Why are 90 and 120 day pay agreements accepted in the oil and gas and construction industries? How did we get here?
In the early 1980s Dome Petroleum over-extended themselves with the purchase of a few too many additional oil and gas companies. To help compensate for this, they told their vendors they wouldn’t pay invoices for 90 days. The vendors at the time accepted this as Dome was a reliable company.
Monkey see, monkey do. Dome got away with it so more companies followed.
Like the frog in a pot of boiling water metaphor, service companies didn’t jump out because change happened over time. The creep was gradual so the impact to bottom line was not realized until here we are 40 years later with over 80% of producers taking over 30 days to pay contractors.
These longer payment terms benefit the producers by allowing them to collect interest on the accounts-payable money. Per contractor invoice the producer interest gained is around 1 percent. For the contractor that 1% is translating into a 20 percent loss of their profit margin.
Some say legislation is required to solve this. The thing is, there is legislation, but it isn’t very effective for oil & gas contractors.
The Prompt Pay and Construction Lien act was instituted in Alberta in August of 2022. Its intent is to establish strict timelines and rules for payment of contractors and subcontractors in the construction industry.
The legislation requires invoices to be paid within 28 days of receipt, increases the lien period from 45 to 60 days, and implements a fast-tracked adjudication process so complaints can be dealt with in a more-timely manner.
This all sounds good, so it should apply to oil & gas construction, right? It does, but also doesn’t.
Lien periods for oil & gas construction remain at 90 days. Which, on the surface, seems like a reasonable amount of time, but if the agreed to payment period is 90 or 120 days and a company does not pay you, then the opportunity to place a lien has elapsed.
The mechanism for adjudication of complaints is also problematic. It forces vendors to call out the slow payers in a public forum. This focuses on the negative behaviour and feeds a fear of retribution, so its use is minimal.
If legislation doesn’t help, how can this issue be solved?
The simplest way is to reward and recognize the positive behaviour of the companies that pay quickly and reliably. Call them out for being better than their competitors, recognize their positive affects within the industry so their competitors will want to follow, just like they did in the 1980s.
Using a tool like PayScore.ca allows you to reward the good, recognize the bad and start the process of making 30-day payment periods the norm, rather than the exception.
