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

Learn about common pitfalls of and best practices for back charges and get expert advice for FREE at www.levelset.c..., or read related FAQs at www.levelset.c....
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.
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[@floralkid]

These videos have gotten so much better lately quality-wise! I always felt like there was a weird amount of space at the top of the screen but NOT anymore! Very professional. Very helpful.

[@SpyGrl007]

I did learn something! Thanks

[@adriennekennedy2506]

Yes I need more construction payment related. What's the Davis beacon act-wages clause?

[@merrillhernandez1563]

Can a general contractor back charge a subcontractor if there is no contract in place from their end?

[@Levelset]

Thanks for watching and for asking your question @merrill!
If you go to www.levelset.com/payment-help/ask-question/ - you can ask your question anonymously and note what state you are in. A construction lawyer who knows the laws in the state you are doing the project will respond to help you. Good luck!