This is the fourth post in a series regarding Construction Contract Notice and Recognition.
This post addresses backcharges. The subject does not have a broad applicability; but is very troublesome to subcontractors and vendors. This discussion is focused on notice.
Simply, backcharges (or backcharge) is a term of art or a term of the trade to describe an assessment of money from one contract party to another. Typically, this is done by a prime or general contractor to a subcontractor, supplier, vendor or other subordinate party. Unfortunately, this is often done unilaterally and without explicit contractual coverage. Further, the timing of these backcharges is not favorable to the recipient and can lead to pressure to engage in deal making or compromises in order to receive final payment.
A similar issue can arise with cross charges. I use this term of the trade which describes backcharges from two parties that are not in direct contractual relationship. However, the actions of one party may influence the other party. An example would be a civil subcontractor that places defective work which causes an impact on a follow-on trade such as structural steel subcontractor. Both are stakeholders in the erection work; but may not be related through a direct contract.
In addressing this subject, I wish to advise all that I was president of a modest size ($35 million USD annual revenues) engineering, procurement, construction, commission and startup contractor for five years. As a mechanical and/or electrical controls subcontractor, we often faced the unpleasant reality of backcharging, both to us as well as our subcontractors, suppliers and vendors.
The issue has been introduced in a LinkedIn Discussion Comment as follows:
Patrick Ouellet • [snip] on denying compensation for lack of notice, I would like your opinion on general contractor or owner backcharges to subs. Often, there is no notice and the backcharges “surface” at the end of the project, and written in a deductive change order – no notice, no chance to deny charges. [Contract Risk Management Group – Construction Industry].
The above comment was directed to a discussion group participant, Greg Vialpando. Greg comments as follows:
Greg Vialpando • Patrick, The simple answer is to put Notice provisions on backcharges when the contract is negotiated and if I were a subcontractor, I would stand firm and counter, that I have specific notice of change provisions, you should have the same. However, unless it is specifically requested, I would not add that clause as it provides me with less restriction and less chance for error in the administration of my subcontracts. There is the disputes clause for fighting against unjust backcharges. Subcontractors are often too compliant in the negotiation stage and give up or overlook disadvantageous clauses as they want the work, want to keep a good relationship with a client or just don’t understand or read the full contract. Now, I have ignored the unscrupulous contractors who routinely underbid work with the intent utilizing scope creep whether real or not to recoup $ and pad profits. Those types tend to under-document or fabricate entitlement which can be uncovered easily with vigilant contract administration.
As we have posted before in this series, timely notice is totally appropriate. Restating the background, giving notice requires recognition of the event or occurrence of the underlying event. By this, I mean that notice follows an event. In an earlier post, I cited both Bramble and Pickavance [link] regarding the purpose of providing notice. A clear statement is presented by Bramble “Notice will allow the owner [in this case, perhaps the prime contractor, subcontractor, vendor, and others – insert added by M&M] an opportunity to remedy the problem, mitigate the damages, or plan for the consequences.”
Consequently, the project team must address means and methods that will identify the events that can reasonably be expected to give rise to backcharges and/or cross charges. These means and methods should be clear in subcontract and purchase documents. Notice with reasonable allowance for time and options to cure the issue prior to liability for a backcharge of crosscharge.
In implementation, these issues must be addressed in a timely manner and resolved quickly as well as fairly. Use of the change provisions within the contract is best.
As a project/construction/contracts/business manager and similar, it is important that you define your project execution approach as it relates to notice and recognition (actually, recognition and notice) of backcharges and cross charges. Keep in mind that these considerations relate to many stakeholder interfaces (owner/developer/employer to prime contractor; prime contractor to subcontractor; prime contractor to vendors and suppliers). Since issues of this nature can lead to a very negative impact on the overall job morale, they are important beyond the actual monetary value.
Good luck and let us all attempt to approach the issue of backcharges with a mindset of equity and integrity. I suggest a policy based on a fair but firm approach.
It is important to note that McLaughlin and McLaughlin [M&M] is not a law firm and is not intending to provide legal advice. M&M is a consulting firm providing (among other services) non-legal expertise in dispute resolution and litigation support. For further information on M&M services, please see www.McLaughlinandMcLaughlin.com.