Recently, I have had several cases where my clients were being assessed large back charges on commercial projects. Only to find out, after a little digging, the evidence relating to the back charge claims was bogus.
What is a Back Charge in Construction?
A back charge involves withholding or deducting money from a contractor or subcontractor’s payment for unexpected costs incurred due to their work on a construction project. Often leading to disputes, delays, and issues, it serves as a means for contractors to offset or counter-claim against subcontractor-related expenses.
The Shower Door Incident
I had one client in particular who was hired by a well-known general contractor to provide shower doors for a large multi-family project. My client was hired to deliver the shower doors and another subcontractor was hired to install them.
Halfway through the installation, my client gets a call from the general contractor claiming there were defects with the shower doors. My client went out to investigate the claims and discovered the general contractor had hired the drywall subcontractor to install the shower doors. This subcontractor had no experience installing this type of shower door and did not read the installation instructions provided by my client, so the shower doors did not work properly.
My client gave the drywall subcontractor a set of instructions to fix the improperly installed shower doors and showed him how to install the remainder of the shower doors correctly. After the drywall subcontractor fixed the issue and completed installing the remaining shower doors, my client received a back charge of $300,000.
Investigating the Back Charges in Construction
He was being back charged for the overtime and other expenses the drywall subcontractor incurred to correct the problem and complete the project on time! My client was in shock and hired me to help resolve the issue.
Before we got to who was at fault for all the extra expenses, I wanted to ensure the general contractor paid the drywall subcontract the extra $300,000.
A basic rule in contracts is that before you can recover damages from someone, you must have actually incurred those expenses. Meaning, if the general contractor did not actually pay the drywall subcontractor, they could not back charge my client. I began asking for the drywall subcontractor’s contract, pay applications and proof of payment to the drywall subcontractor. Because I had to be sure the $300,000 the general contractor claimed to have paid the drywall subcontractor as extra was not actually part of his original contract amount.
The only document they sent me was a lien waiver signed by the drywall subcontractor for $284,000.
Resolution and Final Outcome
I explained to the general contractor, again, the information they provided did not confirm whether that payment was part of his original contract amount. Once again, I requested they provide the drywall contract, pay applications and proof of payment. I let the general contractor know if they did not provide the requested information, I would have to move forward with filing a lien for the $300,000 my client was still owed.
I filed a lien on the project, and eventually was provided with the drywall contract and the pay applications, however, they still would not provide proof of payment to the drywall subcontractor. Finally, I was left with no choice but to threaten to file a lawsuit to enforce my client’s lien unless they provided me with proof of payment to the drywall subcontractor.
Wouldn’t you know…the next thing I hear, the general contractor reached out to my client saying it looks like we owe you $300,000. Meaning they had never actually paid the drywall subcontractor the extra $300,000. What bull shit! Trying to cheat my client by deducting something that was never actually paid.
I am not saying there are no valid construction back charges, but make sure you do a thorough investigation before you simply agree to the amount of a back charge. Ask for proof of payment and anything else you might need to prove that a back charge is legitimate.
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