The target’s receivables aged like a sixty-day business, so the buyer modelled sixty days. The legislature had put it on twenty-eight days coming in and seven going out, and the historical numbers were a record of a business ignoring both.
At a glance
A national electrical contractor was buying a regional subcontractor as a market entry: $18.9 million of revenue, 96 field electricians, a stable book of institutional and light-industrial work. Asset purchase at $5.4 million plus a working capital adjustment against a peg set the ordinary way — the trailing twelve-month average, $2.31 million. Days sales outstanding averaged 58 over the same period, so the buyer modelled 60 and moved on.
Fifty-eight days is what this business collected in. It is not what it was entitled to collect in, and the gap is not a commercial fact about the customer base but a compliance fact about the target.
Ontario put construction payment on a statutory tempo in October 2019. An owner has 28 days to pay a proper invoice and can withhold only by serving a prescribed-form notice inside 14 days that details all of its reasons. A contractor that does not invoice properly, does not chase the 28 days, never serves a notice of non-payment and never adjudicates is not experiencing 58-day customers. It is financing them voluntarily.
The buyer’s first instinct was that this was good news — seventeen free days of cash, unlocked by following the rules. That was half the story: the regime runs in both directions, and the outbound leg is faster than the inbound one.
Inbound. Post-closing the buyer put the target on the statutory rhythm: monthly proper invoices, the 28-day clock tracked, a notice of non-payment served wherever an owner disputed. Days sales outstanding fell from 58 to 41 over two quarters, releasing roughly $1.10 million of trapped cash.
Outbound. The target had been paying its own subtrades at an average of 46 days, funded by the same delay it was suffering. Under the statute a contractor paid in full has seven days to pay the subcontractors whose work was in that invoice, and where the owner has not paid, 35 days from giving the invoice unless it serves the right notice. Moving to that discipline consumed roughly $1.40 million.
Net. Run in compliance, the business needed about $300,000 more working capital, not less, in its first quarter under the buyer. The peg had been set on twelve months of a business doing neither leg. It was renegotiated up by $300,000 with a $250,000 true-up at six months — a smaller number than the $1.1 million of released receivables, and not an alternative to it: the released cash is a one-time balance-sheet movement and the higher requirement is permanent.
Construction Act s.6.4(1) sets the inbound clock: subject to a notice of non-payment, “an owner shall pay the amount payable under a proper invoice no later than 28 days after receiving the proper invoice from the contractor”.
Withholding is possible but expensive to do casually. Under s.6.4(2) an owner may refuse to pay only if, “no later than 14 days after receiving the proper invoice from the contractor, the owner gives to the contractor a notice of non-payment, in the prescribed form and manner, specifying the amount of the proper invoice that is not being paid and detailing all of the reasons for non-payment”. Section 6.4(3) confines that notice to the disputed amount: “Subsection (1) continues to apply to any amount payable under the proper invoice that is not the subject of a notice under subsection (2).” One disputed line item does not stop the invoice.
Two supporting provisions make the clock hard to avoid. Section 6.3(1): “Proper invoices shall be given to an owner on a monthly basis, unless the contract provides otherwise.” Section 6.3(2): “A provision in a contract that makes the giving of a proper invoice conditional on the prior certification of a payment certifier or on the owner’s prior approval is of no force or effect” — removing the old lever of refusing to certify so that no invoice can be rendered. And since 1 January 2026 a deficient invoice is deemed proper “unless, no later than seven days after receiving the invoice, the owner notifies the contractor in writing of the deficiency and of what is required to address it”.
Section 6.5 pushes the same discipline down, and faster. A contractor paid in full within the s.6.4(1) window must, “no later than seven days after receiving payment, pay each subcontractor who supplied services or materials under a subcontract with the contractor that were included in the proper invoice” the amount payable. Where the owner does not pay, s.6.5(4) still requires payment “no later than 35 days after giving the proper invoice to the owner” unless the contractor serves a notice under s.6.5(5) — which must include “providing an undertaking to refer the matter to adjudication under Part II.1 no later than 21 days after giving the notice to the subcontractor”. The escape from paying is an obligation to litigate.
Part II.1 makes the tempo real during the project rather than after it. An adjudicator “shall make a determination of the matter that is the subject of an adjudication no later than 30 days after receiving the documents required by section 13.11”; that determination “is binding on the parties to the adjudication until a determination of the matter by a court”, an arbitration or written agreement; the payer “shall pay the amount no later than 15 days after the determination has been communicated to the parties to the adjudication”; non-payment lets the contractor suspend work; and a party may “file a certified copy of the determination of an adjudicator with the court and, on filing, the determination is enforceable as if it were an order of the court”.
The unit distinction that matters for diligence: this is a tempo, not a retention. Section 6.2 keeps them apart in a sentence — “A requirement to pay an amount in accordance with this Part is subject to any requirement to retain a holdback in accordance with Part IV.” Holdback is 10 per cent withheld from every payment under s.22(1); prompt payment is how fast the other 90 per cent moves. A target can be scrupulous about one and negligent about the other, and they show up in different places on the balance sheet.
The peg moved to $2.61 million with a $250,000 true-up at six months. The buyer also bought something it had not priced: an invoicing, notice and adjudication practice that had to be built from nothing, costing a full-time credit administrator and about five months. Two adjudications were commenced in the first year, both settled before determination — the usual outcome and the usual value, because the leverage is not the determination but the 30-day clock, the 15-day payment obligation and the right to suspend work. On pegs set on the wrong basis generally, see a working capital peg set on the wrong month; on the receivables side, a receivable ledger propped up by one debtor.
Closing on the $2.31 million peg would have handed the vendor a windfall and left the buyer $300,000 short of the cash needed to operate lawfully. That shortfall does not present as a shortfall; it presents as pressure to keep paying subtrades at 46 days, which is a statutory breach with an adjudication and an enforceable determination behind it. The buyer would also have mis-read its own performance: collections improving from 58 days to 41 reads as an integration win, when it is the business starting to do what the statute already required, paid for by an outbound leg that moves further and faster.
The tell was an absence. In four years of files there was not one notice of non-payment, not one adjudication and not one contract amendment addressing the regime — in a business whose entire revenue is subject to it. A target that has never used a statutory remedy available to it every month does not have unusually good customers; it has historical working capital that is no guide to its future working capital.
The diagnostic is one line in the diligence request: how many notices of non-payment did you serve and receive in each of the last three years, and how many adjudications were you party to? Zero and zero should move the peg.
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