In this blog we will explore the scope of permissible back charges that an upper tier contractor can levy against a lower tier contractor pursuant to a subcontract. The basic tenement of contract law is that the non-breaching party is entitled to be put into the position as if the contract had been properly performed by all parties. In other words, the damages are limited to what the parties would have received had the contract been fully and properly performed.

As applied to construction contracts, an upper tier contractor would only be entitled to damages which equal the amount it paid to have the improper work performed by the subcontractor corrected and completed. Aside from those damages, an upper tier contractor may be entitled to incidental or consequential expenses it incurred in remedying the issues caused by the subcontractor.

Breach of contract damages which an upper tier contractor seeks from a lower tier contractor are referred to as back charges. Back charges are damages where the upper tier contractor seeks an off-set against the lower tier subcontractor’s contract if the upper tier contractor has been forced to remediate, complete, or cure deficiencies with the lower tier contractor’s work. Back charges may also include offsets by the upper tier contractor to correct improperly performed work, or monies that the upper tier contractor had to pay in order to have the subcontractor’s work completed. Permissible back charges, however, cannot include charges for work which fall outside of the scope of the original subcontract. While it is improper, it is not uncommon that upper tier contractors will attempt to include back charges for items which fall outside the scope, or other incidental expenses which are not related to the completion of the work by a substitute contractor.

It is important that if an upper tier contractor seeks to back charge a lower tier contractor, that the back charges be carefully delineated and clearly documented and relate only

to the work that was allegedly improperly performed or not completed by the lower tier contractor. This will insure the best possibility that the back charges will be viewed as legitimate. If you are the lower tier contractor you should be certain that the back charges do not involve work which was outside of your scope, and moreover that the upper tier contractor not seeking to pass on additional costs unrelated to your scope of work.