The COVID-19 outbreak that moved Ontario construction companies to respond so swiftly has also distracted them from twin generational changes: prompt payment and adjudication.
The legislative changes, which took effect October 1, 2019, will transform the industry by tightening timelines for payment and implementing dispute resolution. These changes are the final step in a three-year legislative process that began with Bill 142. In this key piece of legislation, the Ontario government amended the Construction Lien Act in five key areas and shortened its name to the ‘Construction Act.'
Most of the five changes came into force in July 2018. The exceptions—mandatory prompt payment and a fast-tracked adjudication process—now challenge construction companies to find time amid their COVID-19 response for prompt payment and adjudication. These changes are permanent and most likely require companies to adjust their operations, including their accounting systems.
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What is prompt payment and adjudication?
Prompt payment and adjudication rules are designed to speed up Constructipayment throughout construction projects and to streamline mediation of disputes.
While some other countries have variants of these rules, Ontario was first to introduce this type of legislation in Canada. Other provinces and the federal government—for federally funded projects—are either updating their legislation or considering it. Given Ontario's experience as a first adopter, many jurisdictions are looking to that jurisdiction for key learnings.
The Ontario rules apply to any construction project in Ontario. Given the spread of similar legislation across other Canadian jurisdictions, construction companies across the country will need to asses their readiness for compliance.
Why did Ontario bring in prompt payment and dispute adjudication?
Late payment has taken root in the construction industry, and collection periods continue to increase. What's more, the unique connectedness of the construction pyramid magnifies the impact of late payment. If for example a developer delays payment to a general contractor, the delay will flow down to trades on the project and to materials suppliers.
Prompt payment rules
The Ontario rules for prompt payment follow these steps:
- Starting point – Contractor invoices the owner of the project.
- Within 28 days – Owner of the project must pay the invoice within 28 days after receiving the invoice. The 28-day clock begins only if the invoice conforms to the specifications of Ontario law.
- Within 7 days – Contractor must pay all subcontractors within seven days of receiving payment from the owner. Payment must be made to all subcontractors whose services or materials were included in the contractor's invoice to the owner. This obligation extends down the chain to sub-subcontractors—they must also pay their own subcontractors within seven days.
Parties also face new tight timelines to express their disagreement with an invoice. They must deliver a notice of non-payment within a specified amount of days, even if they dispute part of the invoice.
Dispute adjudication rules
The new adjudication process under the Construction Act is highly structured, designed to resolve disputes quickly and keep payments moving between parties. By creating a process to resolve disputes, the government also hopes to keep projects moving in parallel with the dispute adjudication process.
The adjudicator has broad authority. They may decide all disputes regarding notices of non-payment, valuation of services or materials, payments due under contract, set-off claims, and non-payment of holdback. The list of adjudicators is maintained by the Ontario Dispute Adjudication for Construction Contracts (ODACC), which administers the adjudication process.
Disputes are meant to be adjudicated within 46 days. Extensions may be agreed to by both parties or granted by the adjudicator.
The adjudication process follows these steps:
- Starting point – Contractor or subcontractor (as the referring party) serves a written notice of adjudication.
- Within 4 days – Parties must agree on the choice of adjudicator—and the adjudicator must agree to hear the dispute—within four days after the notice is served.
- Within 7 days – If the parties do not reach an agreement, the ODACC will appoint an adjudicator within seven days of parties not agreeing to an adjudicator or the adjudicator not accepting the matter.
- Within 5 days – Referring party must share the notice of adjudication and all of their supporting documents with the adjudicator within five days of the adjudicator being agreed to or appointed.
- Within 3 days – Responding party must respond and share all supporting documents within three days of the submission of the referring party.
- Within 3 days – Referring party replies to the respondent's response.
- Within 30 days – Adjudicator must issue their decision and reasons within 30 days of receiving the first supporting documents from the referring party. The adjudicator may request a 14-day extension. To assess the matter, the adjudicator may request site visits or further submissions.
How can I respond to prompt payment and adjudication?
Prompt payment and adjudication requires a prompt reaction from construction companies.
To help ensure prompt payment, track the new mandatory timelines for delivering invoices and notices of non-payment. With speed at a premium, companies should consider populating their forms in advance for each subcontractor and supplier.
To prepare the business for real-time adjudication, anticipate the possibility of adjudication for any job. In the past, parties to a dispute could spend months or even years to collect evidence. With adjudication, both parties must be able to access their documentation at all times. Recordkeeping and accounting must be accurate, robust, and digital.
Can technology help me respond?
Technology will help construction companies adapt to the new timelines—but not with the construction technology made famous by sensors and building information modeling. It is the back-office that now requires attention. Many companies have not yet implemented systems to help them adhere to these strict timelines.
The technology response will vary by organization. Some companies will need to invest in new systems, perhaps as add-ons to their current systems. Others will be surprised to discover that their systems can get the job done—but have not been configured or integrated internally to support the new timelines. And most companies will also need to adjust their workflows—either by smoothing their processes to reduce turnaround times in payment and adjudication processes, or by adapting to the new technologies themselves.
Where should I start?
Typically construction companies should begin with three immediate actions:
- Understand prompt payment and adjudication in your jurisdiction
- Revisit operations
- Assess current systems, capabilities, and workflows against new requirements
As part of the assessment, focus on contract and documentation management. Pay attention to the internal approvals process, as well as notification workflows and invoicing details. With time at a premium, the smallest details will help construction companies adhere to these timelines and prepare them for success during litigation.