Could Alberta Infrastructure’s adoption of prompt pay spark an industry-wide shift?

For the Alberta construction industry, the world is looking a little greener than usual this spring—and not just because of the unseasonably warm weather and early start to the building season. Cash is expected to start flowing more quickly—and in a more transparent, easily track- able manner—from government to contractors after Alberta Infrastructure made prompt pay part of its contracts at the beginning of April. 

“Through responsible, timely payment practices we are helping to ensure companies and contractors get paid for work they have completed in a timely manner,” says Brian Mason, minister of infrastructure and transportation, in a statement to Alberta Construction Magazine. “We have a strong working relationship with industry and encourage public and private owners to adopt similar measures in their contracts in support of our local workers.”

Paul Verhesen, chair of the Alberta Construction Association (ACA) and president and chief executive officer of Clark Builders, describes the change as a significant milestone in the relationship between the industry and Alberta Infrastructure. “They see the real advantage of the smaller construction entity being the beneficiary of prompt pay,” he says. “Everyone’s going to benefit, but the real beneficiary is going to be smaller firms.”

Smaller companies often have less cash on hand and fewer assets than the big contractors, which makes it harder to swallow late payments. But the issue of prompt pay certainly touches everyone in the industry. Dave Kinley, ACA’s prompt payment committee chair, says that a 2014 survey of the association’s members found 66 per cent experienced payment delays either all or most of the time on both public and private projects. The average minimum time between invoicing and payment was 60 days.

A Canadian concern

In fact, prompt pay is a nation-wide issue, Mason notes. Alberta Infrastructure now has bragging rights as an early adopter, but a bill that would make prompt pay a part of all federal government contracts is now winding its way through the Canadian Senate. Ontario also attempted to legislate prompt pay in 2013, but the effort was abandoned following heavy criticism from industry. (That province is now looking at incorporating prompt pay into its Construction Lien Act.) Many of the other provinces are also weighing the issue.

Not only do prompt pay concerns cut across provincial borders and the public and private sectors, they require everyone from the owner to the general contractor to the subtrades to re-examine how they operate. For example, during discussions between government and industry, some of the subcontractors went back over their delinquent contracts, according to Alan Humphries, strategic executive adviser of procurement modernization for Alberta Infrastructure. Roughly two-thirds of the delays could be traced back to problems with the original invoice.

In response, the government has tried to clarify its invoicing requirements and mitigate confusion, Humphries says. At the same time, Alberta Infrastructure has changed its contracts to specify that general contractors will be paid 30 calendar days after the government receives the invoice—assuming no errors in the claim, of course. The statutory declaration has also been modified so that contractors must swear that they have paid subtrades within 10 days of receiving payment by the government.

Subcontractors can directly reach out to the government to find out when the general contractor has been paid. Kinley, who is also chief executive officer and founder of Concept Group, has experienced this issue from the perspective of a subcontractor. He says that many in his part of the industry dislike the awkwardness of directly approaching the general contractor to see if payments have been made. If possible, they prefer to avoid forcing the issue and creating tension.

“The transparency that Alberta Infrastructure is working towards is really key for taking that level of stress off of the subtrades, because now they’ll have clear answers and clear guidelines as to where the payments are and how that structure is going to flow,” he says, adding that this greater transparency should make the ministry a preferred client in the eyes of subcontractors.

Holding less back

Ensuring that disputed amounts don’t hold up the claim is another significant shift in how the government is doing business. In the normal chain of events, subcontractors invoice the general contractor, which in turn invoices the government. In the past, one mistake by a single company—say, a subcontractor doing foundations that invoices before the work has been fully completed—would hold up payment for everyone until the problem had been resolved. Now, the government will pay out every other portion of the bill that is not disputed.

Finally, the government will progressively release holdback funds—a big deal for companies working on some of the large-scale, multi-year public works projects out there. Once a company has completed its work on site, it can apply to be paid. If a company completed its contribution to a three-year project in the first six months of that cycle, it will no longer have to wait until the end to receive payment.

Humphries acknowledges that this does mean the government will take on some added risk as a project owner. Should there be problems later on, there will be a smaller pool of holdback funds to draw upon and a heavier reliance on bonds. However, the government feels it is ultimately better placed to carry the added risk rather than requiring smaller subtrades to shoulder a greater financial burden.

“Some owners—perhaps in the private sector—may not be prepared to take on that risk, but it’s certainly one that we think we are prepared to carry,” he says.

Cultural shift

Verhesen describes prompt pay as “just good business practice,” and he is already seeing other major public owners like the cities of Edmonton and Calgary looking at implementing it in some form. To that end, the changes to Alberta Infrastructure’s contract were actually designed to be easily adaptable throughout the industry, according to Humphries. He’s optimistic that the government can help spark a cultural shift in the industry by encouraging others to follow its lead.

“It’s not a difficult change, and we’ve worked with industry to get wording that we believe will work for everybody,” he says. “It wouldn’t take too much to try and adapt this across all owners.”

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