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Home ยป What Are “Back Charges” in the Construction Industry?

What Are “Back Charges” in the Construction Industry?

    Construction projects are only finished with the general contractor encounters a problem with a subcontractor or vendor. When issues arise, the parties responsible for payment must have a process to charge a sub for any direct and unplanned expenditures incurred due to the sub’s work. In construction, this is where back charges come into play.

    Continue reading for a quick primer on using back charges in construction projects.

    Explaining Construction Back Charges

    A back charge is an offset for unanticipated costs. Let’s look at generic contract law to get right to the point.

    Contracts provide for the recovery of damages when one party fails to perform. Damages are awarded to “put the injured party in the position they would have been in had the contract been completed properly by all parties.” The same logic applies to bank charges.

    Bank charges can be incurred in several ways:

    • faulty work/materials (cost to finish/replace)
    • damage to a construction site (cost of repair)
    • Cleaning (costs incurred to ensure worker safety or compliance with OSHA) (costs incurred to maintain worker safety or compliance with OSHA)
    • Equipment use (rental/use fees)

    If you, as the general contractor, need to pay more to repair, replace, or clean up the work of a subcontractor or vendor, the expense can now be borne by the party that should have finished it in the first place.

    Before proceeding, remember that back charges are not mandatory (i.e., provided by law). They are, instead, contractual rights. This means they are governed by the terms of a contract (assuming they are included in the contract at all). Many subcontracts include provisions for back charges, but many do not.

    If a contract does not provide for back charges (also known as “a right to set off”), it may not be an intelligent idea to withhold them!

    Keys to Success with Back Charges

    If you’re diligent, back charges can be manageable. Communication and documentation are the two most important considerations. (To be honest, most construction disagreements might be settled by dialogue and documentation – but that’s a topic for another blog post!)


    It is best practice to mention any back-charge notice requirements specifically. Check that the subcontract has adequate notice provisions. If you incur back charges, ensure you are advised of them and given enough time to remedy, repair, or clean up any faults generated by your team’s work.

    The standard subcontract form of the Associated General Contractors (AGC), American Subcontractors Association (ASA), and Associated Schools of Construction (ASC) gives a sensible approach to the issue of construction back charges.

    According to the document, a contractor must provide notice before incurring bank charges. The subcontract then stipulates that another written notice be delivered seven days after the services or materials are rendered. Finally, by the 15th day of the following calendar month, the contractor must provide a formal compilation of the charges.

    Many GCs, however, utilize their contract forms, which can change any or all of the notification requirements. Therefore, even if it is not required by contract, it is excellent practice to maintain communication to reach an acceptable conclusion.


    Proper and precise documentation is essential, whether you are the GC or the sub! When sending notice of substandard work to GCs, add as much detail as feasible. Take progress shots for your records if the reserve decides to take corrective measures. If the sub does not correct the faults, it is critical to preserve separate invoices and timesheets for the back costs to present to the sub/vendor upon completion.

    If the back charges are disputed for any reason, it is critical to provide sufficient evidence that they were directly caused or incurred by that specific sub.

    On the other hand, the subcontractor should document all phases of the work accomplished. When courts examine back charges, they look to see if the incurred expenses are “within the scope of the contract.” This is a rather broad meaning, and it is not necessarily a hard and fast rule (especially when cleaning up or damaging an unrelated aspect of the job site).

    Keeping accurate documents can assist you in contesting any unjustified bank charges.

    Potential for Abuse with Back Charges

    This is the ultimate issue for subcontractors: the possibility of back charges being abused in construction. Because contract provisions primarily govern back orders, there is considerable room for abuse. It’s a little like lien waivers in that most states don’t control them, which presents the potential for harmful lien waiver clauses.

    In any case, abuse can occur when a top-of-chain party arbitrarily allocates predicted project expenditures to subcontractors without regard for their use of a specific service. Worse, the back costs could continue accumulating throughout the project without the sub being notified until completion. This scenario is incredibly distressing. The reserve lost most of its leverage at the end of the project. They have already paid their suppliers and laborers and are expecting a large cheque (as it is the final payment).

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