Charbonneau commission

Extract from the inquiry report on the granting and management of public contracts in the construction industry (Charbonneau commission):

Recommendation 15 – To reduce delays in payments to construction contractors
During testimony before the Commission, several contractors have reported the problem of delays in payment of invoices submitted to public work providers (DOP). Generally, payment of accounts payable is 30 days after the invoice date, but payment delays in the construction industry are now 3 to 6 months, according to the latter.

These observations were confirmed by other witnesses involved in the public administration. According to the director of supply of the City of Montreal between 2003 and 2006, Serge Pourreaux, the Finance Department had estimated that in 2003 or 2004, 80% of invoices were paid within varying from 4 to 6 months.

During his testimony, the engineer and investigator Jeannette Gauthier Commission echoed this concern. Having met 25 of them and six suppliers of materials, she first said that the average payment period reached four months. She also said that this situation, generalized to all work providers, seemed worse with the public sector.

A study by the firm Raymond Chabot Grant Thornton (RCGT) also confirms this information. In Canada, the average time of collection of receivables in the construction industry exceeded 11.3 days in 2002 that of all the other industrial sectors. And in 2011, this gap has increased from 20.6 days. Worse, in the construction industry, the sectors with the highest percentage of customer accounts receivable over 120 days are those of the civil engineering and roads and the institutional setting. Customers in these areas are mainly in the public sector.

For the Commission, this situation presents three major problems. First, it gives significant power to site supervisors, since they must approve such progress payments. According to the approval rate of these, these professionals can intimidate or encourage construction contractors, thereby contributing to private corruption ploys. Second, this situation contributes to restricting competition in the industry, thus promoting the creation and maintenance of collusive agreements. Indeed, having already paid their workforce, suppliers and subcontractors, entrepreneurs must financially support these payment terms. This lack of liquidity limits the number and growth by restricting their ability to undertake new mandates. In this regard, in 2013, over three-quarters of contractors have refused to answer at least one tender, judging unfair payment terms or anticipating payment problems. In addition, late payments penalize more small and medium businesses (SMB) who do not always have easy access to credit. They are therefore more at risk of experiencing financial difficulties. This is not likely to encourage them to engage in new markets.

Third, this situation favors the infiltration of organized crime in the construction industry. Indeed, (SMB)s facing financial difficulties arising from excessive accounts might be tempted to resort to other non-traditional funding sources. In fact, this is what happens. The non-traditional financing is used by a significant proportion of construction companies because of late payments.
To these three major problems must be added a fourth, this time for the state. This situation encourages contractors to consider this financial risk in the price of the tenders submitted. In other words, these financing costs are transferred to the public work providers, and thus taxpayers.

To counter these adverse effects to the progress of the construction industry and development of the economy, several States have undertaken to supervise payment terms to their suppliers. These are the United States, the European Union, the United Kingdom5 and the State of South Australia in Australia.

The Commissioners therefore recommend to the Government to adopt legislative or regulatory provisions in order to propose, as part of a prime contract and subcontracts a standard production time progressive statements and payments to reduce the grip of construction supervisors and DOP on companies working in the construction industry as well as the possible infiltration of organized crime.