Chargeback

Term Definition: Chargeback

Chargeback refers to the process of assessing and assigning the costs of a system or service to the departments or customers that use it. If the Marketing Department sent a print job to the internal printing department, the cost of the service would be captured in the general ledger as a chargeback to Marketing. When the chargeback is internal, there is no money exchanged, but budgets are impacted. In this example, the Marketing Department would incur an expense to their budget, while the Printing Department would receive an upside to their income line.

There are three types of chargebacks:

Charge – The listed cost account will pay you money.
Credit – You will pay money to the listed cost account.
Transfer – One account will pay money to you, and you will pay money to the other account.

Chargebacks can be used to make cost adjustments in project work. In these instances it would change the amount of money paid to subcontractors or suppliers. These chargebacks are typically the result of errors or damages. Chargebacks can be used to settle damage penalties, damage adjustments or bid changes. If a general contractor working on new home construction hired a drywall subcontractor who in turn damaged internal wiring in the home, this would constitute a damage penalty. A chargeback would reduce the amount of money that the contractor paid to the drywall subcontractor. Using the same example, if the wiring had been done by an electrical subcontractor and the damage created extra work, this would be a damage adjustment. The contractor would chargeback the drywall contractor and reimburse the electrical contractor. If the contractor bid on building the home with 6 rooms and the developer added a guesthouse, this would constitute a bid change. The contractor could then use a chargeback to increase (or decrease, if applicable) the total bid price. The chargeback could also be used to specify a change even if there was no corresponding change in cost.

Area of Application
Project Accounting
Project Management