Bad news for contractors:
Most general contractors don’t make a 3% profit on contracts; therefore, the withholding could be as much as or more than the profit from their contracts. The AGC uses this example:
A small business contractor may hold one government contract which is to be completed in one year for $10 million. This law requires withholding of $300,000 on that contact. Meanwhile, the contractor expects to net approximately 2.5%, $250,000, after paying for supplies, services, subcontractors and other ordinary business expenses. The tax on the revenue generated is at most 35% of the profit, which means the maximum tax owed on the $10 million project is $87,500 (35% of $250,000). Ultimately, the government has withheld $300,000 for $87,500 in tax liability.
The biggest potential problem from the law is the impact on contractor cash flow. Losing 3% to a withholding tax will affect the cash flow needed to pay employees, subcontractors, suppliers, etc.
If cash flow is squeezed it can affect surety companies’ willingness to provide bonds for contractors, as contractor cash flow is a leading indicator for surety underwriting. Restricted cash flow caused by this 3% withholding could require additional bank borrowing and lead to higher bond and construction costs.
The law is advantageous to government, but it could be just enough extra financial weight to break the business backs of already struggling contractors.
If you’re a contractor performing public work, you should check with your local, state and national industry associations to learn more about this law and what it means for your business.
