January  5, 1996

Bulletin # 4: Back-Charges

The Surprise Ending

Acme Sheet Metal is approached by a general contractor to bid on an office building project. The general contractor is a large out-of-town firm, with which Acme has had no previous dealings. In the bidding process, Acme is presented with a lengthy, complicated and unfamiliar subcontract form. The general contractor tells Acme that its terms are non-negotiable. Competition for the job is intense but Acme’s bid price is accepted. Anxious to secure the large project, Acme’s owner signs the subcontract form and returns it to the general contractor.

The project proceeds routinely. There are occasional delays and disputes over progress payments, the scope of the subcontractors work, and coordination. There are many conversations between the general contractor’s job superintendent and Acme’s foreman about the work but little gets written down. After nine months Acme finishes its work and makes its application for final payment and release of the 10 percent retainage.

A week later, Acme is informed by the general contractor that $15,000 in costs are being back-charged to Acme for clean-up, temporary services, and use of general contractor materials and equipment. Only at this point does Acme’s owner look carefully at the subcontract. He finds the following language:

"The contractor may allocate to the subcontractor a charge for clean-up costs and generally available services and materials, as determined by contractor."

Acme has few written records of its actual use of services, materials, or equipment. However, the owner of Acme is certain that the $15,000 charge is outrageously excessive. After a heated argument with the general contractor’s representative, and faced with the damaging subcontract language, the subcontractor agrees to the back-charge in order to get the rest of the funds released. The owner of Acme leaves feeling that he has been ambushed.

The Proper Role of Back-Charges

Back-charges are clearly appropriate in some circumstances. An owner or general contractor must have the right to charge a subcontractor for direct, unanticipated costs that are incurred as a result of the subcontractor’s work. If the subcontractor does not properly clean its work area, the general contractor may do so out of concern for general safety risks and OSHA citations. That work involves a cost to the general contractor. If the subcontractor requires the use of the general contractor’s equipment for materials handling, cutting a wall opening, or installing heavy equipment, it is appropriate that the subcontractor be charged a reasonable amount for such use. However, the subcontractor should be aware that a cost is being incurred and should be able to determine that cost in advance.

The abuse of back-charges occurs when an owner or general contractor either arbitrarily allocates anticipated project costs to the subcontractors without regard to their use of a particular service, or accrues back-charge throughout a project without notifying the subcontractors until completion. When requesting final payment, the subcontractor has almost no leverage. Its work is complete. The final progress payment is likely to be substantial and to include most or all of the retainage. Having already paid its own labor costs and facing the need to pay suppliers, the subcontractor may be in no position to fight over the back-charges. The "surprise ending" is usually an unhappy one.

Minimizing Back-Charges Through the Subcontract

As with many subcontractor issues, the problem or solution concerning back-charges usually begins with the subcontract document. Every subcontract will allow for some imposition of back-charges. However, a reasonable subcontract will require the contractor to give the subcontractor notice that back-charges are being incurred. For example, if there is a clean-up issue the general contractor would be required to notify the subcontractor of the problem at the time, so that it could be addressed directly by the subcontractor without the need for back-charges.

If the use of general contractor equipment or materials is to involve a cost to the subcontractor, the general contractor should be required to disclose that cost before the work is performed. Under all circumstances, the subcontractor should be able to keep track of the accumulation of excess charges as the project progresses.

Under the AGC/ASA/ASC Standard Form Construction Subcontract (1994), back-charges are dealt with very reasonably. In Paragraph 8.4, the contractor waives any right to claim for additional services rendered or materials furnished unless the contractor provides: (i) prior oral or written notice (except in an emergency affecting the safety of persons or property), (ii) written notice of the claim within seven (7) calendar days after the services or materials have been furnished, and (iii) a written compilation of the charges no later than the fifteenth (15th) day of the next calendar month. While not eliminating back-charges, this provision should eliminate the surprise factor.

Minimizing Back Charges Through Project Management

If the subcontract form the subcontractor is being asked to sign does not address back-charges or gives the general contractor broad discretion to impose them, the subcontractor should attempt to negotiate for a reasonable notice provision, preferably using the approach set out in Paragraph 8.4 of the AGC/ASA/ASC subcontract form. Whether or not such negotiations are successful, the subcontractor should keep a record of any clean-up issues that arise with the general contractor and of the use of general contractor or owner materials or services. If there is a dispute about a potential back-charge situation (i.e. whether a problem with clean-up is the fault of the subcontractor or others on the job site), the subcontractor should promptly communicate its position in writing to the general contractor and retain the written notice in its project records.

If the subcontractor is concerned about possible back-charges it can also include, with its progress payment requests, a written request that the general contractor disclose any back-charge charges accrued to date on the project. The need to respond to such a request may "flush out" a general contractor that intends to ambush the subcontractor at the end of the job, and a failure to respond would be valuable evidence for the subcontractor in disputing back-charges that were not disclosed, despite the requests.

Finally, the subcontractor can try to assess the likelihood of problems with back-charges by the track record of the general contractor. If the general contractor has a reputation for "squeezing" its subcontractors through back-charges, it should be assumed that the same problem will likely be encountered on a new project. Knowing this, the subcontractor can try to limit that risk, either in the negotiation of the subcontract terms or in the pricing of the work.


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