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Overhead & Profit and Sales Tax - Construction Project


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Scenio - firm fixed priced construction contract in Oklahoma. I have a prime contractor and a construction management service contractor disagreeing on on how O&P and use tax is being applied on change orders.

The prime is stating that they are not charging use tax on the project, however they are subject and required to pay use tax on all material purchases for the project. The use taxes on the materials are incorporated into the material cost of the project, which is subject to overhead and profit. The CA is saying that is should be calculated as overhead and profit over tax to have no conflict with IRS.

In regards to O&P, the prime is saying that the Division 01 2000 spec states that the contractor may charge up to 10% for O&P; they are charging 6% for each, which is under the 10%. the CA believes this should be a combined overhead plus profit max of 10%.

Appreciate any insights...

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Thoughts -

Tax - Is the CA willing to pay the tax if calculated wrong? Or in other words if the prime can substaniate their formula with regad to how they are applying the tax then it would seem it would be an allowable and allocable cost to include in the final pricing of the change. Additiionally, In the end it is the CO's say on what is accpetable, not the CA, and I would suggest the CO make that determination to end disagreement.

References to visit that might help - FAR part 29 and FAR Part 31 (31.205-41).

O&P - Without seeing the exact wording of the spec it is anyones guess. Even with the spec it still might be and again to end the disagreement the CO needs to make a determination on interpretation of the contract and go with it. The prime will always have the disputes route if it disagrees with the CO's interpretatiion.

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Scenio - firm fixed priced construction contract in Oklahoma. I have a prime contractor and a construction management service contractor disagreeing on on how O&P and use tax is being applied on change orders.

The prime is stating that they are not charging use tax on the project, however they are subject and required to pay use tax on all material purchases for the project. The use taxes on the materials are incorporated into the material cost of the project, which is subject to overhead and profit. The CA is saying that is should be calculated as overhead and profit over tax to have no conflict with IRS.

In regards to O&P, the prime is saying that the Division 01 2000 spec states that the contractor may charge up to 10% for O&P; they are charging 6% for each, which is under the 10%. the CA believes this should be a combined overhead plus profit max of 10%.

Appreciate any insights...

Please provide the exact wording of the Division 01 spec limit on OH and Profit . I'd have to see the exact wording of the 10% limit for markups to provide my "insight".

Regarding your first problem with use tax, your post is confusing. I don't understand what the contracted Construction Manager is saying. Is the contract advisor from Oklahoma?

Also, you can call up the State office responsible for collecting the use tax to determine how it is applied to construction contracts. I used to do that and got pretty good information. If it is charged to materials then I would think that it is a direct cost that should be part of the base for applying OH/profit,. You or your CA could certainly call someone in the Tulsa District Construction Division of the USACE and they can explain how use tax is normally charged and how OH and profit are applied to it.

DO NOT MAKE A DECISION without first learning how use taxes are normally handled. The Tulsa District of the Corps of Engineers obviously deals with this on a routine basis.

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While waiting for your response Chief, I will offer that if a contract states that "the contractor may charge up to 10% for Overhead and Profit", note the distinctive difference between that phrase and the phrase "the contractor may charge up to 10% for Overhead and for Profit". I'm sure that there are decisions in cases of contract interpretation that cover similar situations; your lawyer should be able to assist you in that regard. Unfortunately, I'm not a student of grammar - you can probably tell.

I tried looking up on-line style manuals for a distinction between the two phrases but was unsuccessful. My "gut feel" is that the former is all inclusive: "(up to 10%) for overhead and profit" would be all-inclusive "for both" or "in total". The latter phrase should mean "for each" - that is, "(up to 10%) for profit and (up to 10%) for overhead".

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  • 4 weeks later...

Scenio - firm fixed priced construction contract in Oklahoma. I have a prime contractor and a construction management service contractor disagreeing on on how O&P and use tax is being applied on change orders.

The prime is stating that they are not charging use tax on the project, however they are subject and required to pay use tax on all material purchases for the project. The use taxes on the materials are incorporated into the material cost of the project, which is subject to overhead and profit. The CA is saying that is should be calculated as overhead and profit over tax to have no conflict with IRS...

Appreciate any insights...

Ok, I checked with the Tulsa a District of the Corps of Engineers. Contractors working in Oklahoma are subject to pay a use tax on any materials purchased outside of the state. The rate is the same as the sales tax would be for in-state purchases. Thus, the Corps would treat a use tax the same as if it were paid as sales tax. And it would be part of the material cost as a direct cost. Sorry for the late response.
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JI, that clause is not pertinent to the question at hand. The question concerned whether the "use tax" is considered a direct cost or if it is paid separately, below the (overhead and profit) line when negotiating change orders. It wasn't a question of allowability as a cost.

The use tax is also not an after imposed tax. It has been in effect prior to negotiating change orders.

Edit: I don't quite understand JL's stAtement that the contractor has not been charging use tax to the contract and how that affects the situation. JL, are you saying that the contractor has avoided paying the tax to date, so did not include it in the original contract price for those materials purchased out of state?

Further edit: See my post below. JL may have been trying to say that because the contract is in Oklahoma, the contractor, who is from New Mexico, has not been charging a New Mexico gross receipts tax. See discussion below.

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After corresponding with JL Chief, I learned that the contractor is from New Mexico, where the state charges a gross receipts tax on the bottom line contract amount, not a direct sales tax on materials. For contracts in New Mexico, one apparently adds the tax to the bottom line during the negotiations. This is similar to Mississippi, where there was a gross receipts tax on the bottom line contract amount and no sales tax was charged on construction materials for contracts performed in Mississippi. When JL Chief referred to a "use tax" in the original post JL may have applied this term to all taxes on materials for the Oklahoma contract, whether purchased in Oklahoma or outside OK. At any rate, for a construction contract in Oklahoma, one would include both "use taxes" (if any) and "sales taxes" in the direct cost of materials during negotiations. The taxes are then included in the subtotal before adding G&A/profit/bond determine the total price of the mod/contract.

If a questioner doesnt use the correct term for a "tax" in defining the problem, it can cause confusion, as here.

JL Chief, I'm no expert on the New Mexico gross receipts tax, although I did some quick Internet research on how it works. It does not appear to apply to construction services performed outside of New Mexico. If part of your question is whether or not the contractor is subject to the New Mexico gross receipts tax in addition to or in lieu of Oklahoma sales/use tax, then your consultant or you should consult with those familiar with the law.

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