Executive Summary: Building a Federal Framework for Prompt Payment and Adjudication

For a copy of the full report and support documentation, please contact PSPC Real Property Services by e-mail at biensimmobiliers.realproperty@tpsgc-pwgsc.gc.ca.

Executive summary of analysis and recommendations

Canada, like many other jurisdictions around the world, is considering mechanisms to ensure the orderly and timely building of federal construction projects by ensuring that cash flows down the construction pyramid quickly.

The review was announced on January 30, 2018. The purpose of the review is to provide the Government of Canada with a set of recommendations in relation to the implementation of prompt payment and adjudication legislation on federal construction projects.

In the federal context, under the Financial Administration Act (FAA), the Treasury Board Payment Directive, and the federal government Contracting Policy, there is an ordinary course of payment environment established that can fairly be characterized as fundamentally based upon the core principles of prompt payment. In particular a 30-day from invoice payment cycle, payment of undisputed amounts, and mandatory interest which assists in ensuring that payments are made by the federal government promptly.

However, over the course of the stakeholder engagement process stakeholders have raised concerns about the lack of prompt payment on federal construction projects, citing reports prepared by Prism Economics and Analysis, Ipsos Reid (prepared for Ontario trade contractors) and Raymond Chabot Grant Thornton (prepared for the Quebec coalition contre les retard de paiement dans la construction) in relation to payment delays.

We have concluded that the existing prompt payment policies and/or proposed voluntary codes are inadequate to achieve prompt payment, particularly at the trade contractor level and below, such that the implementation of prompt payment legislation at the federal level makes sense.

From a policy perspective and considering the jurisdiction of the federal government to enact legislation, the reason that the federal government should introduce such legislation is to:

1. assure the orderly and timely building of federal construction projects by ensuring that cash flows down the construction pyramid quickly, thereby avoiding the disruptive effects of delayed payment, and potentially non-payment;
2. avoiding increased construction costs caused by trade contractors adding contingencies to their bid prices on federal projects to make up for the cost to them of slow payment; and
3. reducing the risk of disruption on federal construction projects attributable to the insolvency of contractors and subcontractors.

We recommend that the above-policy reasons be expressed as the legislative intent behind the proposed legislation.

Regarding the content of the proposed legislation, as is apparent from a review of our recommendations set out below, we recommend legislation that is similar in many respects to that introduced in Ontario. Ontario is presently the only province or territory that has prompt payment or adjudication legislation and developing legislation that is aligned across the country, to the extent possible, is important from a policy perspective.

We note that Chapters I through VII of the report provide necessary context and our analysis and recommendations begin at Chapter VIII. A summary of our recommendations and their reference location in the report is set out below.

In this section

• Chapter VIII—Applicability of Legislation
• Chapter IX—Prompt Payment
• Chapter X—Adjudication
• Chapter XI—Key Contractual Issues
• Chapter XII—Legislative Alignment
• Chapter XIII—Further Consultation
• Chapter XIV—Transition and Education

Chapter VIII—Applicability of Legislation

1. The federal government should enact legislation introducing prompt payment and adjudication on federal construction projects.

2. The legislation should make clear that the intent of the federal government is to:

• assure the orderly and timely building of federal construction projects on federal lands by avoiding the disruptive effects, including gridlock, which arises from non-payment down the supply chain;
• avoid increased the construction costs of construction that result from bidders adding a contingency amount to allow for the risk of late payment, which contributes to the federal government's objective of achieving best value; and,
• reduce the risk of disruption to federal construction projects because of the insolvency of subcontractors and suppliers.

