Back charges are commonplace on commercial construction projects. Whether you are a general contractor or subcontractor assessing back charges against a lower tier contractor or a lower tier subcontractor arguing against back charges that have been assessed against you, the information in this article will provide insight into best practices for proper back charges to help you in your business.
Below are four tips to consider if you are dealing with back charges on a commercial construction project. The list is by no means exhaustive, but it provides some fundamental advice that can help protect your bottom line.
Deal with back charges up front
One of the most important things that a contractor can do when it comes to substantiating its back charge against a lower tier subcontractor is to deal with the issue of back charges up front in the subcontract. At the outset, the subcontractor agreement can outline the mechanism for how back charges are to be assessed, what rights the lower tier contractor has to repair or correct the work prior to the general or higher tier subcontractor performing such work itself and assessing the back charge, as well as create a general understanding of what will be assessed as a back charge and the rates that will be charged to the lower tier subcontractor (e.g., the subcontract can provide that costs for labor and equipment will be back charged at the same rates being charged to the owner on the Project under the prime contract). If these issues are not dealt with up front in the subcontract, more likely than not all of these items will be disputed if the parties cannot agree on an amount for a particular back charge. The contract can provide a road map for how back charges are to be assessed that can eliminate ambiguity and uncertainty when the parties are working to resolve a back charge on a commercial construction project. Spend the time up front to make the procedure clear and you will benefit ten fold from the saved time on the back end.
Document, Document, Document!!
Not to be overshadowed by our first tip, proper documentation of back charges is extremely important and is arguably the most important tip for properly assessing back charges. Lack of documentation does one thing—it reduces the reliability and trustworthiness of your back charge (or your arguments in opposition to a back charge if you are the lower tier subcontractor). Both sides of the relationship should be keeping detailed records so that they can properly address each other’s concerns when dealing with a potential back charge. The general contractor should be keeping invoices for third-party vendors related to the back charge, daily reports specifically related to any remedial or corrective work, daily time sheets for labor and equipment used in conducting the repair work, and all communications with the lower tier contractor regarding the disputed work. The lower tier contractor should be keeping copies of communications, daily reports, and other project documentation related to the work that is being repaired by the higher tier contractor.
However, the lower tier contractor’s documentation efforts should have been going on during the course of performing the work. For example, if problems with the work were caused by adverse site conditions, the lower tier contractor should have documentation in the form of daily reports and communications with the general contractor detailing the adverse site conditions on the project and explaining why it is affecting the work. If the lower tier contractor remains silent as to issues on the project that may have caused problems with their work (e.g., adverse weather conditions, unanticipated site conditions, etc.), it is going to be incredibly difficult to challenge the merits of a back charge if the general is required to come in and repair the work. Indeed, the subcontractor may even be barred from raising such a claim if the subcontract has a claims provision requiring notice within a certain number of days. So, it is important for all sides to understand the terms of the subcontract and how they relate to back charges and claims by subcontractors on the project.
Be mindful of Ohio’s Prompt Pay Act
Ohio’s Prompt Pay Act is codified in Section 4113.61 of the Ohio Revised Code and requires a general contractor or subcontractor to pay a lower tier subcontractor within 10 days of receiving payment from the higher tier contractor or owner for the lower tier subcontractor’s work provided that the lower tier contractor has met its obligations in that section. The Prompt Pay Act permits a general contractor or higher tier subcontractor to “withhold amounts that may be necessary to resolve disputed liens or claims involving the work or labor performed or material furnished by the subcontractor.” However, the general contractor must be cautious not to withhold more than the disputed amount because it could be considered a violation of the Prompt Pay Act, which carries stiff penalties—18% interest and attorneys fees to the subcontractor who has not been paid.
The best course of action would be to submit a letter or email to the subcontractor outlining the reasons for the back charge and itemizing the amounts being back charged. Then, if the subcontractor is owed amounts above the amount of the back charge, remit payment to the subcontractor for the balance before the expiration of the ten days under the Prompt Pay Act. This way, if the dispute between the general contractor and the subcontractor goes into litigation or arbitration, the general contractor can likely avoid penalties under the Prompt Pay Act by providing its basis for withholding the amount of the back charge and asserting that it had a good faith dispute with the subcontractor as to the amount withheld.
Communicate with the other side and seek amicable resolution
The quickest way to have a dispute turn into costly litigation is to stop communicating. When that happens, the side that feels aggrieved likely sees no other option but to file a lawsuit and, after that, the dispute will cost everyone involved much more than if they continued to communicate and seek an amicable resolution. This does not mean that you are without legal counsel. Our experienced construction lawyers regularly work with clients during the course of construction to resolve disputes before they wind up in litigation and/or arbitration. In fact, getting the lawyers involved sooner rather than later can wind up saving you money in the long run. Indeed, litigation is costly and can quickly make either or both sides dig into their position and make resolution nearly impossible absent a protracted dispute. By engaging experienced legal counsel early, the dispute can work toward resolution prior to the filing of a lawsuit and the expense of litigation can be avoided.
If you are having a dispute on your commercial construction project and want practical advice aimed at getting a project on the right track and minimizing disruption, contact one of our experienced construction lawyers below.