Jacob Austin 00:00:00 Hi all, it's Jacob Austin here from QS.Zone. And welcome to episode 76 of The Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow, and grow their business. So for today's episode, I'm actually going back to a topic that proved really popular last time I covered it, which was contra charges, and now just me saying the words contra charges. You're probably feeling that twinge of panic as if the main contractor has sent you a notice or you've noticed a mysterious deduction on your payment certificate. But the thing is, contra charges don't have to be cryptic or some oppressive form of punishment. In many cases, they're simply the right contractual mechanism for rectifying actual damages or setting the scales straight if a breach is taking place. So in this episode, I'll be sharing some in-depth insights, drawing on real world experiences so that you'll know not only what conch charges are, but how to spot them? How to challenge them appropriately. And even when it's appropriate to negotiate alternative resolutions. So stay tuned for the details.
Jacob Austin 00:01:11 And if you're new to the show, please subscribe for more user friendly advice on all things subcontracting. Now let's get started. The phrase country charge might give you a visceral reaction, like your blood pressure rising a few notches. And why is that? In many cases, it's not the concept of paying for a genuine mistake that rankles. Rather, it's the suspicion that main contractors sometimes use contre charges indiscriminately, or as a sneaky tactic to chip away at your payment. And sadly, that suspicion doesn't come out of nowhere. Everyone in the industry has heard horror stories about questionable or inflated deductions. But to give main contractors their dues? Most of them are not sat there combing line by line, trying to dig out items just so that they can pass the costs on to you. Many main contractors are actually working on really tight margins themselves, and you only have to look at industry results to see that often main contracting is yielding a margin of somewhere between 1 and 2%. That's not exactly impressive. And it's for this reason that you likely see as many cost deductions, abatement set off or contra charges as you do, because what they're doing is passing on actual cost that they've incurred because of somebody else's, either negligence or breach of contract.
Jacob Austin 00:02:55 And simply put, if they don't do that, they're losing money. And regardless of personal feelings, it's helpful to remember that nobody. Nobody loves dealing with counter charges. Nobody sat there salivating for an excuse to impose a claim. If there's a charge, the chances are they've had to arrange for corrective works, or they've incurred some costs due to a problem that you have caused, or that's traced back to an activity that one of your team has carried out. Now let's just touch on the terminology. While the phrase contra charge is ubiquitous on construction sites. It typically doesn't appear in any standard form of contract. The JCT forms, for example, literally don't say the word contra charge. Often the concept is encompassed under the broader idea of set off, where an employer or main contractor adjusts sums due to a subcontractor. By the amount of money it would take to rectify a subcontractors breach, and where a contractor has had to make good some damage. Say that you've caused. Then what they're doing is passing you back the cost that they've incurred because of the issue.
Jacob Austin 00:04:08 So you can think of it as we've had to fix your mistake or pay someone else to fix it. So now we're charging that cost back to you. You've then got a similar but different adjustment called abatement. And this is a slightly different animal. It's when the main contractor adjusts the amount payable because the work wasn't completed to the agreed standard, or perhaps in the case that it wasn't completed at all. For instance, if you were supposed to deliver a high spec kitchen worktop as part of your subcontract package, but instead you provided something off the shelf that you could source from Down Peak, the main contractor might reduce the price to reflect the lesser value of the work. Think of it as like taking a discount for subpar performance rather than a direct claim for damage. So in short, the three things are contra charged, which is a cost for rectifying your breach or default set off, which is withholding money otherwise due. Based on a claim that's held against you, and then abatement, which is downward adjustment due to non-compliance or incomplete work.
