In June 2019, Canada finally joined nearly every other Western nation in embracing prompt payment for contractors on public projects. The federal law complements prompt payment laws already passed in a number of provinces. Here, we dive into the law, how it will speed up construction payments on government construction projects, and how it compares to the US Prompt Payment Act.

What is Canada’s Prompt Payment Act?

It’s officially called the Federal Prompt Payment for Construction Work Act. The law sets up a nationwide system for requiring and adjudicating prompt payments on federal construction projects throughout Canada.

The purpose of the Act is “to promote the orderly and timely carrying out of construction projects in respect of any federal real property or federal immovable by addressing the non-payment of contractors and subcontractors who perform construction work for the purposes of those projects.”

Basically, the Act accomplishes two primary goals. The first goal is to make sure contractors receive payment promptly for work on federal property. The second goal is to establish a system to resolve disputes over late payments.

When does it require contractors to be paid?

The law creates payment deadlines for all contractors and suppliers on federal projects. Once a proper invoice has been received by the federal agency contracting the work, they have 28 days to pay the prime contractor. The prime contractor then has an additional 7 days to pay their subcontractors. Those subcontractors have an additional 7 days after that to pay their subs and suppliers.

Under this schedule, all contractors and suppliers on a project should be paid within 42 days of receipt of proper invoice by the government.

What are the prompt payment laws in each province?

Several Canadian provinces have enacted their own prompt payment acts in the last few years.

  • In Ontario, starting October 1, 2019, a revised lien act that includes prompt payment terms, adjudication of disputes, and other amendments went into full effect. Certain provisions had been active since July 1, 2018.
  • A bill in Nova Scotia got royal assent on April 12, 2019. This bill provides prompt payment terms and adjudication, but only in cases of non-payment.
  • A Saskatchewan bill includes prompt payment and adjudication provisions like Ontario’s, and it was given royal assent on May 15, 2019.
  • Similar bills have been introduced and passed in New Brunswick, Manitoba, Quebec, Alberta, and British Columbia. Alberta’s is the oldest, passed in 2016.

Why did the Canadian government create this act?

Ultimately, the act aims to speed up construction payments, which are notoriously slow. Lobbying for Canada’s Prompt Payment Act has been a work-in-progress by several construction trade associations over the last ten years.

The act provides protection for construction companies across the nation who work on federal projects. Local lien laws are not enforceable when working for Canadian federal agencies, so companies had no recourse when payments were delayed or not sent.

The act also sets a path for adjudicating payment issues without having to go to court. This should help streamline and shorten the timeline for resolution of these conflicts, making things easier on everyone.

How does Canada’s law compare to the US Prompt Payment Act?

Canada’s law operates in a similar way to the US Prompt Payment Act. Both set payment deadlines for contractors working on federal construction projects.

The US PPA requires the government to pay prime contractors within 14 days of receipt of a proper invoice. That’s a significantly shorter timeline than Canada’s 28-day requirement. After that, the timeline is relatively the same. In both the US and Canada, subcontractors must be paid within seven days after the prime contractor receives payment.

There are provisions in both countries’ laws that stipulate that upper-tier parties may only hold payments for substantial issues. They must deliver written notice to the contractor or supplier on the lower tier before the payment due date. These notices must include instructions on how the problem can be remedied as well.

In both countries, interest accrues past the payment due date. The interest rate charged on late payments is set on a federal level. While the contract between two parties can stipulate an interest rate in the contract, it cannot be lower than the federal rate.

What does Canada consider proper invoices?

Canada’s law spells out some of the features of a proper invoice, though each contract will have its own provisions, and those are the ones that need to be met. Only the prime contractor is required to submit an invoice meeting these requirements.

Under Canada’s prompt payment law, proper invoices must contain at least the following information:

  • Contractor’s name and address
  • Invoice date, and date range the invoice covers
  • Name of federal authority purchasing the work
  • Quantity and description of the materials or work provided
  • Total amount due and payment terms
  • Mailing address and phone number of the person to send payments to
  • Any other requirements specified by the contract

Impact on general contractors

The law will likely create a bit more work for general contractors initially, as they make sure their systems are set up with the correct payment due dates. They need to ensure that they notify subs and suppliers promptly when their work or materials are in dispute.

Their invoices must also be set up to include all the information required by each agency they work with, and each set of contract terms. Reading the fine print in the contract is going to be more important than ever.

In the end, any stress of additional work will likely be far outweighed by the benefit of faster payments and improved cash flow.

When will it take effect?

While the law received “royal assent” in June 2019, it isn’t exactly clear when Canada’s new prompt payment law will actually take effect. There is some question about whether contracts will be grandfathered into the payment provisions from before the act, or if all contracts will be required to transfer to the new payment terms at some point.

There also is the task of setting up the system that is going to adjudicate issues with prompt payment under the act. Some sources say it could be another year or two until the act is officially implemented. This leaves contractors wondering when they need to be ready to comply with the new provisions.

The big question: Will contractors actually use it?

It has taken quite some time for Canada’s government to catch up with the US in recognizing slow payment in construction as an issue worth regulating.  It is still unclear exactly when the provisions will go into effect – and what will happen to current contracts at that time.

The US Prompt Payment Act has been in effect for decades, but it’s still one of the most misunderstood and least-used remedies for slow payment in construction. Many contractors on government projects still rely on more well-known remedies, like bond claims.

Will Canadian contractors be more eager to use their prompt payment law to ensure faster payment? Or will they accept slow payments as the status quo? Stay tuned.