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)
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)
- Bergon F., (1986), Factors Influencing the Use of DP Chargeback Information, "Management Information Systems Research Center", MIS Quarterly, University of Minnesota
- Chaudrhy A. et al., (2015), Interpretation and Application of International Financial Reporting Standards, Wiley IFRS, New Jersey
- Joao R. A., (2017), Apparatus and method for providing transaction history information, account history information, and/or charge-back information
Author: Kamila Nawara