In the fast moving and often contentious world of construction projects, contracharges (or set-offs) are a frequent source of frustration and disputes. For subcontractors, they can feel like deductions made with little warning or justification. For main contractors and employers, they are seen as a mechanism to recover costs when something goes wrong on site.
But what exactly are contracharges, when can they be applied, and how can you protect your position if you are on the receiving end?
What are contracharges?
Contracharges (sometimes referred to as back charges or set-offs) are amounts that a party deducts from sums due under a contract, usually in response to some alleged failure by the other party, such as:
- Defective work
- Delays or disruption caused on site
- Damage to property or materials
- Failure to complete part of the works
- Use of the contractor’s labour or materials to rectify another party’s mistake
In most cases, the party applying the contracharge is the main contractor, and the party it is applied against is a subcontractor. However, it can happen in any tier of the construction supply chain. The standard principle is that the burden of proof lies with the claiming party, so in the context of contracharges it is the party claiming those charges that is required to prove their entitlement.
Contracharges are often presented in final accounts, interim applications, or sometimes unannounced deductions. They can significantly reduce the amounts paid to subcontractors and often come as a surprise where they have not been discussed or notified during the project. This is where disputes typically begin.
Are contracharges legal?
Contracharges are not automatically unlawful, but they must be:
- Permitted under the contract
- Properly notified (where required)
- Reasonable and evidenced
- Not in breach of the Construction Act 1996 or relevant payment provisions
The biggest issue we see is improper or opportunistic use of contracharges, deductions made without warning, explanation, or evidence. If the deduction is not backed by the contract and clearly substantiated, it can be challenged and reversed. But doing so often requires swift action and a strong evidential position.
The payment process and the construction act
Under the Housing Grants, Construction and Regeneration Act 1996, all qualifying construction contracts must include a fair payment regime. This includes:
- Payment notices
- Pay less notices
- Clear due dates and final dates for payment
If a contractor wishes to make a contracharge (i.e. deduct from a payment), they must issue a Pay Less Notice within the required timeframe, stating the basis and calculation of the deduction. This requirement is not optional.
Failure to do so can mean the subcontractor is entitled to the full amount claimed, even if the contracharge was valid in principle. This is a common reason for disputes, and a common route to adjudication.
Common pitfalls for subcontractors
Subcontractors often find themselves on the receiving end of contracharges with little room to manoeuvre. Common issues include:
- Lack of written notice or late notification of the contracharge
- No opportunity to rectify alleged defects or issues
- Unsubstantiated costs (e.g. inflated labour charges)
- Blanket deductions with no link to actual loss
- Contracharges being used to delay or avoid payment
In some cases, contracharges are raised only after a subcontractor has submitted a final account or requested adjudication for non-payment, as a reactive defence tactic. If this happens, it is critical to challenge both the timing and content of the deduction and question whether it complies with the contract and the Act.
Contract terms matter
The right to contracharge (and how it must be done) is often set out in the subcontract. Key things to look out for include:
- Notification periods – does the contract include any requirements for notifications? How soon must the contractor tell you about defects or issues?
- Rectification rights – do you have the chance to return and fix problems before costs are deducted?
- Evidence requirements – must the contractor provide proof of costs incurred?
- Limits on liability – is your liability capped or limited in any way?
If these terms are unclear or missing, general legal principles and statutory protections may apply. But relying on those after the fact is no substitute for robust, up-front contract negotiation and consistent records throughout the project.
Protecting yourself against contracharges
Here are some practical steps subcontractors can take:
- Maintain detailed records – photos, daily logs, communications, and delivery tickets all help.
- Respond promptly to notifications – act quickly to address issues and avoid escalation.
- Challenge unreasonable deductions – request evidence and clarification where deductions are unclear or excessive.
- Know your contractual rights – including any entitlement to suspend work or refer a dispute to adjudication.
- Seek early advice – if a dispute is brewing, speak to a specialist before positions harden.
Remember, if a contracharge is raised, silence is not a strategy.
How CCC can help
CCC works with contractors and subcontractors across the UK to deal with contracharge related disputes, whether it is advising on entitlement, recovering withheld payments, or bringing or defending an adjudication. We understand how disruptive and costly improper contracharges can be, and we know how to cut through the noise.
We can help you:
- Review the legality of a contracharge
- Draft or challenge payment and pay less notices
- Preserve evidence to support your position
- Pursue payment through negotiation or adjudication
- Avoid future disputes with clearer contract wording
Received a contracharge that does not seem right? Do not wait for the final account to challenge it. Contact our team today for fast, expert advice on protecting your payment rights and resolving construction disputes with confidence.
Get in touch to ensure your contracts, claims, and compliance strategies are up to date and effective.
