delays along the contracting chain of contractors to subcontractors for federal construction contracts. A 2015 survey available from the Canadian Construction Association indicated that approximately $46 billion in payments remained unpaid after the conventional 30-day period, which represented about 16% of the estimated $285 billion in construction contracts in Canada that year.
The federal government was asked to take a leadership role and engage in dialogue with construction industry stakeholders to identify, assess, and implement possible measures to address timeliness of payment, which was of particular concern to small and medium enterprises (SMEs) in the construction industry. To date, the avenue available to SMEs affected by delayed payments or non-payments has been to seek redress through the courts, which is not a viable option for most SMEs. It usually involves long timelines to reach a judicial decision and legal costs are high, often exceeding the amounts being sought. With the exception of the province of Ontario (the Construction Act), no jurisdiction in Canada had a broad legislated prompt payment regime in force with a relatively fast and low-cost dispute resolution and enforcement mechanism in place.
While the federal government itself maintains a good payment record and pays on time for completed construction work and services as per Treasury Board policy, there remain inconsistent payment contract terms and payment delays further down the chain. This inconsistency drives the cost of federal construction up and ultimately does not support growth, innovation, and employment. For workers, delayed payment means fewer opportunities for apprenticeships or working for firms unable to invest in technology or future work. For Government, delayed payment throughout the payment chain on federal construction projects erodes its buying power, increases financial risks, and escalates costs for construction.
In 2017, the Prime Minister mandated the Minister of Public Services and Procurement Canada (PSPC) to modernize practices to ensure the prompt payment of contractors and subcontractors that do business with the Government. To consider this issue, a government-industry working group was established, composed of PSPC, Defence Construction Canada and the Canadian Construction Association. The working group was established to consider ways to improve the speed of payment on federal construction jobs. In 2018, a 14-point action plan was developed, which included a recommendation to develop legislation as a key action item. The legislation was deemed essential to ensure appropriate promptness of payment through all levels of the construction supply chain. The Act responds to that recommendation.
The core of the Act addresses the timelines of payment down the construction supply chain. The Act stipulates that payment will be due from the federal government 28 days after receipt of a proper invoice from the contractor. The contractor will then have 7 days to pay its subcontractors, and those subcontractors will then have 7 days to pay their subcontractors, and so on down the chain.
To ensure greater consistency and ease to construction firms in the province where a reasonably similar prompt payment regime exists, the Act allows the Governor in Council to designate that provincial prompt payment legislation as applicable instead of the federal legislation, and the designation also requires that the provincial legislation include an adjudication regime that is similar to the one set out in the Act to handle cases of non-payment of contractors or subcontractors in the designated province.
If there is a dispute between parties working on the construction project related to payment anywhere down the chain of payment, the Act introduces an adjudication process. Adjudication is a pragmatic, swift, and flexible dispute resolution mechanism. An adjudicator reviews evidence and arguments presented by opposing parties and arrives at a timely decision to determine the rights and obligations between the parties involved. Ultimately, adjudication allows a swift determination of a dispute, enabling a project to proceed and payments to flow through to lower tiers within the payment chain. The adjudicator’s determination is binding on the parties to the dispute unless they come to a written agreement or the determination is set aside by a court order or arbitral award.
PSPC is responsible for procuring the services of an Adjudicator Authority and will engage it through the issuing of a contract for services. The Adjudicator Authority will then be responsible for establishing a training and certification program for adjudicators, as well as to establish a code of conduct for adjudicators and methods to ensure adherence to that code. The Adjudicator Authority will also be responsible for maintaining a national list of adjudicators that it has certified, and will make this list available to industry, so that a certified adjudicator can be identified to resolve a dispute amongst parties.
Finally, the Adjudicator Authority will be responsible for tracking information about the various adjudications and will publish statistics on an annual basis to enable industry to see the status of prompt payment adjudications related to federal construction projects. PSPC will approve the format and content of the annual statistics prior to posting and address any performance issues raised by industry.
The Act has set out the adjudication process as a dispute resolution process. It identifies how the adjudication is to be started (with a notice of adjudication), that the adjudicator is to be chosen from a list of adjudicators established by an Adjudicator Authority, and that the determination of the adjudicator is binding, unless the disputing parties come to a written agreement, or the determination is set aside by a court order or arbitral award. The Act also stipulates that the two disputing parties must pay their own costs, and an equal portion of the adjudicator’s fees, unless the adjudicator rules differently.