Jacob Austin 00:05:18 Common reasons for country charges. So the most frequent culprit is that property or work gets damaged. Maybe your forklift truck scuffs some brand new brickwork, or your painter splashes the wrong color paint on a brand new carpet. The main contractor then has to arrange for a third party to fix it. And that fix costs real money. So labor plant materials. In some situations, the scaffolding. There might be downtime whilst the repair is carried out. And whatever that cost is that's incurred to set the damage right should logically be passed back to the person that has caused the damage. You also get conscious charges for breaches of contractual obligations. Say you're responsible for delivering an area of a building as watertight by a particular date, but your section is incomplete. And then, lo and behold, Hurricane Boris has turned up and rainwater floods in, causing damage to all manner of internal finishes and some other trades materials that were sat in a storage area that there is a breach of contract. You fail to meet your programme obligations and if the main contractor foots the bill for that repair, you can expect there to be a contrary charge for the rectification works.
Jacob Austin 00:06:40 Then you've got delays and liquidated damages. Delays are arguably the biggest cost multiplier. If your scope sits on the project's critical path and you cause a multi-week delay, the contractor might incur additional overheads for them to be on site, and they might also incur client imposed liquidated damages. They will likely try to pass those costs on to you via a set off or country charge, provided that they can prove the link between your default and the delay and cost incurred. And that leads me on to the next section. So as I mentioned before, there isn't really a contractual mechanism written into any of the standard forms of contract. And so what happens when there is a country charge is we're defaulting to what's known as common law entitlement. And in common law, if somebody has breached an obligation to you and that breach is then gone on to cause you costs, then you can sue them essentially for the recovery of that cost. And what we're doing with the country charge process is avoiding taking the whole situation to court. And it's basically saying, look, here's a default.
Jacob Austin 00:07:52 This is how much it's cost me, and I'm going to recover it from you. So that depends on there being what they call a cause and effect to make the country charge valid. The contractor has got to establish that there has been something that you've done that's contrary to the contract, or perhaps you failed to do something that you are obliged to do. Then there must be the effect, which is the resulting loss or the damage that was caused. So the main contractor has now got to show actual quantifiable loss stemming from that breach, and it must be linked. And this could be like hiring another tradesperson or purchasing replacement or extra materials, which justifiably must be required to correct the damage that has been caused. Next, you have the burden of proof. So in any dispute, be it adjudication or in the court in front of that crinkly haired man, the main contractor has the burden of proof to demonstrate why they're entitled to the deduction. And in this, the adjudicator or the judge is an independent third party.
Jacob Austin 00:08:56 And what they're having to do is demonstrate that, on the balance of probabilities, the breach of contract that you've caused has caused them to lose this amount of money. They might be providing photographic evidence, site diaries or email chains, and then they would have to do similar for the costs, be that providing invoices or providing an extract from a contractor's account that justifies the amount that they're deducting from you. Of course if we're talking liquidated damages then these should be set out in the main contract and you should be able to review that to see what the figures are. Then you would want to see that there is a notice and perhaps a copy of the contractor's payment certificate showing that the client has deducted liquidated damages from them. And these are the kind of lengths that ought to be gone to to prove the cost. If they don't prove that they've got a legitimate cost, then there's no figure to deduct. We don't go guessing that, oh, there's £1,000 worth. There should be invoices, extracts of an account, timesheets and even a labour plant.
Jacob Austin 00:10:01 materials build up that sort of level of detail that you ought to be having sight of prior to agreeing a deduction. Now, that's not to say that to speed up the process, if you're genuinely accepting that there's been some kind of a breach, you can agree something reasonable with the contractor or to keep them onside, you might want to agree a holding adjustment so that it can get firmed up later when the proper cost has been incurred. So when it comes down to handling a charge yourself, what should you be doing? So starting off, I would always read your subcontract. If you're working for a large main contractor, they will likely have a procedure outlined in their standard adjustments that introduce either a set off or contra charge procedure. And if they do that, then you want to hold them to it. Make sure that they follow their own procedure. They might be specifying that they have to issue a notice in advance, or introduce a particular way of specifying the grounds for the deduction and the amount. Others might require a particular time frame or the issue of a pay less notice, but check that they're following the right procedure, as you might be able to resist the contrary charge if they don't follow their own rules.