3. The legislation should operate only in relation to matters integral to federal powers. The legislation should be limited to:

• federal construction projects on lands owned by the federal government, and defence projects. However, the legislation should not apply merely on the basis that the federal government has funded a project in whole or in part or because the federal government has specific regulatory authority in relation to a particular industry.
• "Lands reserved for the Indians" (recognizing that this language is anachronistic, but is used in the Constitution Act, 1867), we recommend that the ability to include projects on such lands be included within the ambit of a subsequent regulation, if viewed as merited, after appropriate consultation.     
• construction projects that are part of a federal undertaking or of a work declared to be for the general advantage of Canada and in particular:
  • federal undertakings (as defined in s. 92(10) of the Constitution Act, 1867, e.g. lines of steam or other ships, railways, canals, telegraphs) or
  • declared by the Parliament of Canada to be for the general advantage of Canada or for the advantage of two or more of the Provinces.
• projects designated by a Minister on a case-by-case basis at the outset of a project.

4. Federal prompt payment and adjudication legislation should be deemed to apply to all construction contracts that fall within the ambit of recommendation 3, drawing on the definitions of terms like “improvement”, “services and materials”, etc. from provincial lien legislation.

5. Parties to construction contracts should not be permitted to contract out of the legislation.

6. Subject to recommendation 3, prompt payment and adjudication legislation should apply to all federal departments and federal Crown corporations that do federal construction work under their own contracting authority.

7. The legislation should apply to federal P3 projects so long as those projects are federal P3 projects that meet the constitutional requirements outlined above (i.e. matters integral to federal power(s)) with necessary modifications, as implemented under Ontario’s Construction Act. Specifically, the following should be considered:

• the appropriate definitions of the special purpose vehicle (SPV), the project agreement, the design-build contractor and the design build agreement;
• modifying the applicability of adjudication, including limiting the topics that can be adjudicated and having the independent certifier serve as adjudicator;
• allowing milestone payments;
• allowing provisions that impose pre-conditions on the delivery of a proper invoice (e.g. in relation to certification); and
• requiring the Independent Certifier to be the adjudicator.

8. The legislation should not apply to maintenance and repair work under long term contracts and it should only apply to work that constitutes a “capital repair." The legislation should define capital repair and suggest consideration of the Ontario approach as a basis for that definition.

9. The legislation should exclude fit-up work for leased buildings as described in the Contracting Policy.

10. There should be no thresholds in the proposed legislation.

Chapter IX—Prompt Payment

11. Prompt payment should apply at the level of the owner to general contractor, general contractor to subcontractor, and downwards.

12. The trigger for payment should be the delivery of a "proper invoice" as defined by the legislation, subject to certain pre-conditions, as will be discussed below. We recommend that the Ontario definition of a “proper invoice” should be used as a basis for the development of a federal definition.

13. The time period for payment between federal owner to general contractor should be 28 days and the period for payment at levels below the general contractor should be 7 days from receipt of payment from the owner, and so on down the contractual chain.

14. The time period for payment by a federal owner to its general contractor in relation to Substantial Performance of the Work and Final Completion should be 28 days and then 7 days down the payment chain.

15. Parties should otherwise be free to contract in respect of payment terms, but if the parties fail to do so, payment terms will be implied by legislation, being monthly payments.

16. A policy should be developed for construction projects that is not inconsistent with existing policies and allowing the certification of a claim as reasonable before "verification", but following the delivery of a proper invoice.

Provided this is feasible, the legislation should render a contractual provision of no force and effect that makes the giving of a proper invoice conditional on the prior certification of a payment certifier or the owner’s prior approval. As noted above, the exception to this is in relation to P3 projects.

17. Payers should be permitted to deliver a notice of non-payment within 14 days following receipt of a purported proper invoice, provided that the notice of non-payment must set out the quantum of the amount withheld and adequate particulars as to why that amount is being held back. Undisputed amounts should be paid. Parties who withhold after receiving a notice of non-payment must undertake to adjudicate that issue with the withholding party within a stipulated period of time. As a result of this undertaking, pay-when-paid clauses should be permitted.

18. Consistent with the broad rights of set-off under the FAA (i.e. under s.155), the federal government should retain its current right of set-off against all projects. In the alternative, a proviso to s. 155 of the FAA could be considered, if the federal government is prepared to forego its ability to apply cross-project set-offs, in order for the legislation to be consistent with Ontario.

