How to factor state taxes and other fees into commercial construction contracts
Construction contracts are made up of numerous costs. This is especially true with time and materials itemized contracts (as opposed to lump-sum contracts). Less tangible costs can include insurance, permits, site preparation, blueprint costs and others. Some of the more confusing costs can be taxes which vary by state. It is important to note that most states in the U.S. don’t require sales tax for construction services. But it’s not quite that black and white. Builders do have some different expectations around sales taxes for buying, or billing, for supplies used. Also, differing construction contracts, such as time and material contracts or lump-sum, can alter sales tax requirements. Builders and contractors in the majority of states don’t have to charge sales taxes in billing customers. But builders do have to pay taxes when buying their construction equipment. In the sale of completed construction however, sales tax is not required in most states. Some states consider contractors to be “resellers;” buying materials for the sole purpose of resale to the customer, negating the original sales taxes for the builder when initially buying materials. Logically these purchasing scenarios in certain locations apply mostly to time and material, or itemized, contracts as opposed to lump-sum contracts, since lump-sum contracts don’t itemize everything. But even for states where sales tax is required for builders when purchasing materials, exemptions can occur. Although for some states these sales taxes are not required, they may still be charged, as long as the correct tax rate (determined by the location) is what is billed. Again, often the charging of sales tax is determined based on whether the contractor uses a lump-sum or time and material contract. The lump-sum contract is an agreement based on a single amount aggregating all fee-based elements into one line item, while the time and material contract separately itemizes the different elements and charges including services, supplies, etc. With the time and material contract, some states will allow the construction company to act as a reseller - not paying sales taxes on supplies themselves, but required by law to charge the customer for those materials’ sales taxes. Whereas the lump-sum requires the contractor to pay sales taxes when initially buying materials. Yet another element affecting tax rates for building projects occurs when the tax rate changes. Because construction projects can take long periods of time, state tax rates can change in the middle of a project therefore affecting the final contract - just another element difficult to predict in an initial contract before final invoice. Taxes aside, there are certainly other fees associated with construction projects. Here are some of what get factored into construction contracts:
- Insurance costs can be those which consider overall general liability insurance, or more job-specific insurance policies. Policies may be considered for the contractor’s risk, wind, flood and other potential hazards. Insurance may be applied to materials which can be effected by natural disasters.
- Interest and fees may include those such as legal or management fees for a specific project.
- Permit costs may be involved, covering surveying, zoning, mechanical, plumbing, electrical, environmental or even department of transportation permit fees.
- Blueprint costs may include payments to outside parties and compensating for increased time for engineers and architects, design and development for bids and client review times, and even local municipalities review requirements.
- Site preparation can include additional costs such as excavation and related machinery and labor, as well as erosion control related costs.
- Finally, foundation and exterior, in addition to building costs, can have fees related to seismic zone and insulation requirements, as well as additional design and review boards for local city establishments.