As part of the American Jobs Plan, President Biden unveiled his plan to preserve and retrofit more than 2 million homes and commercial buildings. The economy will likely receive a big boost in jobs in the construction industry and in the real estate industry. As the construction industry prepares to gear up for the windfall of new projects, general contractors, subcontractors, and vendors alike need to be prepared for the road ahead.
With the future in mind, industry professionals should stay abreast of a common charge in the construction industry: construction back charges.
Construction back charges
In general, back charges in construction are typically incurred by subcontractors for unexpected costs related to work on a construction project. Such charges can be incurred for:
- Defective work
- Failure to perform work
- Untimely delivery
- Scheduling problems
- Damage to the project site
- Cleanup cost, etc.
If any of the above happens, the general contractor has to hold someone monetarily accountable, and the buck typically falls on the subcontractor. To think in contract terms and the theory of remedy, the general contractor uses the back charges to make him/herself whole again. These charges are equivalent to damages that are awarded in breach of contract tort claims.
How to include the provision in a contract
Unlike other contract law theories, the law does not contain any uniformed guidance for construction back charges. While there is no uniformed law, there is some case law that industry professionals can look to for guidance if they are ever faced with a back charge, such as Great Western Drywall v. Roel Construction. The decision in this case offers contractors guidance on the type of back charges that are permissible.
What type of back charges are permitted?
While the general contractor can generally deduct the back charges from fees paid to the subcontractor, the amount deducted must be permissible. In general, the back charges cannot be greater than the amount that was included in the original contract between the parties. For this reason, it's crucial to carefully draft the contract.
If for any reason the back charges are for an amount greater than what is included in the contract, the general contractor needs to prepare adequate documentation to justify the charges.
If you are an industry professional and in the midst of drafting a contract, your best bet is to contact an attorney who practices in the field. Taking this step helps ensure that the subcontractor/vendor has received proper notice of the possibility of being exposed to back charges.
In addition to including the contract provision, proper documentation is also a must. Some types of documentation that you may want to consider:
- Photos of the defect
- Notice to the subcontractor/vendor
- Project diaries/log
- Financial statements
The Millionacres bottom line
Back charges in the construction industry may be a necessary evil of project completion. While this may be the case, a best practice is to make sure subcontractors and vendors have proper notice -- and always document everything.