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In accounting, a back charge is a bill created to collect an expense incurred in a previous billing period. In construction, a back charge works a little differently.
It is billing for work not performed (or costs incurred) that, in accordance with an agreement, should have been performed or incurred by one of the two parties. Subcontractors bill general contractors, but if the work is not performed satisfactorily, the general contractors reduce the amount they pay by a back charge. Examples of back charges include the costs of cleanup or to repair something damaged by the subcontractor, such as a broken window. In home building, the real purpose of back charge is to keep your job moving forward and holding people accountable for their misdeeds. In my experience back charges are underutilized. A lot of builders don’t like to use them, but they should.
Let me tell you a little story.
One of my clients, who I will call “Darrell” to protect the innocent was a Mississippi State graduate. Darrell was a real risk taker and a very savvy businessman. You would never know it if you met him though. He was a soft-spoken guy, who had a round and generally nondescript face cut by a rakish chevron mustache. Out of college, Darrell had started and sold a camouflage goods hunting manufacturer. With the proceeds he rolled into home building in the early 2000’s faster than a hot knife through butter. Before long he had put together a pretty big regional home building company, but he still had some things to learn about the business. Conventional and unconventional at the same time Darrell could be ruthless when focused on his goals.
His office was like a small natural history museum of mounted fish he had hooked and mounted game he had shot. Keeping the trophy heads company, he had also hung a number of plaques from conservation groups recognizing his contributions. He even had one from the Sierra Club.
One day he called me into his office where I sat staring at a glassy-eyed Moose.
“I could pull my hair out!” Darrell exclaimed in frustration. “We have a home. It is all set to close. The buyers are very particular – a doctor and lawyer wife team. We have been busier than a Waffle House fly trying to make the house great, and then this happens. The plumber dropped a hammer on the counter top and chipped it.”
“NOT good.” I said. “All the trades know when you are in the final push, you need to take your shoes off, pad up your work area and be extra careful.”
“The thing is these counter tops are super awesome,” he said. “And it happened right in the dag nab middle of the counter. I think we are going to need to replace it and those things cost about $7,500 apiece. If it delays the closing, then it is going to cost me even more. I am so frustrated I feel like going out and shooting something.”
“Well don’t shoot the plumber,” I joked. “We all make mistakes, and he wouldn’t look good mounted over there on the wall.”
“Very funny,” said Darrel. “You got any bright ideas?”
“As a matter of fact, I do. Creative and thoughtful use of an old management tool you busi need to understand back charges better Darrell,” I said. “They can remedy a problem when a trade does not perform well. A lot of builders don’t like them because they think they cause resentment and bad feelings, but in my experience if used properly they can avoid law suits. They should always be written into the master agreement and are standard in most building contracts. Even when they are not in the contract they are covered by statute, and accepted by custom, so you can almost always use them.”
“Without giving me more contract law, how would you use them in this particular case?” Darrell asked.
“The first thing you can do is to not delay the closing,” I said. “Promise the good couple that you will make everything right after the paperwork is done. Second you can charge back the expense of the counter to the plumbing subcontractor by taking it out of what you owe them. The plumber is a good guy, isn’t he?”
“Yea, he is a hard worker, even if he is a mite clumsy,” Darrell said.
“And he fessed up right?” I said. “Did not deny it or blame someone else.”
“I will give him that,” Darrell replied.
“In that case I would cut him some slack,” I said. “Mistakes happen. In situations like this the industry tries to work out some solution. The counter top guys may give you a new one at cost, especially if they can cut out the chip and use the damaged counter somewhere else. You could also work out a payment plan. You could say to the plumbing subcontractor, say listen, over the next ten houses or so we will just take out $750 dollars a home until the cost is covered.”
“That might work indeed,” Darrel said. “Thanks Noelle!”
In the end, after a few phone calls Darrel was able to have the closing on schedule and to work out getting the homeowner a new counter top without having to sacrifice much profit. The point is that you can do back charges in a way to recoup your losses and still work together with the trades. You don't have to get into a fighting match where you may lose both the battle and the war and not be compensated for the costs that are truly are out of your pocket and lose the trade.
The moral of all this is used correctly back charges can solve more problems than they create. They are part on continuous improvement, reminders of the best behavior to get things done effectively. That is my story, and I am sticking to it.
Home builders and developers are the backbone of this country. They work hard, take risks, and create more wealth for society than any other sector of the economy. If you are a home builder and concerned about your results - you can do better! If you want to find out more, call me at 303.525.4944 or email me at noellet@buildertools.com and LinkedIn is a great place to find out more about my credentials, background, and references.
My first three questions when you call are usually:
1) How many units do you sell per year?
2) What is your average sale price range?
3) What is your projected net income for the current year?
https://www.linkedin.com/in/noelle-tarabulski/
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