Back charge definition
/What is a Back Charge?
A back charge is a cost that one party incurs on behalf of another and later charges back to the responsible party. It commonly arises when a supplier, contractor, or internal department fails to meet contractual obligations, such as rework, delays, or damage. The party incurring the cost records the expenditure initially and then recognizes a receivable for the back charge. Revenue or expense offsets depend on whether the back charge represents reimbursement or recovery. Proper documentation is essential to support the charge and avoid disputes.
Example of a Back Charge
A construction company, Grimm Contractors, is hired by a property developer to construct a residential apartment complex. As part of the contract, the developer supplies certain materials (like custom windows) to be installed by Grimm. During the project, Grimm repeatedly informs the developer that several window shipments are arriving late or are missing components, causing delays in the schedule.
To keep the project on track and avoid breaching the contract deadline, Grimm decides to purchase replacement windows and hire extra labor to complete the installation on time. These actions incur additional costs of $8,000 for materials and $2,000 in overtime labor.
Several weeks later, once the work is completed and documented, Grimm issues a back charge to the developer. This invoice outlines the expenses that Grimm incurred due to the developer’s delay in delivering the agreed-upon materials. The back charge totals $10,000, and includes copies of receipts, labor time logs, and a written explanation for accountability.
In this example, the back charge is sent after the expenses were incurred and serves to recover costs caused by the client’s failure to meet contractual responsibilities.
Back Charge Best Practices
It can be quite difficult to collect on back charges to customers. Here are several ways to do so:
Set up a contractual obligation. Include a clause in your contract with the customer, stating that back charges may arise from time to time, and that the customer acknowledges its liability for these items.
Maintain credit card information. Require the customer to provide you with its credit card information, so that you can charge the amount on a back charge directly to the card.
Require ACH debit authorization. Require the customer to agree to an ACH debit transaction, where you can charge the customer’s bank account for the amount of the back charge.