The proposed Regulations aim to define key administrative aspects related to the designation of provinces and the adjudication process that would allow the Act to function, namely
- The criteria for the designation of provinces that have enacted a reasonably similar prompt payment and adjudication regime (e.g. Ontario, Saskatchewan, Alberta), so that any federal construction work in those provinces will, by default, be under their prompt payment regime.
- The days that are not to be counted towards timelines of payment in the adjudication process (e.g. holidays).
- How interest on unpaid amounts is to be computed.
- The situations where adjudicators can be relieved of the requirement to adjudicate a specific dispute (due to consolidation, revocation of appointment, conflict of interest, circumstances beyond their control).
- Enable implementation of the Act.
- Detail and define the criteria for the designation of provinces as well as time limits, interest and circumstances of the adjudication process.
The proposed Regulations would define the criteria for the designation of provinces that have enacted a reasonably similar prompt payment and adjudication regime as well as the time limits, interest and circumstances of the adjudication process.
The criteria for the designation of provinces would establish that the following aspects of a provincial legislation would have to be reasonably similar to those of the federal regime:
- The submission of a proper invoice.
- Time limits for invoice payments to the contractor and subcontractors.
- In the case of non-payment, the provision of a written notice of non-payment.
- In the case of a payment dispute, an adjudication process that would allow a determination within certain time limits.
- A binding determination, unless the parties come to a written agreement or the determination is set aside by a court order or arbitral award.
The proposed Regulations would outline the time limits, interest and circumstances of the adjudication process as follows:
- The days that are not to be counted towards timelines of payment in the adjudication process (e.g. holidays, Saturdays).
- How interest on unpaid amounts is to be computed as simple interest that is equivalent to the average bank rate plus 3% per year, from the due date until receipt of payment.
- The situations where adjudicators can be relieved of the requirement to adjudicate a specific dispute (due to consolidation, revocation of appointment, conflict of interest, circumstances beyond their control).
Upon royal assent of the Act, PSPC continued to engage an advisory group comprised of key representatives from real property construction associations (i.e. the Canadian Construction Association, the National Trade Contractors Coalition of Canada, and the General Contractors Alliance of Canada), construction law experts, and interested individuals to ensure continued support and to clarify items to be included in the proposed Regulations. This advisory group was established during the build-up to the development of the Act, with expert industry representatives selected by a third-party construction-focused legal firm. The advisory group provided its feedback on multiple occasions during 2020. All feedback that was received from the advisory group informed, and was integrated into, the regulatory policy position.
Modern treaty obligations and Indigenous engagement and consultation
PSPC conducted an assessment to determine the implications of the legislation and resulting regulations on modern treaties. As the Act and proposed Regulations deal with prompt payment for the delivery of federal construction projects on federal lands only when the contracting authority is a federal department or agency, the proposed Regulations have no implications on modern treaties.
The Act establishes that the details of the adjudication process are to be included in the proposed Regulations and they would become a fundamental element in the overall prompt payment regime. The Act assigns the details of the adjudication process to regulations because adjudications related to construction payments are new to the federal construction payment regime, and minor adjustments may be required to the process in the years following implementation. Adjustments can be more readily made to regulations compared to legislation.
Benefits and costs
The costs to businesses as a result of the proposed Regulations are seen to be neutral or potentially resulting in a cost savings. Adjudication is likely to be a significant benefit as it allows for a quick and cost-effective way of obtaining a determination on amounts owing. Industry has stipulated that a real cost is incurred when payment is not completed promptly. In order to recover these amounts owing, firms must engage lawyers and seek determinations through the courts. This litigious process is expensive and often more costly than the amounts that are being sought, resulting in firms not collecting the amounts that are owing. Countries, such as Australia and the United Kingdom, have found that with the introduction of adjudication, payment practices significantly improve, and when adjudication does become necessary, it is faster and less expensive than proceeding with a court action.
The proposed Regulations would not create additional costs to industry as they simply define the adjudication process to be followed as per the Act. Ultimately, adjudication costs are seen as regular dispute costs associated to the construction project itself as opposed to a government-wide cost. As costs related to mediation and arbitration are only accounted for at the individual project level, so too would any adjudication costs associated with Government of Canada payment disputes with the Contractor. As adjudication is seen as a quick and efficient method for settling disputes related to payment, it is likely that overall dispute costs will drop with the introduction of adjudication. Thus, no additional costs or funding have been identified for this element.
