Prompt Payment and a proper invoice
By Catherine DiMarcoHPAC General Human Resources Management
What all parties to a construction project need to know going forward in Ontario.
The new prompt payment revisions under section 1.1 of Ontario’s Construction Act (formerly called the Construction Lien Act) came into effect on October 1, at the same time as Part 2.1, which includes the adjudication provisions. The new prompt payment and adjudication provisions follow the modernization provisions and trust changes that came into effect last year.
It is reported the average time to pay an invoice on a construction project is approximately 72 days. It was generally recognized that there were important, some say critical, improvements to be made to the construction lien and trust regimes in Ontario. The ultimate goal of the prompt payment provisions under the new Act is to ensure that contractors and subcontractors are paid on time and, with the introduction of the adjudication regime, to provide for a dispute resolution process designed to resolve disputes more quickly, easily and cheaply.
The new prompt payment provisions apply to:
1. Payments made under contracts entered into on or after October 1, 2019.
2. All projects, whether public or private projects.
3. All payers, whether the owner, general contractor, or subcontractor.
4. All projects, regardless of size.
The trigger for payment is delivery by the general contractor to the owner of a “proper invoice.” The concept of a proper invoice does not apply to invoices delivered by subcontractors. “Proper invoice” is a defined term under the Act(1).
So, what is a proper invoice? It is an invoice for work performed under a contract, which must be submitted to the owner monthly, unless the contract provides otherwise. Payment due pursuant to to delivery of a proper invoice cannot be conditional on certification(2), or on the owner’s or consultant’s approval of the work.
There are certain statutory minimums to be contained in a proper invoice:
- Contractor’s name and address.
- Invoice date and period in which the services or materials were supplied.
- Information identifying the authority under which the services or materials were supplied (i.e. under the contract, a purchase order, or otherwise).
- Description of the work, including quantities where appropriate.
- The amount payable and the payment terms.
- The name and contact information of the person whom payment is to be sent.
- Any other information prescribed.
It is important to remember that a proper invoice may also include additional items, provisions or requirements as specified in the contract. What the contract cannot do, however, is remove any of the legislatively-mandated items set out above.
An owner who wishes to dispute some or all of a proper invoice must deliver a Notice of Non-Payment in the prescribed form within 14 days of receipt of a proper invoice from the contractor. This notice must provide a list of all of the reasons for non-payment and all undisputed amounts must be paid.
If the owner does not dispute the proper invoice, it must pay the full amount of the invoice to the contractor within 28 days, and thereafter the deadlines for payment continue to apply down each tier of the construction pyramid (seven days from contractor to subcontractors, seven days from subcontractor to materials suppliers, and so on).
Delivery of a “proper invoice” is the trigger for the payment deadlines, which are mandated by the Act and cannot be modified by the contract. In the contract, the parties can agree upon the deadline for submission of a proper invoice (for example, monthly or at particular milestones), but once a proper invoice is submitted, the Act governs the timelines for payment.
Owners should coach their staff on what a “proper invoice” is, not only under the Act, but also on any additional proper invoice requirements set out in each particular contract. As a starting point, controllers and accounts payable staff should be provided a copy of each contract and trained to understand the chain of events that will be set in motion if the owner fails to pay the contractor within 28 days.
Contractors should understand that the concept of a proper invoice only applies to invoices from the contractor to the owner. In other words, the general contractor cannot reject an invoice from a subcontractor as not a proper invoice. If a general contractor’s contract with the owner provides for additional requirements for a proper invoice (in addition to the statutory requirements), the general contractor should consider whether any elements of these requirements give rise to the need for additional information from a subcontractor, or more than one subcontractor, and consider whether their subcontracts have been drafted to require the subcontractors to provide that information.
Architect and engineer consultants should be aware that owners may be looking to their consultants to certify applications for payment made pursuant to a proper invoice in order to provide a level of comfort to the owner in paying the proper invoice within 28 days, which is required by the Act, or delivering a Notice of Nonpayment for some or all of the amount, within 14 days. This is not a long period of time. Owners should be reviewing their professional services agreements with their consultants to ensure that expectations are clearly set out and that the consultants understand what is being required of them.