Deductive Change Order

3 weeks ago

We are a commercial plumbing company. We worked with a GC on a number of projects a couple of years ago.

There are about 4 jobs that have not been paid by this contractor dating back to 2017. To date, the contractor has not paid the balances due on these jobs.

We also had 3 jobs that were a little more problematic, dating back to the fall of 2018. Other than one of those job (on which we only completed 1 of 3 phases), we completed the other 2 through final inspection.

We attempted for some time to collect on this work. Finally, months after the fact, the GC is saying that he had additional costs on these jobs, and will not be paying for them; furthermore, he is attempting to hold the monies owed on the 2017 work (completed satisfactorily) against his “additional costs” on the 2018 work.

I never received, and have still not received, any sort of deductive change order or accounting from the GC regarding the 2018 work that he is alleging had additional costs. I do not believe that is legal in Georgia to hold monies on one contract for an issue on a different contract. Furthermore, it seems that there must be some mechanism or process for applying “additional” costs (via a deductive change order) to monies owed from a GC to a subcontractor.

Can you give me some insight on this, and whether or not what the GC is attempting to do is legally allowable?

THank you for your time

Senior Legal Associate Levelset

Generally, a deductive change order is a change order that reduces the scope of work for a particular contractor, sub, or supplier. So, a deductive change order would take place before the canceled work is performed. When a customer opts to cancel payment due to issues with work or disputes, that’s more likely a back charge.

Back charges, generally

Some level of back charges may be appropriate if a customer has encountered issues on a job as a direct result of their sub or supplier’s work. If they incurred costs correcting defects or otherwise fixing their sub or supplier’s work, they may be entitled to withhold some level of payment. At the same time, when issuing back charges, a contractor should generally provide some sort of accounting or rationale for the amounts being withheld. And, as you mention above, withholding payment on one contract for something that happened on a totally independent contract is generally not allowable. Rather, the contracts should typically be treated as totally and completely separate – because they are!

Recovering improperly withheld back charges

As for how to battle a contractor on questionable or unfounded back charges, there may be a few different tools available to help on that front. For one, the usual legal remedies will likely be available. Legal actions like breach of contract or a suit under Georgia’s prompt payment laws could be effective to compel payment. Note also that, for disputes that cover smaller amounts, Georgia small claims court might be a viable option for bringing claims but keeping the dispute from the costs and risks associated with traditional litigation. More on that here: Guide to Georgia Small Claims Court.

Keep in mind that, often, the mere threat of a lawsuit can be enough to get talks moving in the right direction. Sending payment demands can go a long way toward resolving a payment dispute, particularly when the demands and threats included in such a document are specific. More on that here: Demand Letters for Contractors – How To Write One That Gets You Paid.

In order to best assess what options make the most sense for recovery under your circumstances, it’d be wise to consult with a local Georgia construction attorney. They’ll be able to assess all of the relevant circumstances, documentation, and communications then advise you on how best to proceed with potential claims.

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