How to Manage Delays in Construction Projects as an Owner or a ContractorOctober 16, 2023
Written by Harp Khukh, Corestone Law
***This article was originally written for the Voice Magazine for Ontario Society of Professional Engineers June 2020 issue***
New Construction Act
If you are providing construction related services which fall under Part 1.1 of the new Construction Act, R.S.O. 1990, C.30. (the “Construction Act”), which is the new Prompt Payment Regime, then ensure that billing practices are consistent with the new rules. The Prompt Payment rules became law on October 1, 2019. Our article for the fall issue of The Voice will focus exclusively on the Prompt Payment and Adjudication amendments of the Construction Act.
Avoiding Legal Disputes
If you have had any involvement in a lawsuit, you will know that the process can be stressful and expensive. The best way to avoid a lawsuit for an unpaid account is to employ good business practices that start prior to the contract for services being signed. In the following, we have compiled a list of good practices to avoid unpaid accounts and good practices to collect unpaid accounts. In compiling this list, we sought the assistance of several of our engineering firm clients.
Good Practices to Avoid Unpaid Accounts
- To provide a clear and concise fee arrangement/budget and payment terms and to ensure the client understands it.
- If the fee arrangement/budget increases, provide the client with written confirmation and/or seek client approval.
- Secure a signed contract with clear terms regarding invoicing and payment.
- The contract should allow you to suspend and terminate services for non-payment.
- The contract should allow you to charge interest after the term date to pay the invoice.
- Require a retainer/partial payment prior to commencement of work.
- If work is completed in phases, require a retainer payment prior to commencement of each phase.
- For extended projects, provide invoices in short increments.
- Send timely invoices.
- Review invoices carefully to ensure the billing rate, hours and disbursements are correct.
- Set shorter payment terms of net 15 days.
- Be polite and create a positive relationship with the client.
- Provide incentives for early or timely payments.
- Have multiple payment methods, which include credit card, online payment, cheque, wire transfer, etc.
- For new clients, require credit applications.
- For new clients, secure background information and searches to assess clients and their financial capabilities; and
- For unfamiliar or smaller corporations, require that the contract have a personal guarantee, or the contract be entered into personally with the owner of the corporation.
Good Practices to Collect Unpaid Accounts
- Implement a follow-up system, which requires follow-ups on invoices one week prior and one week after the term date.
- The key individual who dealt with the client on the project should send both a personal email and phone call to inquire on the reason for delay and resolve any issues that could be a cause for non-payment.
- If you are able to reach the client, ask them for the timing of when payment will be made and then follow-up diligently on that date.
- Offer reasonable installment payments if client is unable to pay the full account.
- Have a signed contract, change/extra approvals and good documents, and this back-up should be sent to the client prior to taking any legal steps.
- Provide written notice to key players for ongoing projects to advise that services may be abandoned if no payment is received; and
- Set a firm and final deadline for payment before collections or legal steps are taken.
Pursue unpaid accounts immediately. The longer you wait, the greater the likelihood of non-payment. If an account has not been paid within 90 days following the term date and the client has not provided a promise to pay or a reasonable explanation for nonpayment, then pursue collections or legal steps. However, if you have construction lien rights then you should be more proactive due to the strict timelines under the Construction Act.
For non construction lien related accounts, you must keep the Limitations Act, 2002, S.0. 2002 (the “Limitations Act”), in mind. The Limitations Act is the statute that governs the time period for beginning lawsuits in Ontario. For unpaid invoices, the Limitation Act sets a two-year period to begin a lawsuit from the end of the term date for payment of the invoice or when the last payment for the invoice was received. The law states that invoices must be rendered within a reasonable time following the services for the foregoing to apply. The limitation period may restart if the debtor makes partial payment or acknowledges the debt in writing.
For smaller unpaid accounts, many companies will use a collection agency. The main incentive being that the transfer will affect the credit score of the client.
For larger accounts, you may consider taking legal action. The following legal options are often used for debt collection:
- Demand Letter – have a lawyer send a letter for payment. The letter should set out a firm deadline for payment and legal recourse for non-payment. A lawyer being engaged is, often, enough to secure payment.
- The Superior Court of Justice – Small Claims Court – this branch of our Court system handles disputes up to $35,000.00. The Court’s practices and procedures are simplified to allow the general public to use this legal route to bring or defend a legal action without a lawyer. The typical steps to be taken are issuing a claim, serving a witness list, providing a document brief, attending a settlement conference and trial. The Ministry of the Attorney General has provided helpful guides on their website at https://www.attorneygeneral.jus.gov.on.ca/english/courts/guides/. OSPE also provides a course that teaches engineers how to pursue a Small Claims legal action from commencement to trial.
- The Superior Court of Justice – Simplified Procedure & Regular Procedure – the Simplified Procedure is a streamlined procedure to pursue legal actions between $35,000.00 and $200,000.00. The Simplified Procedure sets limits on regular Court practices and procedures to ensure that the matter is processed in a cost efficient and timely manner. If the amount exceeds $200,000.00, then the regular procedure applies. The typical steps to be taken are issuing a claim, an exchange of documents, examinations of the parties involved, a pre-trial conference, mediation and trial. The Ministry of the Attorney General has provided a helpful fact sheet for Simplified Procedure on their website at https://www.attorneygeneral.jus.gov.on.ca/english/courts/civil/fact_sheet_simplified_procedure_76.pdf.
- Construction Lien under The Construction Act – allows individuals or companies who provide labour or materials on a parcel of land to register a lien on the title of the land for non-payment. For engineering services to qualify for a lien, the services must have enhanced the value of the land. For example, design plans and specifications for a new home are considered an enhancement. The lien forces the landowner to deal with the debt. If you were contracted by a contractor and not the owner, a lien may compel the owner to pressure the contractor to pay the account. The time limits to register a lien must be carefully considered. In general, a lien must be registered within 60 days of a trigger date, which is based on various considerations defined in the Construction Act. For matters where the old Construction Lien Act applies, the lien period is 45 days. If the time limit expires, the lien right expires indefinitely. If the lien is not paid, then it must be perfected by issuing a legal action in the Superior Court of Justice and the claim will have to be proven.
- Adjudication under The Construction Act – in the Spring 2020 issue of The Voice magazine, we mentioned Prompt Payment and Adjudication as new regimes in the Construction Act. If the engineering services fall under the Construction Act, the new Adjudication regime is a source of resolving unpaid accounts. The mandatory process aims to provide a fast means to secure an interim decision while the construction project is being completed. The government has set up an organization to carry out this program, known as the Ontario Dispute Adjudication for Construction Contracts (the “ODACC”), which has already implemented procedures and appointed adjudicators for the program. The ODACC outlines the process on their website at https://odacc.ca/en/adjudication-process/.
The information in this article is a brief overview of legal options. If you have an unpaid account, it is critical that you consult with a lawyer immediately to determine the best legal strategy for your situation. The considerations for construction liens and limitations are highly technical and require tailored legal advice.
This article is provided for information purposes only and does not constitute legal advice. For any questions or concerns, please contact Corestone Law at email@example.com.