Back Charges in Construction [What They Are & Best Practice 2020] - YouTube

Construction projects are rarely completed without the GC running into some issue with

a subcontractor or a vendor.

When problems begin to pop up, the parties making payment must have some mechanism to

charge a sub for any unanticipated costs incurred as a result of the sub’s work.

This is where back charges come into play in construction.

A back charge (also known as a right to set-off) is basically an offset for unexpected costs

and it can be incurred in a few different ways such as:

• defective work/materials;
 • damage to a jobsite;


• cleanup;
 • And use of equipment.


Here’s an example.

If you’re a GC on a project and ended up having to pay out of pocket to replace defective

work or clean up the jobsite because the supplier or a sub didn’t do their job properly, it

wouldn’t be fair, right? 

If back charges had been provided in their contract, that additional, unexpected cost

would’ve been taken out of that sub’s next payment. 

Keep in mind that back charges are not statutory, meaning that they are not provided or required

by law.

Rather, they’re contractual rights.

This means that they are governed by the terms stated in a contract.

If the contract doesn’t provide for back charges then it might not be a good idea to

withhold them! 

While back charges could be helpful in getting unexpected costs paid for, they can also be

tricky if you’re not careful.

The two main things to keep in mind are communication and documentation. 

In terms of communication, the best practice is to have notice of back charge provisions

that are clear and reasonable in your contract.

Meaning, IF and WHEN you incur back charges, be sure you are notified of them and provided

with ample time to correct, repair, or clean up the problem.

Most industry standard subcontract forms include reasonable notice provisions when it comes

to back charges, and require multiple notices before being able to back charge, along with

requiring an itemized statement of the work or damage in question.

The problem is, many GCs use their own contract forms which can alter any or all of the notice

requirements.

So even if notice isn’t required by your contract, it’s in your best interests to

keep communication as open as possible.

Other than clear communication, thorough documentation is essential, whether you’re the GC or the

sub.

If you’re the GC, be sure to include as much detail as possible when sending a notice

of defective work.

If the sub decides to take remedial action, take progress photos for your records.

If the sub doesn’t cure the defect, it’s important to keep the invoices and timesheets

regarding the back charges separately.

That way, if they are challenged for any reason, you can provide a full breakdown of the work

and charges.

On the flip side, if you’re a subcontractor, you should also document every phase of the

work performed.

As a general rule, when courts analyze back charges, they look to see if they fall “within

the scope of the contract.”

Meaning, if it’s within the scope of the work, you may be held responsible for them.

This is determined on a case by case basis, and isn’t always clear; especially when

it comes to clean up or damage to other aspects of the jobsite.

Keeping detailed records will help you contest any back charges you may feel are unwarranted. 

At the end of the day, it’s important to keep a close eye on any back charges.

Since they are solely governed by the contract terms, there’s a potential for abuse.

Many times GC’s will use back charges to cover costs that they may have underestimated.

This problem could get worse if the sub isn’t notified that back charges are accruing; whether

they are legitimate or not!

At the end of a project, a sub has lost almost all of their leverage.

They’ve already paid their team and suppliers, and are waiting on a substantial final payment

check.

Getting hit with a long list of back charges can be devastating.

That’s why it’s so important to communicate properly, and document everything so you can

protect yourself.

I hope you learned something about back charges today.

Leave a comment down below and let us know if you’ve had experience with back charges,

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