Watch Your Back (Charges)!
by David Mendes

Subcontractors: Can you imagine receiving a proposed subcontract agreement that stated your firm must "proceed with sufficient labor and equipment continuously to completion, and in default thereof ... permit the Contractor immediately upon notice and demand to take possession of the work forthwith and complete same at Subcontractor's cost or expense"? Under these terms, your company would have no opportunity to respond to any default claimed by the customer before it claimed substantial backcharges. This is one of those cases where reality is stranger than fiction - the language is from a real subcontract proposed to a real subcontractor. It should serve as a warning: Don't just watch your back, watch your back charges!

A white paper from the American Subcontractors Association (ASA), titled "Backcharges," explains that construction subcontract documents typically scatter terms allowing for backcharges throughout the document, so that even if your company successfully deletes one unfair term, others still lurk in the final agreement. Each holds the potential to wipe out anticipated profits, or even to turn a project into a loss.

According to ASA's white paper, one way subcontractors can handle the risk presented by inflated or frivolous backcharges is to obtain subcontract terms addressing all the other proposed subcontract terms relating to backcharges in a single paragraph. For example, a subcontractor's bid could specify use of the ASA Addendum to Subcontract (2005) as an attachment to its customer's proprietary subcontract form. It provides:

"Backcharge Claims. No backcharge or claim of Customer for services shall be valid except by an agreement in writing by Subcontractor before the work is executed, except in the case of Subcontractor's failure to meet any requirement of the subcontract. In such event, Customer shall notify Subcontractor of such default, in writing, and allow Subcontractor reasonable time to correct any deficiency before incurring any costs chargeable to Subcontractor. No backcharge shall be valid unless billing is rendered no later than the 15th day of the month following the charge being incurred. Furthermore, any payments withheld under a claim of Subcontractor default shall be reasonably calculated to cover the anticipated liability and all remaining payment amounts not in dispute shall be promptly paid."

Alternatively, the ASA Subcontractor Bid Proposal (2005) specifies the American Institute of Architects (AIA) A401-1997 subcontract form as the governing agreement. This subcontract form provides that the subcontractor is entitled to three days' written notice of any default, and then allows the customer to take over the subcontractor's work, and backcharge, only after giving the subcontractor a second, three-day notice.

Learn more about backcharges. Visit ASA's Web site at www.asaonline.com and click on "Stand Up! for Subcontractors," or call ASA at (703) 684-3450.Contact: David Mendes
(703) 684-3450, Ext. 1335
dmendes@asa-hq.com