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Material Supply by Client

So this question came in from my dear friend Chaitanya.

Q: In case client is supplying cement and sand do we need to add the material cost in the boq rate?

A: This is actually a simple concept that some builders follow to save/share on the VAT benefits, mainly input and output VAT (will not dwell into the taxation part here,since it's an accounting perspective and I do not have the qualification to advice on it)

So, In case the material is being supplied by the client there can be three types of contract:

- The 1st type will be a purely free  issue material contract, here the contractor will not include the material price into the BOQ prices, mind you this is not an "only labour" contract as the allied materials will still be in the contractor's scope. The contractor is therefore responsible for the reconciliation of the material and the client is responsible for the supply of the material, which makes the client directly viable to VAT.

Incase there is proveable increase in the allowable wastage the client can deduct the same from the contractor depending on the specifics of the contract.

I have come across a contract where in the 'allowable wastage' was deducted at the basic price mentioned in the contract and the additional wastage being deducted at 'Market Price + Over heads', though this may be very harsh on the contractor.

However it becomes imperative that the contractor should have made note of the same while agreeing to the terms of the contract and necessary allowances were put in place at the time of pricing.

-The 2nd type will be the sale issue contract, here the contractor will include a 'basic material' price into the contract which will be suggested in the tender/signed contract. At the time of bill the material component as supplied by the client is deducted from the contractors invoice at the said basic price x material supplied/consumed. The client at this stage is to provide the contractor with a material invoice so as to enable the contractor to claim input VAT.

It becomes important to mention here that there could be a sub-division for this type of contract where in the client could either deduct the entire supply at the agreed basic price or on the other hand require a reconciliation statement, in which case the consumption is determined  via agreed coefficients which is then deducted at basic price and the wastage is deducted at the market price.

- The 3rd is a combination of the two, where some materials are supplied by the clients free of charge and some are a sale issue.

As a QS/Contracts professional, one should be aware of the type of contract right at the tender stage to avoid any hits to the cash-flow and bottomline of the project.



Chaitanya, hope this clarifies the query, do let me know if I could elaborate anything for you further.  

Comments

  1. Thank you megha for sharing the details on this subject and it really helped me in our contracts negotiations. It will really educate all of us in understanding the vat input and taxation in the contracts.

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