Back charges arise from a tension in the delivery of the works. It involves non-performance of the Subcontractor often impacting the Main Contractor’s ability to deliver its commitments under the Main Contract. As a result of the Subcontractors actions, the Main Contractor steps in and takes special measures to deliver the disrupted works and sets off the cost of such measures against the amount owed under the Subcontract Final Account. Notably, back charges can also arise due to poor quality or defective completed work. Issues common to such scenarios include:
- Usually, back charges arise from an asserted non-performance of the Subcontractor not performing its duties under the Subcontract with disagreements arising from poor quality delivery, under resourcing or slow progress causing the Main Contractor to step in and take over certain aspects of the Subcontract scope.
- Correspondence is exchanged in relation to back charges and the parties to the Subcontract may agree or disagree a list of back charges in terms of responsibility, scope, and the method of valuing such back charges arising from the Subcontractors non-performance.
- The valuation of the back charge is often asserted on an indemnity basis, with the Main Contractor seeking additional costs for the works they assumed. Tension can arise as Subcontractors tend to challenge the reasonableness of the presented back charge valuation.
In our experience, the key underlying issue arising from Subcontractor non-performance is that the Main Contractor incurs costs for addressing this issue while still delivering the overall project.
The Subcontractor may have cash flow issues and consequential funding issues, which lead to under resourcing and therefore slow progress of the works. This then impinges upon the Main Contractor’s performance under the Main Contract, with disproportionate financial exposure or impact upon the Main Contractor.
Non-performance under the Subcontract may amount to corresponding critical delays under the Main Contract, such that the Main Contractor may be liable for liquidated damages thereunder. Where resources are diverted to manage the originally subcontracted scope, the Main Contract is also likely to incur additional management and running costs to meet its obligations under the Main Contract.
When the Main Contractor compiles a back charge account, the contract administration usually takes the form of a set off or deduction. Where the Subcontractor has a negative valuation against a previously certified amount, this is likely to result in adversarial discourse. The Subcontract may specifically provide for attendance and OH&P mark-ups, or the Main Contractor may provide its build up to such charges. From the Main Contractors perspective, the back charges will be regarded as a cost requiring a contribution to its management and handling of those works together with overhead and profit mark-up.
A Subcontractor may consider the additional costs relative to the original tendered amount or tendered rates to assert a sensible benchmark for the Main Contractors back charge.
It would a legal matter whether the back charges are a contractual right under the Subcontract or to be claimed as damages. This determination is crucial, as it can impinge upon the Main Contractor’s right to claim for a mark-up on the back charges incurred.
In terms of a valuation, there may be a question of the valuation being limited to an abatement, to reduce the value of the works according to the original breakdown of the Subcontract Price. Claims for indemnity or set off are dependent on the production of demonstrable records of costs (linked to the back charge correspondence) and the ambit of the back charge itself.
The topic of back charge will also need to consider any overlap between the Main Contractor claiming additional supervision and management as part of any daywork records or allocated charges under the Main Contract.
A third-party determination may be necessary to diffuse tension. Such intervention may be helpful in resolving the back charge account and can be helpful to narrow figures.