19. Payers (below the level of the owner) should continue to be able to set off all outstanding debts, claims or damages but the right of set-off should not extend to set-offs for debts, claims and damages in relation to other contracts, except in circumstances of a payee’s insolvency.

20. The Ontario model should apply to federal prompt payment legislation. Specifically, the following should be legislated in relation to the consequences of a failure to pay:

• The right to commence an adjudication;
• Mandatory statutory interest;
• The right to suspend work (without breach) if an adjudicator’s determination is not paid within 10 days;
• Resumption of work after suspension, conditional on payment of a determined amount, interest, reasonable costs incurred by the payee as a result of the suspension

Chapter X—Adjudication

21. Adjudication should be adopted as a targeted dispute resolution mechanism to support prompt payment.

22. All participants in the construction pyramid on federal government projects (including owners, general contractors, subcontractors, and suppliers), should be permitted to commence an adjudication.

23. Adjudication should be permitted to be commenced from the outset of construction until final completion of the prime contract. The right to invoke adjudication should not extend beyond completion of the contract.

24. The legislation should provide that the period from December 24 to January 2 be excluded from the counting of days for the purposes of adjudications.

25. There should be a single adjudicator who has the responsibility to make a determination on matters within his or her expertise. Federal adjudicators should have:

• no conflicts of interest;
• significant defined experience in the construction industry, and experience levels should be carefully defined and include a minimum number of years;
• successfully undertaken a thorough training and certification program run by an Authorized Nominating Authority (ANA), paid the associated fees, and agreed to abide by the requirements for holders of certificate including complying with the code of conduct;
• no criminal record;
• no record of an undischarged bankruptcy; and
• satisfied any security clearance requirements of the federal government as appropriate for the nature of the federal construction project at issue.

26. Adjudicators should have immunity from suit.

27. Judicial review of adjudication decisions should be permitted based on limited specified grounds, following the Ontario model, but parties should be free to subsequently litigate or arbitrate their disputes as the adjudicator's decisions are only binding on an interim basis.

28. The parties should be able to select an adjudicator after a dispute arises (but not before as part of the contract or otherwise) and they should have a short defined period of time to do so. We suggest 4 days after the notice of adjudication is delivered. If they cannot agree, then the Authorized Nominating Authority should appoint the adjudicator.

29. The federal government should determine whether one of its departments (e.g., the Department of Justice) or a private entity should fulfill the role of ANA, depending on resourcing constraints, and if the federal government requires additional time to consider this issue, then it should craft the legislation such that this function can be performed by a public or private entity, as long as that entity is able to perform the following functions effectively.

30. The Authorized Nominating Authority should be created and should be responsible for:

• Developing and providing training and continuing education for adjudicators;
• Certifying, renewing certifications, withdrawal of certifications for adjudicators, and ensuring that adjudicators meet all prescribed criteria;
• Maintaining a publicly available registry of qualified adjudicators that lists and categorizes qualifications and any other relevant information prescribed;
• Appointing an adjudicator where the parties are unable to choose their adjudicator within the timeframe required;
• Regulating the conduct of adjudicators, including establishing a code of conduct;
• Addressing complaints against an adjudicator in relation to breaches of the code of conduct, including establishing a complaints procedure;
• Addressing circumstances where adjudicators have resigned and appointing replacements;
• Reporting on adjudications (in a similar manner to the Construction Dispute Resolution in the United Kingdom) such that an annual report would be prepared by the Authority providing statistics on adjudication, so that ongoing assessments can be made about the success of adjudication. This report should be publicly available; and
• Establishing and maintaining a fee schedule and authorize fees where the parties do not agree.

31. Adjudication should be applied in relation to a defined set of issues focussed on payment disputes including the following:

• valuation of services or materials;
• payment under the contract/change orders;
• disputes in respect of notices of non-payment;
• set-offs;
• holdback payments;
• non-payment of holdback; and
• issues that the parties may agree to be part of an adjudication.

