Back charges and subcontractor disputes: doing it so it sticks

A back charge is the mechanism a head contractor uses to recover the cost of fixing, completing or replacing a subcontractor’s work. It is not a penalty and it is not a management tool you can reach for whenever a trade annoys you. It is a contractual claim, and like any claim it stands or falls on the words in the subcontract and the evidence you can produce.

The reason back charges so often fail is not that the head contractor was wrong on the merits. It is that the claim was assembled after the fact, when the defective work had been covered, the subbie had demobilised and the only person who saw the problem was a site supervisor who has since moved to another job. By then you are arguing about memory, not about a clause.

This article deals with the recovery of the cost of someone else’s rework. It does not deal with delay damages, liquidated damages or general set-off, which are separate claims with their own rules. It focuses on what the subcontract has to say, what you must collect before the trade leaves, how to give a genuine chance to rectify, and where a back charge crosses the line into a payment dispute you are likely to lose.

What the subcontract has to say before a back charge exists

A back charge has no independent legal life. It exists only because the subcontract says the head contractor can recover costs incurred as a result of the subcontractor’s failure to perform. If the subcontract is silent, you are left trying to argue a breach of contract and quantifying your loss, which is a much longer and more expensive road.

When you are reviewing a subcontract, or negotiating one for a project, look for the clause that lets you recover the cost of making good defective work, completing work the subbie failed to complete, or engaging others to do work within the subcontractor’s scope. The clause should also say how the recovery is made — whether it is set off against money otherwise payable, deducted from retention, or invoiced separately.

The mechanism matters as much as the right. A subcontract that gives you a right of recovery but no clear right of set-off leaves you chasing an invoice rather than deducting from a progress payment. And a clause that requires written notice before any deduction is made is a trap for head contractors who deduct first and document later. The NSW builder CPD courses that deal with contract administration tend to focus on exactly this: reading the payment and set-off clauses before there is a dispute, not after.

Two other provisions in the subcontract shape what you can recover. The first is the defects liability regime — how long the subbie is obliged to return and rectify, and on what notice. The second is the dispute resolution clause, because that is the path the matter will take if the subbie rejects the back charge. If your subcontract has no dispute clause, the fallback is the process set out by the NSW Government for resolving building disputes, which is slower and less within your control.

Why the evidence has to be collected before the trade leaves

The single biggest reason back charges fail is timing. Defective work gets covered, removed, or built over. Once the evidence is gone, you are left with a photograph of a finished wall and an assertion that something behind it was wrong. That is not a claim; that is a conversation.

The obligation to gather evidence sits with the person who saw the problem first — usually the site supervisor. The practical rule is that no defective or incomplete subcontract work should be covered, removed or remediated until it has been recorded in a form that would make sense to a third party who was never on site. That means dated photographs, a written description that ties the defect to a specific scope item or drawing, and any inspection or test result that supports it.

Where a certifier, engineer or other consultant has identified the non-compliance, keep that document. A certifier’s comment or an engineer’s inspection report is far more persuasive than a supervisor’s note, because it comes from someone with no commercial interest in the outcome. If the defect concerns work that will be covered — waterproofing, in-ground services, structural connections — record it before the next trade starts, because the next trade’s work is what will make the claim unprovable.

Site diaries matter more than most builders expect. A contemporaneous diary entry recording when the defect was observed, who was told, and what was said is evidence. A diary written up at the end of the week from memory is much weaker. If your supervisors are not keeping same-day records, that is a training issue, and the guide to how NSW builder CPD works is a reasonable place to start thinking about what your supervisors need to know.

Giving the subcontractor a genuine chance to rectify

Almost every subcontract, and the general law of contract, expects the head contractor to give the subcontractor an opportunity to fix their own work before engaging someone else at their cost. This is not a courtesy. It is a condition of the claim. If you skip it, the subbie will argue that they could have fixed the problem more cheaply, and a court or adjudicator may accept that argument and reduce or dismiss the back charge.

The notice should identify the defect specifically, refer to the subcontract clause that obliges the subbie to rectify, state a reasonable period for them to attend, and make clear that if they do not attend you will engage others and recover the cost. It should be in writing. A phone call is not notice, even if the subbie acknowledges it, because you cannot prove what was said.

What is a reasonable period depends on the nature of the defect and the stage of the project. A defect that stops a follow-on trade from starting may justify a short period. A cosmetic defect at practical completion may justify longer. The point is to be able to show that the period was reasonable in the circumstances, not that it was convenient for you.

If the subbie attends and fixes the work, there is no back charge. If they attend and do a poor job, document that and consider whether the second attempt satisfies the subcontract. If they do not attend, record that fact and any communication they sent. The record of their non-attendance is what converts your right to rectify into a right to recover cost.

Where a back charge becomes a payment dispute

The most common way a back charge goes wrong is not that the subbie disputes the defect. It is that the deduction from a progress payment or retention triggers the payment provisions that apply to construction work in NSW. Those provisions have deadlines, and missing them can mean the deduction is treated as a failure to pay the amount due.

