Navigating the intricate financial landscape of construction projects requires a keen understanding of various mechanisms, and among them, the ‘right to set off’ clause, or ‘back charging’ as it’s commonly known, plays a pivotal role.
Deciphering Construction Back Charging
1. Definition: Construction back charging is a strategic process involving the transfer of costs incurred by one party in a construction project back to another responsible party. This method ensures that the party accountable for a specific cost bears its financial implications.
2. Purpose:
- Cost Allocation: Back charging serves as a mechanism to allocate costs directly tied to specific activities or changes to the responsible party.
- Enhanced Accountability: By discouraging actions leading to additional expenses, back charging promotes accountability among project participants.
Construction Back Charging During The DLP
There are some key back charges specific to the warranty period. It is important to note that there are two types of warranties:
- Statutory warranties – including vendor or materials, workmanship issues.
- Implied warranties – Examples include ‘fitness for purpose’ and the like (in NSW (under Section 18B of the Home Building Act).
Where Do Back Charges Occur?
- Scope Adjustments: Back charging comes into play when alterations to the project scope result in additional costs, allowing for a fair distribution of these expenses to the party responsible for the changes.
- Quality Concerns: In cases where defects or quality issues arise due to a particular contractor’s work, back charging helps allocate the costs of rectification to that contractor.
- Costs Related to Delays: Back charging is employed when one party causes delays that lead to increased project costs, ensuring that the responsible party bears the financial repercussions.
Four Best Practices for Effective Construction Back Charging
- Clear Contractual Agreements: Establishing comprehensive contractual agreements that explicitly outline the circumstances under which back charging may occur is crucial to minimising disputes.
- Thorough Documentation: Robust documentation of changes, delays, and associated costs is essential. This meticulous record-keeping provides the necessary evidence in the event of disputes.
- Emphasise Communication: Maintain open communication channels among project stakeholders. Timely communication helps address issues before they escalate, reducing the necessity for back charging.
- Adherence to Legal Standards: Ensure that all back charging activities align with legal requirements and industry standards. Seeking legal advice, when needed, helps avoid potential legal complications.
How DLP Manager Is Important For Back Charging
The back charging function becomes more difficult once the construction project has been handed over and the project enters the Defect Liability Phase. Lack of documentation and information passed around by inexperienced operators subsequently gets lost, costing the builder money – straight off the recently realised profit.
Theoretically for the builder and developer, most of the cost of defects should be offset against the subcontractor’s retentions and in our experience, this is rarely done well unless the cost starts to get too great.
By providing the defect teams with the right training and tools that connect to the right systems this process can be streamlined and efficient. It also mitigates legal risk, as this area of construction can be fraught with legal challenges.
And as defects reported in the 12-month DLP then roll on to a new 12-month DLP, there is even more reason to have documentation in relation to defective work and best practices clearly documented.
At DLP Manager we approach this commercial function with care and adherence to best practices, so that construction back charging becomes a valuable tool for ensuring financial transparency and accountability in construction projects.
By grasping its intricacies and implementing these best practices, project stakeholders can confidently navigate the challenges associated with back charging, contributing to the overall success of construction and profitability of construction projects.
Contact Chris Polin cpolin@dlpmanager.com for more.