April 10, 2008

WILLIAM CONWAY/PROGRESS PHOTOGRAPHY

Employers of trades such as these welders working on a Toronto condo job often aren’t fans of the pay-when-paid practice sometimes employed by contractors. Some contractors, on the other hand, especially smaller ones, says it’s a necessary way of reducing their financial risks.

Pay-when-paid debate rages on

For some, it’s an ethical business issue, for others a question of resources

VINCE VERSACE

staff writer

Transferred risk, due diligence, ethics and who is the bad guy — these are the common themes that emerge in any discussion of pay-when-paid practices in construction.

But how pay-when-paid is viewed often depends on where someone is in the industry food chain.

“Poor industry payment practices go to the ethics of the business that are doing it,” says Paul Charette, chairman and CEO of Bird Construction. “Poor payment practices do not just hurt a trade but that effect is felt all the way down the line.”

During a “worst industry practices” session at the recent Canadian Construction Association conference, Charette shared his personal view that he does not believe in pay-when-paid. Charette says Bird’s strong relationship with its trades is founded on its willingness to vet clients properly and pay trades on time.

“We believe it is our responsibility to manage the risk and it is our responsibility to vet the client,” explains Charette. “Also, there is an inherent risk when you are taking on more work than you can handle.”

Ian Steer of Aluma Systems and member of CCA’s manufacturers, suppliers and services council, says “the will to pay” is as big a factor as pay-when-paid. For suppliers, especially smaller ones, it’s vital to know their customer and the contract.

“As suppliers, we have no one to transfer the risk to as it transfers down,” says Steer. “The fractionalized nature of the construction industry also does not help. It can be awkward to follow the cash through the business.”

Ross McLean, manager of Houle Electric’s Victoria branch, says he runs into less and less instances of pay-when-paid.

Because there is enough work right now in Victoria, he feels that generals are following good practices to attract good sub-trades. When an economic slowdown does happen, pay-when-paid practices may occur more often.

A slower economy leaves a GC more cautious and wanting to ensure that terms of payment are being respected, explains Francis Pomerleau, vice-president of Construction Pomerleau and chairman of CCA’s general contractors council.

“It all really depends on how a GC manages their business,” says Pomerleau. “In some cases, a bigger GC can afford financially to take on more risk, and can bridge that period when they get paid and the subs get paid.”

McLean says that regardless of a contractor’s size, they have a responsibility to do their due diligence on a prospective client.

Grant Neal, vice-president of Vipond Inc. and chairman of the CCA’s trade contractors’ council, adds that it is not a subcontractor’s responsibility to assess the GC’s customer from a financial perspective.

When it comes to the issue of GCs possibly overextending themselves, a GC remembers the “lean times” and it can be difficult for them to turn down work, says Clive Thurston, president of the Ontario General Contractors Association.

“The fact of the matter is, just like some trades that say it does not say ‘banker’ on their forehead, a GC is not a banker either and we are not there to bankroll an owner’s project,” says Thurston.

Pomerleau says that in some cases his company has paid its subs in advance but making that a common practice is taking a huge risk for any GC. He believes trades and suppliers should be paid, but does not believe a GC should absorb all the risk, because it may set “an unfavourable precedent” where owners won’t mind paying later than they are supposed to.

Ultimately, pay-when-paid is not a just a GC and trades issue — it is an issue for anyone who is a “contractor” or contracts services, says Neal.

Everyone involved should work towards higher ethical practices, he says.

“Just like a contractor expects to be paid on a time, a trade should be able to pay their suppliers as well,” says Neal.

“The same ethics should apply to everyone up and down in the pyramid.”

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