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In calculating fees on the basis of a percentage of construction cost, should the construction cost include or exclude value added taxes (VAT) such as the harmonized sales tax (HST)?

History

Prior to the introduction of VATs in Canada, taxes were buried in the cost of the product (e.g. manufacturers’ sales tax) and weren’t identifiable as a separate amount. Part of the promise of the switch to VATs was increased transparency. All taxes would be shown separately on any invoice.

What became the RAIC fee guide was developed prior to the introduction of VATs in Canada. The various percentage rates in the fee guide were based on the total cost of construction including the various hidden taxes.

With the abolition of the hidden manufacturers’ sales tax and the introduction of the goods and services tax (GST), the amount of the tax became visible. To have excluded the GST from the fee calculations at that point in time would have lowered fees overnight with no change in the amount of work to be done. Rather than recalculate the entire fee guide at that time, it was decided to include the GST in the construction cost for the purposes of calculating fees. The result was that even though the tax regime changed, architects’ fees did not.

Present

Some authorities (without knowing the history) don’t think architects should get paid based on the taxes being included in the construction cost. They view taxes paid to the government as separate from and above the cost of construction.

If a client wants taxes excluded from the construction cost and an architect is using the 2009 version of the RAIC fee guide or other percentage calculation, one way to compensate is to increase the percentage fee being charged by an amount equivalent to the tax rate.

The new version of the RAIC fee guide does exclude VAT from the fee calculations; with the percentages already adjusted to account for this change. Now that this has happened, the definition of construction cost in OAA contracts will be revised to reflect this.

It really doesn’t matter whether construction cost is defined as including or excluding taxes, as long as it is explicitly stated, and consistently applied throughout the documents and processes. It would be advisable to check any standard contracts being used (OAA, RAIC, CCDC, etc.) to see how taxes are handled, and then be consistent with the standard contracts to avoid confusion, ambiguity, and having to write supplementary conditions.

Excluding taxes from the architects’ fee calculations should not be expected to save the client any money. The only real impact it may have is on the appearance of the reasonableness of the fee calculation in the perception of those who don’t know the history.

 

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These articles do not represent OAA policy or guidance but rather are based on the opinions and experiences of members of the OAA and are prepared for the benefit of the profession at large.

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