32. There should be clear timelines including the following:

• A notice of adjudication delivered by the claimant should be the start of the process. The notice of adjudication should set out essential details of the nature and a brief description of the dispute, the nature of the redress sought by the claimant and also the name of the proposed adjudicator to conduct the adjudication;
• The parties should then agree on the proposed adjudicator, or another adjudicator, or request that an adjudicator be appointed;
• If the parties agree on an adjudicator, an adjudicator should have four days to consent to conduct the adjudication following receipt of the notice of adjudication;
• If the parties do not agree on an adjudicator, the Authorized Nominating Authority, upon receiving a request to appoint an adjudicator, should have seven days to appoint an adjudicator;
• Five days after appointment of the adjudicator, the referring party should provide the adjudicator and the other party with the documents that party relies on;
• After the adjudicator receives documents from the referring party, the responding party should have a right of reply within a stipulated time period extended as necessary by the adjudicator on consent;
• Thirty days after receiving documents, the adjudicator should make a determination (can be extended on consent after a request by the adjudicator for up to 14 days, or a longer period of time if agreed to by the parties;
• Copies of the notices of adjudication should be provided to the Authorized Nominating Authority (even if the parties agree on the adjudicator);
• Subject to extension by agreement, the entire process would be concluded in 46 days; and
• Following a determination, payment should be made within 10 days, failing which a right to suspend should arise as well as mandatory interest.

33. There should be one model of adjudication, but there should be some flexibility in relation to the timeframe for the completion of adjudications, and adjudicators should be provided with mechanisms to exercise some flexibility in relation to scheduling.

34. We recommend that adjudicators be given the following powers:

• Issuing directions respecting the conduct of the adjudication
• Taking the initiative in ascertaining the relevant facts and law
• Drawing inferences based on the conduct of the parties to adjudication
• Conducting an on-site inspection of the improvement that is the subject of the contract or subcontract
• Obtaining the assistance of a merchant, accountant, actuary, building contractor, architect, engineer or other person in such a way as the adjudicator considers fit, as is reasonably necessary to enable him or her to determine better any matter of fact in question
• Making a determination in the adjudication
• Any other power that may be prescribed

35. A carefully crafted set of provisions should be created to permit consolidation, but with appropriate constraints and timelines. Consolidation should be permitted if all parties agree or if the general contractor requests it, subject to timing constraints.

36. Adjudications should consider a single matter only, except in the context of a consolidated adjudication, or as agreed.

37. All parties to an adjudication should be obligated to maintain confidentiality in respect of the documents disclosed during an adjudication process and adjudicators should be bound by confidentiality obligations.

38. Each party should bear its own costs of an adjudication unless there has been frivolous or vexatious conduct.

39. The ANA should establish a fee schedule that would apply where the parties have not agreed on a fee schedule, and this schedule should take into account the principle of proportionality.

40. There should be a clear and straightforward mechanism to enforce an adjudication award by filing it with the court and then enforcing it as you would an arbitral award, as under the Ontario model.

Chapter XI—Key Contractual Issues

41. The federal government should revise its Standard Federal Government Construction Contract to include reference to the prompt payment and adjudication regimes recommended in this report, to take effect when the legislation takes effect. In addition, the contract should be revised to impose prompt payment obligations on general contractors and subcontractors.

42. In relation to contractual holdbacks:

• Contractual holdbacks should be clarified and in particular there should be clarity in relation to when such holdbacks are to be released.
• The total contractual holdback should be reasonable in quantum and should not be held back for longer than is reasonable (e.g. 12 months or a time period related to the warranty period).
• The general contractor working for the federal government should be allowed to flow down a similar holdback, and this should apply down the contractual chain as appropriate.
• In relation to the payment of holdback funds, once received by the contractor such funds should be paid within seven days of receipt, subject to a notice of non-payment.

