Do Contractors Pay for Construction Materials?

For clients and homeowners sorting out budget details for their construction projects, the question of whether or not contractors pay for materials is bound to come up.

The answer to this question relies on the terms of the written contract, and the scope of the project, and it also relies on spoken agreements made between the contractor and their client. Here is a quick list of four common construction contracts you’re likely to encounter.

If you’re in the throes of construction project management right now and your mind is flooded with planning logistics, this comprehensive guide will help you sort out which party covers the cost of materials.

We will also delve into state regulations concerning these construction materials, possible tax deductions involved and the ability for these materials to be recycled!

When Contractors Pay for Materials:

You may have heard about situations where contractors pay for materials upfront when they’ve signed on to do construction work for their clients.

Arrangements like these typically come together when clients and contractors agree to lump-sum or fixed-price contracts.

This means the contractor has agreed to go out and handle the actual sourcing and purchasing of the materials needed for a project.

In these cases, it is extremely important for the contractor and the client to be on the same page about who ultimately bears the cost of the materials because depending on the contract, it could go either way.

Contractors need to be careful not to buy a bunch of supplies expecting reimbursement before they actually have it in writing that a client has agreed to pay for said supplies.

When Clients Pay for Materials:

Sometimes what works best for the project overall is to have clients purchase materials directly or reimburse their contractors for material expenses. Here are a few scenarios where that may be the case:

Cost-Plus Contracts

• Client reimburses the contractor for the actual costs of materials, labor, and overhead
• Cost-plus contracts also include an agreed-upon percentage or fee for profit

Owner-Supplied Materials

• Sometimes it’s just personal preference — clients simply want to purchase their own materials for certain construction projects.
• Having unique preferences, special access, or some kind of discounted pricing are a few specific reasons why the project might be better off if the clients go for it and handle the purchasing of the construction materials.

Progress Payments

• There are contracts where clients agree to make payments in advance or periodic payments to cover the cost of materials throughout the project’s timeline.
• Larger projects with extended timelines are good examples of when clients make progress payments.

Are Construction Materials Tax Deductible?

Just like with any other line item in your budget, if you can prove that your construction materials are being used for business purposes, then yes, those expenses are tax deductible.

To name a couple of examples, construction materials used for commercial construction and for home improvement projects for rental properties, may be eligible for tax deductions or depreciation.

Tax laws and regulations are super complex, so if you can get a tax professional or an accountant to give your situation a look, that would be ideal. That person can help determine which would be more beneficial — having the client or the contractor purchase materials.

You will save yourself a lot of time and headaches if you hire an expert to review these factors:

• Depreciation schedules
• How you generally use the property built using the construction materials purchased
• Any and all tax codes that apply

This Tax Guide for Construction Contractors is a useful resource for starting your process.

Can Construction Materials Be Recycled and Renewed?

Oh, yes. If you want to talk about sustainability and environmental responsibility, the construction industry in California is a great place for you to start a conversation.

Imagine for a moment that a client or a contractor has a special connection with previously used or found materials. Examples of recycled building materials:

• Concrete
• Steel
• Wood
• Topsoil
• Recycled aggregates and crushed stone

If using materials like these is extra important to either the client or the contractor for their construction project, whichever party has the special link to the supplies will most likely be the one to source and/or purchase them for the construction project.

Industry Standards and Regulations for Construction Materials

For any construction project, safety, quality, and order are always at the top of the priority list.

Fortunately, there are several authorities and various figureheads in charge of setting the standards and enforcing codes at the local, state, and federal levels.

Whether the client or the contractor purchases the building materials, all parties involved must comply with the following:

Building Codes

• Local building codes will tell clients and contractors alike what the minimum requirements are for the design, construction, and materials used in their projects to ensure safety, durability, and energy efficiency.

Environmental Regulations

• It’s good for clients and contractors to be aware of federal and state environmental requirements and restrictions. These regulations make sure that the disposal and recycling of construction materials are safe so we can minimize pollution and mitigate environmental hazards.

Industry Standards

• Certain precedents for safety protocol and quality standards in the construction industry are set by professional organizations like Cal/OSHA and the ASTM (American Society for Testing and Materials).
• When making decisions about construction materials and how they will be secured and used throughout a construction project, clients and contractors are likely to discuss these safety standards and quality guidelines.

Conclusion

Determining whether the contractor or the client will pay for construction materials is a majorly important piece of the overall collaboration. This is a discussion that should not be glossed over or swept under the rug.

The written contract must indicate how the responsibility of payment for the construction materials will be managed.

Whether a contractor is covering material costs upfront or if the client pays throughout the progress of the project or any other arrangement, it is advised to hold off on purchasing anything until all parties have approved and signed off on the agreement.

Sometimes tax deductions play a factor in deciding which person should purchase the construction materials. Sometimes also access to the materials or special preferences will make the ultimate call.

No matter the scenario, both clients and contractors must select construction materials that comply with building codes, local environmental and safety requirements, and industry quality standards.