A few weeks ago, we discussed Mechanic’s Liens and how you can use waivers to protect your home.
Today we learn from an article posted in Lexology that Manitoba is updating it’s Builder’s Lien Act for the first time in 40 years.
The article appeared May 1, 2019 and was written by John Martens and Daryl Chicoine from MLT Aikins LLP.
Martens and Chicoine have done a great job of outlining the details of the amendment, so rather than restating what they have already documented, I’ll let you check out their article for yourself.
On this blog, I wanted to address the “deadline for payment” section of the act and alert those of you who work for corporations that extended payment terms may soon be a thing of the past.
If you don’t work in procurement, you may find the notion of extending payment terms odd. Why would anyone want to pay late?
However, one of the strategies used by procurement to maximize the value of capital is to extend payment terms.
There is a notion in procurement that delaying payment saves the Company money. It’s a complex concept but simply speaking, realizing the benefit of an investment before you have to release any capital reduces the cost of capital.
For this reason procurement professionals promote extended payment terms.
When I say extended payment terms I mean payment terms that are beyond the typical 30 days it usually takes an organization to process an invoice and issue a check.
There are many misconceptions about the amount that can be saved by extended payment terms. Spend matters has a great article that shows the proper way to calculate the savings from extended payment terms.
In that article they touch on how the loss of status as a preferred customer (by making it hard to get paid) has a greater negative impact over the benefits of delayed payment.
Regardless of what the savings could be, I’ve always protested extended payment terms in construction.
My position on this has always been because of the impact that delayed payments has on the entire supply chain.
Unlike other categories of procurement, construction has a supply chain structure that is very deep. Often a project consists of 2 to 4 tiers of suppliers all providing goods and services ahead of payment. Delayed payments in Tier 1 exponentially impacts each tier below.
In a number of previous article we have addressed the constant and immediate risk of contractor insolvency and it’s impact on Owner’s and subcontractors.
When we delay payment to a Contractor, the contractor delays payment to it’s subcontractors. This elevates the risk to Owners and as we saw with Carillion, is not a sustainable model.
The amendment to the law in Manitoba will make it a statutory requirement that the Contractor be paid within 28 days of an approved invoice. This means that extended payment terms will be unenforceable and essentially illegal.
The law will also require Contractors to make payment to their subcontractors within 7 days of the date the Contractor was paid.
This will relieve the backlog on the industry and by extension reduce the risks to the Owner ensuring that Contractors don’t go broke waiting to be paid.
I hope this provision spreads to other jurisdictions and soon becomes a standard around the world.
What do you think? Do extended payment terms really save money? Is the amount saved substantial enough to offset the risks of insolvency? Tell me your stories.
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