43. The requirement for a statutory declaration should be amended such that statutory declarations for federal government projects are allowed to be provided in digital form and issues related to timing, in particular in relation to the first statutory declaration, should be addressed in the Standard Federal Government Construction Contract.

44. Contracts between federal government entities and their consultants should, if necessary, be amended to ensure prompt payment and adjudication timelines are appropriately accounted for and the consultant is obliged to meet its contractual requirements in relation to the review of payment applications and change order requests within the timeline available to the federal government under new legislation (i.e. prior to the deadline for issuance of a notice of non-payment.

45. Public Services and Procurement Canada (PSPC) and Defence Construction Canada (DCC) should maintain their websites which provide payment information and include reference to the information available on the website in the contract, as well as the current practice of including it in their construction services solicitation documents. Other federal government entities should provide information to PSPC for posting on a regular basis.

46. A request based disclosure requirement should be included in the Standard Federal Government Construction Contract such that payees may request (in writing) defined information and the federal government contractors and subcontractors must cooperate and disclose this information and provide it within a timeframe prescribed by regulation.

Chapter XII—Legislative Alignment

47. In relation to alignment, we recommend that the government explore the following three options:

• The new legislation could utilize the approach used in the federal Personal Information Protection and Electronic Documents Act, which provides that part of the Act does not apply if the Governor in Council is satisfied that provincial legislation is “substantially similar” and makes an order exempting the organization, activity or class from the application of the relevant part of the Act.
• A "model law" could be developed by the federal government (possibly seeking the assistance of the Uniform Law Conference of Canada) to address the topic of prompt payment and adjudication legislation for a model or uniform law.
• The federal government could initiate an alignment initiative with a view to attempting to negotiate an inter-governmental agreement on prompt payment and adjudication legislation. The legislation proposed in this report could, in this context, be utilized as a "best practices" model.

Chapter XIII—Further Consultation

48. Further consultation may be required prior to the imposition of either prompt payment or adjudication in relation to projects on "lands reserved for the Indians." We recommend that if further consultation is found to be warranted that in the interim, provision be made in the legislation that provides the government with the ability, after appropriate consultation, to create regulations that will provide for the application of prompt payment and adjudication to Indigenous lands.

49. We recommend that a trust regime be considered and that further consultation be conducted in relation to a trust regime. If it is not possible to introduce a trust regime, or potentially as an additional protection, we recommend that mandatory surety bonding be considered as an alternative mechanism to address insolvency risk.

Chapter XIV—Transition and Education

50. The new legislation should come into effect approximately 18 to 24 months after it receives Royal Assent to allow for the creation of an ANA and to revise standard form contracts (including the Standard Federal Government Construction Contract) and provide time for education of stakeholders.

51. The new legislation should apply only to:

• procurements that commenced after the date the legislation comes into force;
• contracts entered into by the federal government after the legislation comes into force or in the case of procurements; and
• existing Real Property Service Management Contracts (such as RP-1/RP-2) should be specifically grandfathered until the Government exercises any option, following which the legislation should apply to construction aspects of these arrangements, provided that fair adjustment is made to the pricing of such options. The legislation should apply to new Real Property Services Management contracts entered into after the effective date.

52. An education program should be implemented for delivery well prior to the effective date of the new legislation. Included in this program should be a practice guide, as well as web-based learning modules and clearly written plan language guides including flow-chart style informational guides on the use of prompt payment and adjudication. The federal government should work with stakeholders, including the Canadian Construction Association (CCA), General Contractors Alliance of Canada (GCAC) and National Trade Contractors Coalition of Canada (NTCCC) to prepare educational materials regarding contract terms, service standards, and the new legislation as well as creating a training package to be delivered to local construction associations.

In addition, there should be opportunities for joint presentations between construction associations and the federal government.

53. The federal government should provide funding for provincial construction associations, or other applicable associations, to provide training to their members in relation to federal construction projects on an as needed basis.