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The Canadian construction industry dealt with some challenges in 2022, but also saw some promising changes nationwide. Key issues that were addressed by the industry this year were related to continued developments in prompt payment legislation and supply chain disruptions.
Prompt payment has been a challenge in the construction industry for many years. Prompt payment issues typically arise in two scenarios: (1) payments by owners to contractors, sub-contractors and suppliers are not made in a timely manner; and (2) there is a payment impasse when a dispute occurs. A number of Canadian provinces have sought to address this issue through the implementation of prompt payment and adjudication legislation.
Ontario was the first province in Canada to introduce and implement prompt payment and adjudication legislation in 2019. Since then, a number of other provinces have followed suit and brought in similar legislation.
In early 2022, Alberta announced changes to its Builders’ Lien Act. The name of the Builders’ Lien Act was changed to the Prompt Payment and Construction Lien Act (PPCLA). The PPCLA came into force on August 29, 2022 and introduced a framework with tight payment and notice deadlines. Under the prompt payment scheme, the PPCLA provides for the issuance by the contractor of a “proper invoice” which then triggers payment obligations on the part of the owner, unless the owner follows a series of requirements for objecting to payment. The PPCLA also provides for an adjudication process to assist parties in resolving disputes in a timely manner. Saskatchewan also brought similar prompt payment and adjudication legislation into force in 2022.
The remaining provinces will likely follow this trend as we head into 2023. In Manitoba, Bill 28: The Prompt Payment for Construction Act, has received the first reading. In British Columbia, in early 2022, an industry working group was established to accelerate progress on potential prompt payment legislation. Nova Scotia passed legislation that amended the Builders’ Lien Act in 2019 but this legislation has not yet come into force.
Supply Chain Disruptions
We started off the year with major supply chain disruptions in relation to a number of products such as steel, drywall and lumber, resulting in significant price fluctuations in relation to these products. As the year came to a close, it appeared that these disruptions had largely stabilized, and it is hoped that this stabilization trend will continue into 2023.
The primary causes of the supply chain issues in the construction industry have been increased prices, labour shortages, and delays in delivery times. An increase in prices due to inflation, especially fuel prices, resulted in higher transportation costs. This inherently affected how fast and efficiently goods were moved from one location to another.
Due to labour shortages, there have been shipment delays and the rising demand is not being adequately met. Labour shortage has resulted from various factors such as a demand for remote work, employees wanting more flexibility, and an aging workforce retiring. In 2019, the Canadian Construction Association released an Industry Trends Report. This report warned of labour shortages in the construction industry in the coming years, even before the onset of the COVID-19 pandemic, which warnings came to a head in 2022.
In 2023, we expect that addressing labour shortages will be a primary focus of the construction industry. One solution that many industry participants are considering is the diversification of the work force by encouraging historically under-represented groups, such as women, minorities and First Nations workers, to consider opportunities in the construction sector. 2022 saw an increasing number of partnerships with First Nations groups as a result of a commitment to continue on the path of reconciliation. We expect these partnerships to continue and expand opportunities for First Nations groups in 2023.
Wrapping Up 2022
Overall, 2022 was a progressive year for the construction industry in Canada. Alberta and Saskatchewan implemented prompt payment legislation and the remaining provinces appear to be following their lead. The supply chain issues which were prevalent in early 2022 are now stabilizing, and efforts are being made to find solutions to address the labour shortage issues being faced by the industry. It is expected that these positive trends will continue throughout 2023.
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After a complicated 2022, marked by the uncertainty surrounding the failed constitutional process and the continued aftershocks of the pandemic, the outlook for 2023 appears to be more positive for the construction and projects industry.
In 2022, more than a dozen construction and real estate companies filed for restructuring or bankruptcy, involving more than US$500M in losses and debts. These companies were mostly affected by the negative impacts of the social crisis and the pandemic, especially those relating to increased interest rates, high levels of inflation and the rising costs of commodities.
Although these negative impacts remain a factor in 2023, there are some signs of recovery in the Chilean economy. Inflation and interest rates have been stabilized, and more flexible credit access is available for individuals and companies. Thus, according to preliminary information, last January the Monthly Index of Economic Activity (Imacec) rose 0.4% compared with the same month a year before. Also, the Industrial Production index (IPI) rose 0,5%, after seven months of consecutive negative results. The rise of the IPI is mostly explained by the increase of production in the mining, electricity, gas and water industries.
Uncertainty in project and building permits
However, one factor that remains an obstacle to a favorable climate for investment and the development of construction projects is the bureaucracy and uncertainty in the administrative procedures relating to the grant of building permits. The case of the Eco Egaña project is paradigmatic. With an investment of US$300 million, this major real estate project was approved by the administrative authorities in 2019. In 2022, with 25% of the work completed, the new authorities revoked the permit. Finally, after almost a year of legal battles, the Supreme Court recently confirmed the legality of the project. Work has resumed, but the project has incurred estimated additional costs of US$17 million due to the delay.
One of the most relevant regulatory changes was the readjustment of construction and public works contracts that have been affected by the rise in the cost of commodities and supplies, through the modification of the Public Works Regulation (DS 75). According to government projections, this polynomial readjustment will impact 82% of the companies that currently have contracts with the Ministry of Public Works, covering a potential portfolio of 1,423 contracts corresponding to 436 companies, for a total of US$380M.
There have been no landmark decisions by higher courts or arbitration tribunals for the construction industry. However, it is likely that 2023 will see the first judgments relating to the impact of the pandemic on construction contracts. In lease cases, the Supreme Court has already ruled that the Covid-19 pandemic can be considered a case of force majeure, depending on the nature of the obligation affected. What is still uncertain is whether the Court would consider the impact of the pandemic on the performance of contracts to change the traditional rejection of Chilean private law to adjust or terminate contracts in cases of hardship or excessively onerous conditions.
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The U.S. construction and infrastructure sector started 2022 on an upswing, achieving strong growth of 8% spending in 2021. But a closer look at the sector suggests that 2023 will likely experience differentiated growth rates across different industry segments. On the one hand, the nonresidential segment is likely to find monetary support from funds entering the market and government initiatives (e.g., the Bipartisan Infrastructure Bill, the CHIPS and Science Act of 2022). On the other hand, the outlook for residential construction companies is more pessimistic. Overall, inflation, labor shortages, and supply chain issues are risks that will continue to affect all construction and infrastructure sectors in 2023.
Legislation & Legal Updates
Challenges, Opportunities, And Predictions
Despite headwinds, construction demand is expected to remain strong for the near term. Although the possibility of an economic downturn should be taken seriously, considerable pent-up demand for new construction—including a nationwide housing shortage—and government infrastructure projects should largely sustain activity. As contractor backlogs grow, margins should increase, pushing up total construction costs.