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Profit, Overhead, and Sales Tax


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Although I feel like a brain dead fool posting this question, apparently I am a brain dead fool this week. In going over a contractor's proposal, I began to question whether or not a construction (or otherwise) contractor can charge profit against state sales tax. Easy question for all of you, I know. Our 4330 does compute the tax into the total amount the profit is against, but it didn't seem right to me. Would someone please answer this silly simple question for me? Thanks!

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ohno -- Generally, contractors do not pay sales tax on items they are reselling to the Federal government (there are many exceptions, of course). See FAR Part 29 for a discussion of the complex situation, which includes a suggestion to obtain advice from agency counsel. The Federal exemption most directly applies when the contract is cost-type, since title passes immediately. But an argument for title passage can also be made for FFP contracts where contract financing is being used, or where certain CLINs call for items to be acquired and provided to the Government customer.

If an exemption was available and the contractor didn't take advantage of it, then any taxes paid may be unallowable (see 31.205-41).

We don't know the contract type and we don't know the taxing jurisdiction and we don't know which (if any) 52.229 clauses might be in the contract, so we can't say anything more than "if the sales tax being proposed is being legitimately assessed by a state/local taxing authority and there is no exemption available to the contractor and the contractor's practice is to include such tax payments as direct costs of its contracts, then we would expect those tax payments to be included in the total proposed cost used to evaluate proposed fee or profit."

Okay?

H2H

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H2H has some good, comprehensive considerations (as usual).

Sorry, I live in the low bid FFP construction world and sales tax is a way of business that the government can very seldom use an exemption for (how's that for ending a sentence with a preposition). The original post did refer to a construction contract, but no information regarding contract type.

Cocur with H2H's: "If the sales tax being proposed is being legitimately assessed by a state/local taxing authority and there is no exemption available to the contractor and the contractor's practice is to include such tax payments as direct costs of its contracts, then we would expect those tax payments to be included in the total proposed cost used to evaluate proposed fee or profit."

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Guest Vern Edwards

Everybody:

kathilou's question is about negotiating profit on a contract change.

The notion that profit is a "charge" "on" this or that cost, while common, has no statutory or regulatory basis. Although it is common government practice to calculate profit as a percentage of some cost base and to argue about whether this or that should be included in the base, there is no requirement that a contractor do so unless it is contractually bound to do so.

There is no requirement that the government do so unless it is using some kind of "structured approach" to profit analysis, such as a weighted guidelines method. See FAR 15.404-4 and agency supplements. Even then, the method is used only to develop a pre-negotiation profit objective.

In order to hold down profit rates, the government has tinkered with its structured approaches over the course of time in order to remove this or that cost (e.g., G&A on subcontract costs) from the cost base for calculating a prenegotiation profit objective. That's fine. It can try that. But contractors don't have to go along unless their contracts explicitly require that they do.

NAVFAC Form 4330/43 (aka 4330-43), Estimate for Contract Modification, is an old form of which there were several variations and that is no longer mentioned in the NAVFAC Acquisition Supplement. It is not mentioned anywhere else in the FAR System. It may not be currently authorized. A NAVFAC publication, Cost Engineering Policy and Procedures (Version 07/2013), calls for use of an undated version entitled, "Estimate for Change Order Summary Sheet," as backup for government cost estimates. See para. 4.6.1. It does not say that contractors must use the form. The publication does not include an image of the form. A link sends you to an Excel spreadsheet entitled "Estimate for Contract Modification, NAVFAC 4330/43" that includes instructions for calculating "Profit Objective for Construction Contracts/Task Orders". It's all bureaucratic tomfoolery.

Contractors should try to get as much profit as they can, consistent with long term business objectives. They should not go along with the government's structured approach unless it works for them and should refuse to be drawn into a discussion of any structured approach unless they can manipulate it to their benefit.

Government people should comply with their agency's policy, but understand that contractors are not bound to use a structured approach unless there is a clause in their contract that requires them to do so. Even then, contractors should read the contract carefully to see whether it binds them to a specific calculation or merely requires its use to develop a prenegotiation target.

kathilou should read the form and seek advice from her supervisor about the inclusion of sales tax in the profit calculation base.

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