Guest comment from Matt Belliveau, executive director of the Northwest Territories and Nunavut Construction Association.
Construction is critical to the Northwest Territories economy.
The industry’s importance goes beyond its contribution to GDP, which at an annual average of $395 million over the past decade is surpassed only by public administration and diamond mining. The structures we live and work within are created, maintained and renovated by construction companies, who employ thousands of NWT residents at incomes 26.6 per cent higher than the NWT average.
The many Northerners with careers in construction are not the only ones with a stake in the industry. The budgets and investment decisions of governments, local businesses and households are heavily influenced by the financial stability of the NWT construction sector. But there is a well-known threat to this stability that has already pushed many companies beyond the breaking point: late payments.
Late payments can occur in every industry, but the problem is especially damaging to small businesses in the construction sector, who often do not have the cash reserves to float the high upfront costs of construction while they wait on overdue invoices. Studies on this issue in Canada have found that late payments are a serious issue for almost 90 per cent of companies in the industry.
Construction companies react to the risk of late payments in a number of ways that are necessary to remain in operation, but are harmful to the greater economy. They hire fewer people, train fewer apprentices, and invest less in machinery and equipment that could have otherwise increased productivity. They also bid on fewer projects, which leads to a less competitive bidding pool and higher construction costs. When they do place bids, they factor the risk of late payments into their bid prices, which raises construction costs even further.
The late-payment problem is rooted in a unique aspect of the construction industry: its complex system of contracting and subcontracting. A general contractor responsible for the overall co-ordination of a project must hire numerous smaller subcontractor companies – who often hire other subcontractors – to provide all of the specialized skilled labour, materials and equipment needed to complete a range of different tasks while keeping a project on time and on budget. The larger the construction project, the more complex the supply chain becomes – and the more difficult it is for companies within that supply chain to get paid on time.
Imagine a small trade contractor, materials supplier or equipment rental business. On a large project they could be waiting on payment from a subcontractor, who is waiting on payment from another subcontractor, who is waiting on payment from the general contractor, who is waiting on payment from the client who ultimately owns what is being built. A delay at any point in this payment chain creates a ripple effect that can quickly spread and cause serious cash flow issues for many different companies working on the project.
Late payments are a long-standing issue in the construction industry, and governments across Canada have begun taking action. Over the past two years, “prompt payment” legislation has been introduced by provincial governments in Ontario, Nova Scotia, Saskatchewan, British Columbia, Manitoba, New Brunswick and Québec. Similar legislation applying to federal government construction projects also received royal assent in 2019.
Ontario’s new Construction Act, which came into force in 2019, is the most ambitious of these efforts. The Act creates a prompt payment regime that requires the owner of a construction project to either pay an invoice from their general contractor in 28 days, or dispute it within 14 days. Once paid, the general contractor must then either pay their subcontractors or dispute their invoice within seven days. The Act also creates a first-of-its-kind adjudication system that renders decisions on any related disputes within 30 days.
A prompt payment regime similar to Ontario’s would be a huge leap forward for the NWT, where companies have reported waiting not just months, but years to be paid for their completed work. The NWT Mechanics Lien Act is the closest thing we have to a prompt payment regime, but it is more than 30 years old and is missing key definitions that actually create loopholes allowing payment-in-full to be delayed longer than anywhere else in the country.
The NWT and Nunavut Construction Association has explained all of this to the GNWT’s Minister of Justice, who is responsible for the Mechanics Lien Act. We’ve also explained it to all of the current MLAs, as well as the Minster of Justice and MLAs from the previous assembly. Since 2017 we have been requesting that this Act be updated so that NWT construction companies can get paid on time for their work, hire and train more Northerners, invest and grow their businesses, and strengthen the NWT economy from the bottom up.
What are we waiting for?