What are Construction Back Charges?
A back charge is basically an offset for unexpected costs.
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 OHS)
- use of equipment (rental/use costs)
If, as the General Contractor or Owner, you need to pay more to repair, replace, or clean up the work of a sub-contractor or vendor, that cost can now be shouldered by the party that should have completed it in the first place.
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. Most construction disputes could be resolved by the combination of communication and documentation.
Best practice is to have any back charge notice requirements explicitly stated. Make sure that the contract 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 contractor should first provide notice before any back charges are incurred. Then the contractor should give written notice and compilation of the charges – after the services or materials were provided. .
So even if not required by contract, it is best practice to keep communication up in order to allow for an amicable solution when dealing with back charges.
Whether you are the owner, General Contractor or the subcontractor, proper and meticulous documentation is key!
For owners and General Contractors include as much detail as possible when sending written notice of defective work. If the subcontractor decides to take remedial action, take progress photos for your records. If the sub does not fix the defects, it’s important to keep the invoices and time-sheets regarding the back charges separately to provide to the subcontractor/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 subcontractor.
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 the rule, especially when it comes to clean up or damage to an unrelated aspect of the job-site.
Keeping detailed records will help to contest any back charges
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
Not all contracts have to be overly complex — sometimes, a simple, detailed and straightforward contract is enough.
Potential for Abuse with Back Charges
Abuse can occur when a top of chain party has arbitrarily allocated anticipated project costs to the contractor 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 contractor until completion.
This scenario is particularly painful. At the end of the project, the contractor has lost most of its leverage. They have already paid their suppliers and laborers and are expecting a substantial cheque. The best way to protect yourself? Communication and documentation!
Our team of Agents have successfully resolved a wide variety of legal disputes arising from a cornucopia of variation of construction contracts. Do not let yourself become overwhelmed by the process; contact our Agents for straightforward guidance.