Jacob Austin 00:11:19 Keep your own detailed records when you suspect that there is a risk of a contra charge arising. For example, if some of your labor has caused some accidental damage, then document everything. Keep your own set of photos. Perhaps fill out an incident report and note precisely what happened and when, what the damage is. This will enable you to have the grounds to mount a proper challenge. If at a later date, the contractor's version of events seem inflated or inaccurate. Ask for evidence. Remember, the contractor has to satisfy the burden of proof. If you receive some surprise deduction for miscellaneous damage, then ask them for backup. Ask them to show how they arrived at the cost and how they're certain that it was you. Sometimes the main contractor has got little more than a rumor or some incomplete data. By asking for the evidence, you're not being hostile. You're doing your due diligence before accepting a bill for something that might not be your cost. And you're ensuring that the contractor also does that. Consider a pragmatic settlement.
Jacob Austin 00:12:31 If the amount seems fair, or if you know that your team was at fault, dragging out the dispute probably isn't going to help. And actually, what it will allow the contractor to do is to collate all of the various bills. Think about how much time they're spending on it, and come up with a robust number that covers everything. Whereas it can be more effective for you to hold your hands up and say, yes, it was us, we've messed up. But I'll tell you what, I'll do this little bit of extra work for nothing. Or I'll do your first couple of remedial cost free. And strike a bargain that works for both of you. On some occasions, by pushing for more evidence, you might just discover that the true cost is much higher than you thought it was going to be. And so sometimes if you think something is fair and reasonable, shake on it, draw the line and put it to bed. You can also get collaborative when it comes to contra charges. In a perfect world for the contractor, you would spot damage that you've done yourself and fix it before it ever becomes a formal contra charge.
Jacob Austin 00:13:38 If you've got the skills and resources that's ideal, you cut the main contract out of the picture altogether. They stop seeing it as a cost and stop seeing their site managers time being wasted sorting out damage. That's nothing to do with them. You can get the problem solved before it even gets there. Perhaps you could do that by doing a trade off with another Sube. Let's say you're an electrical contractor and you've made some holes in the walls by putting the black boxes in the wrong place. The decorator has then had to fill him in, and he would ordinarily charge the contractor for that. But instead, you've decided to lend him some of your access equipment so he can reach a difficult bit of work. You've got it on site. It's not going to cost you a lot. He's now not got to hire something specific in and incur the transport cost. This kind of handshake arrangement used to be more common on site, but there's no reason why it can't be used in the current day and age. It's just a case of talking to the right people and forming the right relationships.
Jacob Austin 00:14:42 And by doing that, you can try and avoid a lot of heartache. Now, of course, that only suits distinct examples where there's two parties that are happy to work together to overcome something that's relatively minor, really, in the grand scheme of things. So what happens when we've got contrary charges on a much larger scale when there are delays involved. Because, let's face it, a bit of decorators making good probably isn't going to break the bank. But the real big hit money can be if you've caused the contractor to be on site longer, and particularly if he starts triggering liquidated damages. So let's just think about what it costs for the main contractor to sit on site for an extra week. He's got, however, many site managers, his accommodation security, the labourers, the gateman, that dude who cleans the toilets. All of these people are likely to be needed for that extra week. And then on top of that, he's costing himself insurances overheads. And if the delay turns out to be critical, then the employer will probably charge him his liquidated damages for the week too.
Jacob Austin 00:15:50 So if you start being responsible for that delay just for a week, it's a pretty hefty deduction. But you've got to remember here that the principles are the same as if this was a small amount and it was something you could take a photo of. The contractor has cut to come up with a demonstration of why that cost is due to them. This is more than you've messed up. So we lost a week. They have to show that your breach and the delay that you caused was on the critical path, meaning it genuinely extended the duration of the program or it prevented other trades from progressing. And that needs to be proven beyond a reasonable doubt. If there are other items which are concurrent, then the program becomes a bit of a murky place and there might be further mud in that water if there are other delays that have already happened. Perhaps the structural steel started late or design information was incomplete at the relevant starting points. All manner of things could have happened, but in order to land that country charge, they've got to prove that the delay that you caused specifically has caused that one week delay.