Small business lens
The Act and the proposed Regulations are designed to support the construction industry which is made up of predominantly small businesses. The Canadian construction industry employs an estimated 1.5 million people. Over 99% of the firms are micro (1–4 employees), small (5–99 employees) and medium-sized (100–499 employees) enterprises. Large businesses with more than 500 people on payroll account for 0.1% of establishments. Of the 369 979 construction businesses, 61% have 4 employees or less.
The Act, supported by the proposed Regulations, articulates a payment regime that is to be followed throughout the construction supply chain on construction work on federal property, including that payment disputes should be addressed through adjudication, which is a quick, efficient and a relatively inexpensive way to resolve the dispute. Without the regime established by the Act and proposed Regulations, businesses would be required to engage legal counsel and await a decision by the courts — ultimately resulting in a long and expensive process. The proposed Regulations would produce a greater benefit to small businesses by speeding up payments and providing an effective method of resolving payment disputes quickly and efficiently, since going to court is even more cost prohibitive for them than it is for larger businesses.
The one-for-one rule does not apply as there is no incremental change in the administrative burden on business.
The regulations would establish criteria to determine equivalency for provincial programs, ensuring consistency across jurisdictions in Canada under which construction businesses operate, and provide clarity to the adjudication process. Neither of these would directly result in an increase in the administrative burden on business as defined by the Red Tape Reduction Act.
Regulatory cooperation and alignment
Engagement continues through provincial and territorial meetings focused on the administration of real property. Direct engagement with provincial and territorial officials is ongoing, to ensure information sharing (both related to legislative measures, but also for other contractual/administrative measures that may support the promptness of payment). PSPC will continue to monitor provincial and territorial prompt payment initiatives, and will keep provinces and territories informed of the status of the federal regime to ensure alignment where possible.
Strategic environmental assessment
In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan was conducted to identify environmental impacts. Although construction can have an impact on the environment, the proposed Regulations deal only with prompt payment and enforcement through adjudication. As such, there would be no environmental impacts.
Gender-based analysis plus
The proposed Regulations deal with the adjudication of disputes related to prompt payment down the construction supply chain thus assuring the orderly and timely building of federal construction projects on federal property. The Act and proposed Regulations do not address the determination of who will do the work and where the work will be done. All firms will be paid on time, regardless of their ownership and irrespective of sex, ethnicity or culture.
Recognizing that the direct impacts of the proposed Regulations are neutral from a gender-based analysis plus perspective, there is an expectation that there will be some indirect socio-economic benefits created from the proposed Regulations. For example, by paying promptly, industry has indicated that firms would be able to take on more business and potentially hire more workers. Due to the current demographic of workers within the industry, this is expected to benefit more men than women. Additionally, some federal land (and thus some federal construction contracts) will be in remote locations, which would provide for economic benefits to those remote areas. This would benefit both women and men in remote locations but once again, because of industry worker demographics, there would be greater benefit to men than women.
The construction industry includes a range of occupations, such as administrative, welders, bricklayers, sales, accountants, electricians, etc. Although the majority of the construction workforce is male and will likely benefit the most from the indirect benefits of the proposed Regulations, the 13% female segment is actively being targeted through a number of outreach initiatives led by major construction companies and key industry associations, e.g. the “Talent Fits Here” program of the Canadian Construction Association.
While the Government of Canada has no influence over the gender representation within construction companies, it is important to note that Canadian construction firms must abide by the human rights legislation of their respective province, and larger firms may have signed the Agreement to Implement Employment Equity under the Federal Contract Program to ensure employment equity.
Implementation, compliance and enforcement, and service standards
Implementation of the entire federal construction prompt payment regime requires four key elements to be in place: bringing the Act into force, bringing the proposed Regulations into force, creation and ongoing operations of an Adjudicator Authority and finally, revisions to the standard Government of Canada construction contract.
The Act received royal assent on June 21, 2019. It will only enter into force on a date set by the Governor in Council. This will be done to coincide with the completion of the other elements of the federal construction prompt payment regime, including the making of these proposed Regulations.
The Adjudicator Authority will be created through a contract issued by PSPC after a competitive solicitation. This solicitation is being issued in tandem with the publication of the proposed Regulations in the Canada Gazette, Part I. It is the intent that the Adjudicator Authority would be established and that adjudicators are identified, trained and certified prior to the coming into force of the proposed Regulations.
