FAR 52.229-3 Explained: Who Bears Tax Changes After Award?
When pricing government construction work, estimators must know precisely how taxes are allocated between the contractor and the government. Under federal fixed-price contracting, standard clauses govern whether a shift in tax law after contract signing will lead to an equitable price adjustment or come entirely out of your company's pocket. The cornerstone provision for this risk allocation is FAR 52.229-3 Federal, State, and Local Taxes, prescribed under FAR 29.401-3.
What Taxes Must Be Included in the Original Contract Price?
Under paragraph (b)(1) of the clause, the contract price includes all applicable Federal, State, and local taxes and duties in effect on the contract date. The clause defines the contract date as the date set for bid opening, or the effective date if the project is a negotiated contract or modification. Local taxes explicitly include taxes imposed by a possession or territory of the United States, Puerto Rico, or the Northern Mariana Islands if the work is performed wholly or partly in those locations.
There is a statutory exclusion: taxes imposed under 26 U.S.C. 5000 C may not be included in the contract price, nor can they be reimbursed under the contract terms. Outside of that specific statutory exception, your base figure must capture every tax that taxing authorities are imposing and collecting on the contract date when evaluating firm-fixed-price federal contracts.
What Counts as an After-Imposed Federal Tax Under the Clause?
FAR 52.229-3 defines an after-imposed Federal tax as:
- Any new or increased Federal excise tax or duty taking effect after the contract date.
- A tax that was exempted or excluded on the contract date but whose exemption was later revoked or reduced during the contract period.
- A tax on the transactions or property covered by the contract that the contractor must pay or bear due to legislative, judicial, or administrative action taking effect after the contract date.
The clause explicitly states that after-imposed Federal taxes do not include social security tax or other employment taxes. Therefore, changes to payroll-related taxes cannot be shifted to the federal buyer under this clause.
When Can the Contract Price Be Increased for Post-Award Tax Hikes?
Contract price increases are strictly limited to after-imposed Federal taxes. Under paragraph (c), the contract price shall be increased by the amount of any after-imposed Federal tax only if the contractor warrants in writing that no amount for the newly imposed Federal excise tax, duty, or rate increase was included in the contract price as a contingency reserve or otherwise.
Notice that paragraph (c) provides price increases solely for qualifying Federal taxes. It does not provide price increases for state or local taxes enacted after the contract date. For commercial and federal estimators weighing lump sum vs unit price structures, this means the risk of state and municipal tax hikes after bid opening rests with the contractor under standard fixed-price terms.
What Happens If Federal Taxes Are Decreased or Relieved?
Price adjustments under FAR 52.229-3 work in both directions. The contract price shall be decreased by the amount of any after-relieved Federal tax. An after-relieved Federal tax represents any Federal excise tax or duty (except social security or employment taxes) that would otherwise have been payable on the contract's transactions or property, but which the contractor is no longer required to pay or bear, or for which the contractor receives a refund or drawback through post-award legal or administrative action.
The government also penalizes contractor negligence. The contract price shall be decreased by the amount of any Federal excise tax or duty that the contractor is forced to pay, or fails to get refunded, due to the contractor's own fault, negligence, or failure to follow instructions from the Contracting Officer.
What Are the Dollar Thresholds and Administrative Rules?
Contractors cannot seek adjustments for minor tax fluctuations. Under paragraph (f), no adjustment shall be made in the contract price under FAR 52.229-3 unless the amount of the adjustment exceeds $250. When larger changes occur, strict procedural rules apply:
- The contractor must promptly notify the Contracting Officer of all matters relating to any Federal excise tax or duty that may reasonably be expected to cause an increase or decrease in the contract price.
- The contractor must take appropriate action as directed by the Contracting Officer.
- When an exemption is possible, the Government shall, without liability, furnish appropriate evidence to establish exemption from any Federal, State, or local tax if the contractor requests it and a reasonable basis exists to sustain the exemption.
Sources
Acquisition.GOV: FAR 52.229-3 Federal, State, and Local Taxes
Published November 9, 2026. No affiliate links on this page. Facts come from the sources linked above; check them for updates.