Back charges can be a scary part of the construction business. They’re often abused or misused and subcontractors can find themselves with their backs against the wall out of nowhere. In notoriously difficult business to turn a profit in, back charges can represent a sub’s entire profit margin on a job. Solutions to these issues don’t have to be as scary. Contractors need to understand why they exist – and what they can do when their customer is back charging them. The best strategy is for contractors and their subs to avoid back charges altogether.
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What is a back charge?
A back charge is money that is either charged or withheld from a subcontractor in the event of an issue. Charges may include fees for:
- Equipment use
- Incorrect or incomplete workmanship
- Clean up
- Other unforeseen issues
A handshake agreement isn’t always enough to solve a mistake. In scenarios where faulty work or uncompleted projects exist, no amount of backslapping will make the problem go away. Back charges can become a necessary evil when profit margins are tight.
Your company could be back charged for several reasons, whether it’s your fault or not. You can also levy a back charge against your subs should they provide faulty work, damage the site, or leave a mess behind. If that contractor refuses to make good on the issue they’ve caused, they can be billed for it. Back charges are a means to make amends when someone makes a mistake.
Back charges aren’t good for anyone
By their very definition, they represent the fact that something on the job went sideways. Your company might be accused of not completing the work according to the terms in your construction contract. The accusation could be that you somehow negatively impacted an aspect of the job as well, such as through damage caused by your crew.
While it seems appropriate that someone should be held responsible for their mistake, back charges are often levied long after the problem was spotted, even at the completion of a job. This sends a subcontractor reeling to figure out how they’re going to recover the costs.
A lack of communication and reasonable timeline can be the cause for major frustration.
“If I get back charged 6 months later for cleanup, no pictures, no email notices, you will get an email claiming that this is baseless and self-serving,” says one drywall subcontractor. “When that doesn’t get us to the table to talk this over, you will see a [mechanics] lien, and then a finalized one if it’s not settled.”
It doesn’t stop there. You can be back charged for similar issues with your subcontractors as well. If this is the case, you’re likely to back charge your subcontractor as well to recoup your losses. When the job goes pear-shaped, someone needs to pay and make it right.
Start with the contract to avoid back charges
General contractors can back charge their subcontractors, and subcontractors can back charge the sub subcontractors. However, there’s no state law that governs back charges, and whether or not they’re allowed. Back charges are governed by the construction contract itself. In short terms: Back charges need to be part of the contract or they’re generally not allowed.
You can protect yourself at the contract stage. Take a very close look at your contract before you sign it. Either negotiate back charges out of the contract or work with the GC to determine clear and fair guidelines. These guidelines should allow you enough time to rectify a situation before being saddled with a ton of back charges at the completion of the job.
If you hire sub subcontractors on your jobs, consider including clear and fair terms for back charges in your contract as well. The goal here is for everyone to understand the terms and agree that they are fair. When everyone’s on the same page, they’re far less likely to run into payment disputes over back charges.
How to get paid when the GC is back charging you
If you’ve found yourself in a situation where you’ve been hit with back charges, you may be wondering what you can do. The first action you should take is to verify that back charges are definitely part of your contract. You need to be sure that this isn’t an instance of back charge abuse. You have to avoid being leveraged unfairly as well, so evaluate whether or not the back charge is legit.
Talk it out
If the costs incurred by the GC are due to your mistakes, it’s best to handle them correctly. Back charges are only regulated by the contract. This means that you can be creative when fixing the issue. Discuss a solution with the General Contractor and consider making your own arrangements to fix the issue if possible.
When you do take the necessary steps to rectify the problem, make sure you document every step of the way. Photos, timestamps, and job site video footage of your crew or sub making the reparations are key. This can be the fastest way to resolve the issue and avoid paying the GC or owner for the back charge.
Send a Notice of Intent
If you feel that this money’s being withheld from you unjustly, you have some options. If you or your subs didn’t cause the problem, or back charges aren’t included in your contract, let the GC or owner know.
Send a notice of intent to lien according to your state’s regulations. This shows that you’re savvy enough to know you’re being leveraged.
File a mechanics lien for the back charged amount
If you’re still not getting the results you need, filing a mechanics lien could be the answer.
Depending on your state’s law regarding mechanics liens, a lien is likely the fastest way to recover this money. However, the contested back charges can still be settled through effective communication should the GC or owner decide they’d like to avoid the lien process.
Mechanics liens provide strong protection, even in cases where workmanship has been cited for the back charge.
The smart way to avoid back charges
If an issue arises with your subcontractor, you need to play it smart. The worst thing you could do is surprise your subcontractor with a back charge letter at the end of a project, or even months later. If there’s a problem on the jobsite, don’t jump the gun. Get your ducks in a row before you spring a bill on your sub.
Simply withholding cash from a subcontractor’s payment is dangerous and predatory. Be aware that your subcontractor has options. Should they feel that the back charges are unwarranted or unfair, they could file a mechanics lien against the property for the back charged amount. A lien against the owner or property from your subcontractor may be more hassle than you bargained for.
The first step is to document the issue to the best of your ability. Pictures, video, and timestamps are helpful. This gives the sub a full account of the incorrect work, damage, or other problem. Sending a bill for back charges without accurate, clear documentation of the issue will only make them harder to communicate with.
Communicate quickly & clearly
Preventing a payment dispute over back charges requires constant communication with the subcontractor. When you spot a problem, bring it up immediately. Don’t wait 6 months down the line.
Everyone needs to be on the same page for a back charge to be fair. Provide your sub with a well-organized and detailed list of costs so that they know what they’re looking at in terms of reparations. Don’t wait for the current billing cycle to go by before laying the costs on your sub.
Give the sub a chance to correct the problem
It will generally be worth letting them fix their mistake to avoid a back charge and prevent a payment dispute. Depending on the amount of money in labor and materials, it may be worth it to find a more amicable solution. In any instance, communication will be key when solving problems inside and outside of back charges.
There tends to be a lot of quid pro quo on a job site. Contractors and companies will often lend each other a hand, some equipment, or overlook small mistakes as a good gesture. The smoothest run job sites tend to be ones where contractors look out for each other and cooperate along the way.
If your company bails another one out in the time of need, that favor can come back to your company ten-fold. When you help one of the other contractors or trades in a bind (lending a laborer for the day, unloading a truck, etc.), that contractor will remember the favor. They’ll be far less likely to make an issue of your crew’s minor mistakes. These relationships result in far fewer back charges.
This also works in terms of leverage. It may be a better idea to just keep someone’s mistake under your hat: “I work for a large framing company and we generally never back charge,” says one contractor, “but instead keep track of all the things we could back charge for and use them as leverage later if needed.”
If you do decide to back charge, make sure that they are part of your subcontract. If not, and they call your bluff, you could be kicking a hornet’s nest of legal trouble. Be sure that the back charge is worth it and that there are no other solutions worth visiting.
Improve planning & communication to avoid back charges
Mistakes happen, but back charges are really the result of a breakdown in communication. Avoid back charges by communicating openly and frequently about any issues that rise. Also document your work thoroughly and consistently, including your crew’s mistakes. Include all of this documentation with your pay apps. Should an issue arise, you’ll have a record of your monthly check-in with all of these documented issues.
Embrace the paper trail. Emails, notices, and other written documents are excellent for not only communication, but tracking the direction your communication is headed. Keep detailed notes on phone calls as well. Everyone on a job appreciates effective communication and documentation: It keeps the playing field level and minimizes unwelcome surprises.