How Ontario’s construction stimulus law impacts surety

Changes to the way construction contractors and subcontractors recognize profits under Ontario’s Bill 60 mean builders can recognize profits sooner, which should reduce their borrowing costs and improve cash flow. Enacted last year, Bill 60 modifies the province’s Construction Act and other Acts and is intended accelerate new home building and other projects.

And that could affect surety needs for construction companies, says Conor Smith, national surety leader for Marsh Canada.

“There are considerable impacts as a result from Bill 60, in particular the rules governing hold back,” he tells Canadian Underwriter. “In the context of surety, the act provides clarity around annual releases of hold back, a critical tool moving forward to support the flow of money and how we deal with non-payment. 

“Bill 60 doesn’t change any of the accounting rules that are established for profit recognition, but it does accelerate…timelines. Contractors can reach the revenue recognition stages earlier.”

Hold backs are a legally required percentage retained by both owners and contractors from every payment as protection against liens and to ensure projects are finished. Before Bill 60, they were typically recognized at completion of a project. But now, under Bill 60, they can take place annually.

So, while the improvements in cash flow will allow contractors to reduce their financing costs (such as lines of credit), a more frequent recognition of revenue can also create a tax hit. 

“That’s where it’s going to be critical for contractors to look at their cash-flow management structure. This is what we’re advising our clients; [they] need to sit down [with] their accounting and surety partners to understand the implications of this, because potentially there could be a shortfall, depending on how revenue has been recognized and retained in the past by contractors,” says Smith.

Related: Rising construction costs could leave properties underinsured

Build times for large projects often exceed 12 months, which means Bill 60 is a help to the subcontractors and suppliers involved with those projects. It lets them access their hold back funds annually “at a reasonable time, particularly when some of these jobs were going to be stretched over five-plus years,” he notes.

And there’s another wrinkle. Bill 60 took effect Jan. 1 for most projects but it’s also keyed to the one-year anniversary date from the start of a project. So, if a construction project got underway Mar. 1, 2025, its anniversary date is Mar. 1, 2026. And builders will need to ensure they set aside sufficient capital to cover those annual hold-back payments in 2027.

“We’re highlighting that…to our clients, to ensure they’re having those conversations today, so that when they are getting [to] that one-year anniversary on the projects that qualify, they’ll be able to move forward with a process in place and the assurances that they have either set aside enough provision for tax liability, in addition to ensuring that they’re in the process of moving the money through to subcontractors and suppliers…in line with the expectations of the Act,” says Smith.

Related: How labour shortages in construction could impact insurers’ profitability

What Bill 60 does not do is amend standard bond requirements in Ontario, which is required for all public projects over $500,000.

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“We’re starting to see owners asking for our longer-term warranty provisions; so bonds that will go in excess of the standard one-year, or two-year provision,” says Smith. “Those require underwriters to better understand the operational controls of the company and how they are processing and managing their hold back for themselves, but also for their sub-trades where operating as a general contractor.”

He adds large, complex projects bring a lot of the building industry to the table in the form of subtrades, such as mechanical, electrical and structural subcontractors that are crucial to a building’s critical path during construction.

“These are the folks that it’s hard to move forward without their scope either being completed or to a [certain] place before other contractors can then engage the project,” he adds. “Ensuring that the flow of funds is occurring is essential.”

Phil Porado

Phil, an award-winning journalist with over 30 years of experience in financial topics, has been managing editor of Canadian Underwriter for more than three years.