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Winning the End-of-Project Backcharge Game

I represent a lot of subcontractors working on commercial construction projects, and more and more I have been seeing an end-of-project game where general contractors (especially the larger ones) try to solve project problems by pushing costs down onto subcontractors that have nothing to do with the problem.

In my experience, these problems typically arise from one of three areas.  First, the general contractor may have issues with the project’s owner (such as delays, owner-general contractor backcharges, or liquidated damages).  All too often, a general contractor might take whatever costs come from its dispute with the owner and split them amongst all project subcontractors regardless of whether a particular subcontractor had anything to do with the problem.  That is patently unjust.

Second, the general contractor may have serious issues with another project subcontractor and, even though that single subcontractor is at fault, the general contractor shares the costs of that subcontractor’s failure with other subcontractors on the project.  A classic example is where one subcontractor is late in finishing its project work, the general contractor forces all succeeding subcontractors to greatly accelerate their own project work without any additional compensation.

Third, (and I will admit that this is grounded on my own gut feeling, though I feel in my bones that it is true – I am just waiting for the case where I can prove it!) some general contractors take a look at the end of a project and, if their profit percentage isn’t what they expected, they make up that profit by pushing spurious backcharges down on subcontract, essentially lowering their costs and raising profits by simply refusing to pay subcontractors.

Mechanically, these problems hit subcontractors in a couple of ways.  On the one hand, a general contractor might simply issue a backcharge, for example, making a subcontractor responsible for liquidated damages assessed by the owner.  This is the more formal method and easier to spot.

On the other hand, the general contractor may hide the ball a bit and, instead of issuing a backcharge, instead order a subcontractor to perform additional end-of-project work (at additional cost to that subcontractor) in order to resolve an unresolved project problem.  A recent example of this in my own practice was where a drywall subcontractor finished installation of drywall on one floor of a project (sealing in almost all of the wiring on that floor).  Then an electrical inspector informed the general contractor that that entire floor’s wiring needed to be redone.  The general contractor obviously (and rightly) demanded that the electrical subcontractor fix its error, but also (unjustly) required the drywall subcontractor to repair or replace every area that the electrical subcontractor damages in its own repairs without paying the drywall subcontractor a single dime for that additional, unplanned work.

Not all general contractors engage in this unacceptable behavior, and those that do don’t necessarily do it all of the time.  But is DOES happen, and it IS a real problem.

So how do you avoid losing project profits to unfair and spurious end-of-project backcharges or cost-“sharing?”  It’s a combination of preparation, tenacity, and a willingness to push for what you are rightfully due.

First, the bad news – if you want to get full payment in a scenario like this, you need to be prepared to wait for payment.  Once you reach the end of a project and a general contractor plays this game, it can take months (or the length of a lawsuit) to get paid.  But persist!

Second, be vigilant about submitting claims for payment on all additional work you performed at the end of the project (or any time, really), and carving out those claims from all lien releases.  This includes claims for impacts (unexpected effects on the efficiency of your project work) and delays (failure of the general contractor to support your timely prosecution of project work).  That way, you will have protected your rights to compensation for what comes next.  For more information on this, ask for a copy of my book (details at the end of this article).

Third, demand what you are due.  If a backcharge comes in, refuse to sign it until the general contractor has provided clear reasoning (with documentary support) regarding why that backcharge is your responsibility.  And if negotiations with the general contractor do not result in payment, be certain to secure your payment bond and mechanics’ lien rights.  Successful payment claims require leverage over the general contractor, and the pressure brought by bond and lien claims is some of the best leverage out there.

At the end of the day, commercial construction projects can be a rough-and-tumble world, and the prepared and determined subcontractor is the one, in my experience, that gets paid in the end.

Jeremy C. B. Wyatt

Author Jeremy C. B. Wyatt

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