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 direct and unanticipated costs incurred as a result of the sub’s work. This is where back charges come into play in construction.
Read on for a brief overview on the use of back charges on construction projects.
Video Summary of Back Charges in Construction
Explaining Construction Back Charges
A back charge is basically an offset for unexpected costs. To boil it down to the basics, let’s take a look at general contract law.
Contracts provide the opportunity to recover damages when one party fails to perform. Damages are provided in order to “place the injured party in the position they would have been had the contract been properly performed by all parties.” This same principle applies to back charges.
Back charges can be incurred in a few different ways:
- defective work/materials (cost to properly complete/replace)
- damage to a jobsite (cost of repair)
- cleanup (costs incurred to maintain worker safety or compliance with OSHA)
- use of equipment (rental/use costs)
If, as the GC, you need to pay more to repair, replace, or clean up the work of a sub or vendor, that cost can now be shouldered by the party that should have completed it in the first place.
Before going any further, keep in mind that back charges are not statutory (i.e. provided by law). Rather, they’re contractual rights. This means they are governed by the terms set forth in a contract (if they’re even included in the contract in the first place). Many subcontracts provide for some sort of back charges, but many don’t.
If a contract doesn’t provide for back charges (which are also commonly called “a right to set off“), then it might not be a good idea to withhold them!
Keys to Success with Back Charges
Back charges can be tricky if you’re not careful. The two main things to keep in mind are communication and documentation. (Honestly, most construction disputes could be resolved by the combination of communication and documentation — but that’s a blog post for another day!)
Best practice is to have any back charge notice requirements explicitly stated. Make sure that the subcontract provides you with reasonable notice provisions. Meaning, if and when you incur back charges, be sure you are notified of the charges and provided with an ample amount of time to correct, repair, or clean up any issues caused by your team’s work.
The Associated General Contractors (AGC), American Subcontractors Association (ASA), and Associated Schools of Construction (ASC) standard subcontract form provides a reasonable approach to the issue of construction back charges.
The form states that a contractor must first provide notice before any back charges are incurred. Then the subcontract requires another written notice to be sent 7 days after the services or materials were provided. Lastly, the contractor must provide a written compilation of the charges by the 15th day of the following calendar month.
However, many GCs use their own contract forms which can alter any or all of the notice requirements. So even if not required by contract, it is best practice to keep communication up in order to allow for an amicable solution.
Whether you are the GC or the sub, proper and meticulous documentation is key! For GC’s: include as much detail as possible when sending notice of defective work. If the sub decides to take remedial action, take progress photos for your records. If the sub does not cure the defects, it’s important to keep the invoices and timesheets regarding the back charges separately to provide to the sub/vendor upon completion.
If the back charges are challenged for any reason, it’s crucial to have sufficient proof that it was caused or incurred directly by that specific sub.
On the flip side, the subcontractor should also document all phases of the work performed as well. As a general rule, when courts analyze back charges, they look to see if the incurred fees fall “within the scope of the contract.” This is a very broad interpretation, and not always a bright line rule (especially when it comes to clean up or damage to an unrelated aspect of the jobsite).
Keeping detailed records will help to contest any back charges you may feel are unwarranted.
Simple Construction Contract — Free Template Download
Our staff attorneys here at levelset have created a simple construction contract that should be enough for you to use on your more straightforward jobs. There’s no other way to say it — a written contract signed by both parties is always better than a verbal contract or a simple handshake deal. Other important items such as change orders should be in writing, too
Last but not least, not all contracts have to be overly complex — sometimes, a simple, straightforward contract like our template here is enough to do the trick.
To download your free contract template (as an editable Word document), click the box below:
Potential for Abuse with Back Charges
This is the ultimate problem for subs: the potential for abuse of back charges in construction. Since back charges are solely governed by the contract terms, there is a fair amount of potential for abuse. It’s actually a little reminiscent of lien waivers — most states don’t regulate them, either, and this creates a risk of dangerous lien waiver clauses.
Anyway, abuse can occur when a top of chain party has arbitrarily allocated anticipated project costs to the subs without regard to their use of a particular service. Even worse, the back charges could be accruing throughout the entire project, all the while without notifying the sub until completion. This scenario is particularly painful. At the end of the project, the sub has lost most of its leverage. They have already paid their suppliers and laborers and are expected (since it is final payment) a substantial check. The best way to protect yourself? Communication and documentation!
And as always, read your contracts carefully.