If your subcontract contains a clause allowing set-off, and you follow the notice requirements in that clause, a deduction can be a straightforward contractual step. If the subcontract is silent, or you deduct without notice, the subbie can treat the deduction as non-payment and pursue the amount through the payment dispute process. At that point you are no longer arguing about whether the work was defective; you are arguing about whether you were entitled to withhold the money, which is a narrower and more procedural question.

There is a second trap. A back charge that is raised late — at final account, or after practical completion — is much harder to enforce than one raised promptly. The subbie will argue that the delay prejudiced them, that they could have fixed the work cheaply at the time, and that the cost you are now claiming reflects someone else’s inefficiency. Promptness is not just good practice; it is part of the strength of the claim.

The commercial reality is that a back charge of modest value can cost more to pursue than it is worth, especially if it ends up in adjudication or court. That does not mean you should abandon small claims. It means you should decide early whether the claim is worth the process, and if it is, run the process properly.

What a back charge can and cannot recover

A back charge recovers the reasonable cost of making good the subcontractor’s defective or incomplete work. That usually includes the cost of the replacement trade, the cost of removing and reinstating the defective work, and any materials that have to be replaced as a consequence. It may include the cost of supervision and site management attributable to the rework, if the subcontract allows it and you can quantify it.

What it cannot do is punish the subbie. A back charge is not a penalty, and a deduction that exceeds the actual loss is vulnerable to challenge. If you add a margin for head office overhead without a contractual basis, or if you apply a round figure because it feels about right, you weaken the claim. The replacement trade’s quote should match the original subcontract scope as closely as possible, and any additional cost should be explained.

Delay costs are a separate claim. If the rework pushed your programme and you want to recover the consequential cost, that depends on whether the subcontract allows it and whether you can prove the delay. Do not bundle unproven delay costs into a back charge and hope they go through. They give the subbie a reason to fight the whole claim.

Worked example: a bathroom rework in western Sydney

A builder in western Sydney is completing a multi-unit residential project. The waterproofing subcontractor has finished the wet areas in one block and demobilised. During tiling preparation, the tiler reports that the floor waste in several bathrooms is set too high, so the fall to the waste does not comply with the waterproofing membrane manufacturer’s requirements. The builder’s supervisor photographs the affected areas, records the locations in the site diary, and emails the waterproofing subcontractor the same day.

The subcontract contains a defects clause requiring the subbie to rectify defective work within a reasonable period after written notice, and a set-off clause allowing the head contractor to deduct the cost of rectification from money otherwise payable. The builder gives the subbie a written notice identifying the affected units and offering a period to return and fix the work. The subbie responds that the tiler caused the problem by walking on the membrane, and declines to attend.

The builder records the refusal, obtains a quote from a second waterproofing contractor to remove and redo the affected areas, and compares it against the original subcontract rate. The quote is higher because the work is now in a partially tiled bathroom, which requires removal and reinstatement. The builder raises a back charge for the difference, attaches the photographs, the notice, the subbie’s response and the replacement quote, and deducts the amount from the next progress payment, referring to the set-off clause in the covering correspondence.

The subbie disputes the deduction. Because the builder followed the contractual process — written notice, opportunity to rectify, documented refusal, evidence of cost — the deduction is defensible. Had the builder deducted first and notified later, or engaged the second waterproofing contractor without giving the first a chance to attend, the same deduction would have been vulnerable regardless of how genuine the defect was.

Practical steps before you raise a back charge

The difference between a back charge that sticks and one that does not is usually a small number of procedural steps taken early. Before you engage a replacement trade, confirm the following.

• Check the subcontract. Identify the clause that obliges the subbie to rectify, the clause that allows recovery of cost, and the clause that allows set-off. If any of the three is missing, take advice before you proceed.
• Give written notice. Identify the defect, the location, the contractual basis and a reasonable period to rectify. Keep a copy and a record of how it was sent.
• Record the response. If the subbie refuses, delays or fails to attend, document it. If they attend and the work is still defective, document that too.
• Price the rework against the original scope. Use a scope and quote that mirrors the subcontract work, and explain any additional cost caused by the timing or the state of the site.
• Raise the back charge in writing. Attach the evidence, state the amount, and state the contractual basis for the deduction. Do not rely on a conversation or a site instruction.
• Apply the deduction correctly. Follow the notice and timing requirements in the subcontract. If the subcontract requires notice before deduction, give it before you deduct.

None of this is complicated, but all of it has to happen while the people and the evidence are still available. The most expensive back charges are the ones where the builder was right on the facts but could not prove them, and the subbie knew it.

If your business runs subcontracts regularly, the discipline of collecting evidence and giving notice is worth building into your site systems rather than relying on individual supervisors to remember. The PointCPD course catalogue includes contract administration material that covers the notice and set-off provisions you need to know before a dispute starts. Getting the process right on the first job usually pays for the training many times over.

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Published 13 July 2026. General information for builders, not legal, financial or engineering advice for a specific job. Check current requirements with the relevant regulator or standard before relying on them.