The standard Government of Canada construction contract will be adjusted to bring the basis of payment timelines in line with the Act and to add adjudication as a method of dispute resolution. This revised contract would be used for new solicitations that would be issued after the Act comes into force.
Pursuant to the Act, any contracts for federal construction work on federal property that are underway at the time the Act and proposed Regulations enter into force, and which will end more than one year after, would have one year to adjust to the payment periods and adjudication process, and ultimately follow all the requirements under the Act and Regulations.
Compliance and enforcement
Adjudication would be identified in the standard government construction contract as a means of payment dispute resolution. Compliance and enforcement with the adjudication process would be monitored by the Adjudicator Authority, once established. If a party does not adhere to the terms of the contract regarding payment dispute resolution, it could still be resolved through litigation.
Communications, Issues, and Strategic Relations
Real Property Branch
Public Services and Procurement Canada
Place du Portage, Phase III, 9A1
11 Laurier Street
PROPOSED REGULATORY TEXT
Notice is given that the Governor in Council proposes to make the annexed Federal Prompt Payment for Construction Work Regulations (Criteria, Time Limits, Interest and Circumstances) under section 23 of the Federal Prompt Payment for Construction Work Act footnote a.
Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. They are strongly encouraged to use the online commenting feature that is available on the Canada Gazette website but if they use email the representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Real Property Services Branch, Public Services and Procurement Canada (email: Biensimmobiliers.RealProperty@tpsgc-pwgsc.gc.ca).
Ottawa, February 16, 2023
Assistant Clerk of the Privy Council
Federal Prompt Payment for Construction Work Regulations (Criteria, Time Limits, Interest and Circumstances)
Definition of Act
1 In these Regulations, Act means the Federal Prompt Payment for Construction Work Act.
Criteria for designation
2 A province may be designated under subsection 6(1) of the Act if it has enacted, by its laws, provisions requiring
- (a) the submission of an invoice reasonably similar to a proper invoice, as set out in the Act;
- (b) payment of the invoice to the contractor and then to each lower level of the subcontracting chain, within time limits that are reasonably similar to those set out in the Act;
- (c) in the case of non-payment, the provision of a written notice that is reasonably similar to a notice of non-payment, as set out in the Act;
- (d) if a dispute over payment arises, the implementation of an adjudication process that will allow for a determination according to time limits that are reasonably similar to those set out in the Regulations for the Federal Prompt Payment for Construction Work (Dispute Resolution); and
- (e) that the decision rendered under the process referred to in paragraph (d) is binding on the parties to the dispute unless they come to a written agreement or the determination is set aside by a court order or arbitral award.
Days to exclude
3 The following days and periods are excluded from the computation of time for the purposes of the time limits referred to in sections 9 to 11 of the Act:
- (a) any holiday as defined in subsection 35(1) of the Interpretation Act;
- (b) Saturdays;
- (c) the nine-day period beginning on December 24 and ending on January 1; and
- (d) any construction holiday that is recognized by any provincial government.
Interest on unpaid amounts — computation
4 (1) Interest awarded under subsection 14(2) of the Act is calculated as simple interest that is equivalent to the average bank rate plus 3% per year, from the due date until receipt of payment.
(2) The following definitions apply in this section.
- average bank rate
- means the simple arithmetic mean of the bank rates that are established during the month before the month in respect of which interest is being calculated. (taux d’escompte moyen)
- bank rate
- means the rate of interest established periodically by the Bank of Canada as the minimum rate at which the Bank of Canada makes short term advances to members of the Canadian Payments Association. (taux d’escompte)
5 An adjudicator is not required to determine a dispute in the following circumstances:
- (a) the dispute they were to determine has been consolidated with another dispute and another adjudicator has been appointed to determine the consolidated disputes;
- (b) their appointment is revoked by agreement of all the parties;
- (c) they have a conflict of interest; or
- (d) it has been determined, to the satisfaction of the Adjudicator Authority, that they are no longer able to adjudicate the dispute.
Coming into force
6 These Regulations come into force on the day on which section 387 of the Budget Implementation Act, 2019, No. 1, chapter 29 of the Statutes of Canada, 2019, comes into force, but if they are registered after that day, they come into force on the day on which they are registered.
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