Jacob Austin 00:16:59 Extension of the prelims. Then if liquidated damages Start getting involved. It gets trickier still. The contractor might attempt to pass those costs back on to you as the root cause of the delay, but they can only do so if they can prove that you were the actual trigger, that you caused those liquidated damages to be incurred. So we're looking for a chain of causation from the event that has happened on site that caused the delay all the way through to the client stopping damages. And this can't be a threat situation where the client says we're going to hold damages, but they never actually take them. This has got to have actually cost the contractor money in order for them to recover it from you. They then also need to satisfy you that there's been no culpability on their part for the delays that's been caused. Now, before any of this gets to happen, the best point for you to protect yourself from liquidated damages or delay costs is right at the start, before you signed the contract, and actually before that, when you've read the contractor scope and you've provided your quote.
Jacob Austin 00:18:08 Now, some contractors will balk at this, but you might be able to impose a cap on your liability for damages. And if your scope is critical, they might not accept it. But there's always a possibility that they would entertain a percentage value of your contract sum or a cap of a certain amount that if the worst should happen and you've caused some delay, they've got a contribution coming back to them from you. But from your point of view, it limits your risk, hopefully to a sum that you can manage. The other thing that you can do, if the threat of country charge and liquidated damages is just too high, then always remember you can decline the work. A different project might offer terms that don't jeopardize your entire business. If something goes sideways, it's never fun turning down work either. So make sure it's the right decision for you. But consider that it might be better to turn down some work and reduce your turnover. Then take on something that could jeopardize your company altogether. And with that, let's wrap it up.
Jacob Austin 00:19:10 Country charges will never be your favorite topic. No one likes seeing a chunk of money lopped off their payment, however big or small. But hopefully, after today's 20 minute deep dive, you've got a clearer perspective on why they arise, how they are justified, and what steps you can take to mitigate them or, if necessary, fight them. So the big takeaways are understand the fundamentals. There's got to be a breach of contract and there's got to be some damage. Be that physical or monetary for there to be a claim. Documentation is your best friend. Firstly, knowing what your order documents say. But then those site documents, the photos, the diaries, the email trails, your program and progress monitoring. All of these can help you and make sure you get treated fairly. Proactively fix issues if you can. If you've caused some damage. Holding your hand up and dealing with it. Particularly if you can do that without the involvement of the contractor, then you can probably get to the best outcome.
Jacob Austin 00:20:16 Remember, the burden of proof is on them. If they can't show you what the issue is, that it was you that caused it, and demonstrate to you clearly what the cost is, then you've got significant grounds to object. But if you know you've got a liability, a fair negotiated settlement can preserve your relationship. Keep the project running smoothly and hopefully allow things to flow on to the next job without turning the relationship sour. Finally, if the liability is going to be too large for you, try and negotiate at the start or be prepared to sit this one out if the costs just aren't for you. With the strategies from today's episode in mind, you will hopefully be better positioned. Next time a contractor claims that you owe them for X, Y, and Z, and you'll know how to stand your ground if the charge isn't justified. My mission with this podcast is to help the million SME contractors working out there in our industry. If you've taken some value away from today's episode, I'd love it if you'd share the show and pass that value on to somebody else who'd benefit from hearing it.
Jacob Austin 00:21:25 And of course, subscribe yourself if you haven't already. And thanks for tuning in. If you like what you've heard and you want to learn more, please do find us at QS.Zone where you can subscribe to our training and support system for like minded subcontractors. Look forward to next time. Until then. You can find us on all your favourite socials at @QS.Zone. Thanks again! I've been Jacob Austin and you've been awesome!
