Back Charge

From CEOpedia | Management online

Back Charge can be understood as billing in order to cover the expenses that incurred in the previous settlement period. In other words, a back charge is a kind of compensation for unanticipated expenses. Such a situation may occur due to the charging of costs which were not billable until a later settlement period due to, e.g.

  • scheduling problems;
  • lack of payment by the recipient of the service or goods;
  • need of a correcting invoice.

A service or goods provider, exercising its own discretion, may add default interest (late fee) or other fees combined with a back charge which occurs due to the lack of payment.

Where back charges can be found

Back charges occur most frequently in those branches of industry in which incidents and accidents happen, such as manufacturing, construction work and other places where payment by credit cards is allowed. By the very nature of those industries and due to the tendency of making an increased number of mistakes in everyday business operation, a back charge may be issued either in real time or in the further part of the settlement cycle. According to Bergeron (1986) charge-back systems have varying objectives: cost recovery, cost control, demand control, resource allocation [...]. Until now, however, it has been very difficult to demonstrate the effectiveness of charge-back systems with respect to these objectives. (Francois Bergeron, 1986, pp. 225-237)

Settlement period

Many credit card companies, lenders, even banks themselves, often fail to inform users of their services about the back charges. Due to this practice, new funds in the form of default interests on overdue fees, flow to their accounts. If it happens that an institution charges interest on a daily basis, it may turn out that the client is forced to pay a significant amount of money. If possible charging for products or services should be avoided. It is significant to bear in mind that service or goods recipients usually do not anticipate any additional fees, which may be the reason why there is not enough funds on their accounts. As a consequence, a fee-charging institution may have to wait for a longer period of time to collect their fees, due to the fact that unaware clients often-times confuse the situation with billing errors. Back charges can be incurred in quite a few different manners:

  • for defective materials or work non-compliant with the agreement; back charges reimburse the expenses to either replace the materials or have the work revised;
  • for the damage to a working site; back charges reimburse the cost of repair;
  • for a clean-up;back charges reimburse the expenses incurred to maintain occupational safety and health standards
  • for the use of equipment; back charges reimburse rental or usage costs.

Example of a back charge situation

As it was previously mentioned aback charge is an instance of billing in order to pay for the expenses, that incurred in the prior settlement period. That is exactly, why contract costs should be adjusted in such a way to cover back charges. A perfect example of a back charge situation was provided by Chaudry (2015): The contract states that the subcontractor was to raze the building and have the land ready for construction: however, the contractor/seller had to clear away debris in order to begin construction. The contractor wants to be reimbursed for the work; therefore, the contractor back charges the subcontractor for the cost of the debris removal. (Afis Chaudhry, 2015, pp.513)

Advantages of Back Charge

Back Charge is a fee that is charged by one party to another for services rendered or goods supplied. It is an additional fee that is charged for the goods or services that were delivered after the agreed upon time or with certain discrepancies. The following are the advantages of back charge:

  • It helps to ensure that both parties are held accountable for their responsibilities and obligations. This enables both parties to be aware of when services or goods are expected to be provided, ensuring timely and satisfactory delivery.
  • It encourages parties to maintain a high quality of service or product, as it forces them to take responsibility for any issues or delays in delivery.
  • It can help to reduce the cost of goods and services, as the party charged with the back charge is likely to take measures to ensure that they do not incur additional costs.
  • It can provide an incentive for parties to complete the transaction in a timely manner, as back charges are often associated with late delivery or substandard quality.

Limitations of Back Charge

Back Charge can be understood as a fee, which is charged by a supplier or a service provider to their customers for any goods or services that were provided in the past, and not paid for. The limitations of back charge include:

  • Financial difficulty for the customer - Back Charge can put the customer in a difficult financial situation as they may not have the budget to cover the charge.
  • Damaged relationship - Back Charge can damage the relationship between the customer and the supplier or service provider, as the customer may feel that they are not being treated fairly.
  • Inaccurate charging - Back Charge can be inaccurate, as the service provider or supplier may be unable to accurately determine the amount of the charge.
  • Lack of communication - Back Charge can be a result of lack of communication between the customer and the supplier or service provider, leading to misunderstandings and disputes.

Other approaches related to Back Charge

Back Charge is a method used by organizations to recover expenses related to a project or product from the responsible party. It is used to help balance the books and ensure that any costs incurred are duly accounted for. Other approaches related to back charging include:

  • Transfer Pricing: This approach allows organizations to transfer costs from one department or division to another in order to balance the books. This can be done through the pricing of goods or services between divisions.
  • Absorption Costing: This approach uses costs that are allocated among different departments or divisions to help offset any expenses incurred by one area. This helps to ensure that all costs are accounted for and no one area is left holding the bag.
  • Re-allocation of Costs: This approach is used to adjust the costs of a project or product in order to ensure that all costs are accounted for. This can be done through the transfer of costs from one area to another.

In summary, back charging is a method used by organizations to recover expenses related to a project or product from the responsible party. Other approaches related to back charging include transfer pricing, absorption costing, and re-allocation of costs. These approaches can help organizations to ensure that all costs are accounted for and that no one area is left holding the bag.


Back Charge — recommended articles
Debit Note — Retention bond — Tri party agreement — Firm fixed price contract — Purchases ledger — Warranty bond — Negative confirmation — Purchase price variance — Prepaid income

References

Author: Kamila Nawara

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