How overhead and profit are allocated across activity buckets in a mixed contract
Sent to ADOR Tax Policy on August 13, 2026. Answered August 25, 2026.
The question
Where a contract contains both modification and MRRA activity, the worksheet requires the amount charged for each activity to be separately identified. Overhead and profit are contract-wide and do not attach to a single activity. Whether they are allocated pro rata by direct cost, assigned to one activity, or excluded changes the resulting percentage and can change the classification.
What ADOR said
Allocate overhead and profit pro rata by direct costs. Convert the total costs associated with each activity type into a percentage and allocate overhead and profit to each on that basis. ADOR confirms this method is listed as acceptable in the Evaluating Mixed Construction Contracts worksheet.
What changed. The glossary entries De minimis, Bucket, Combined modification charges, and Overhead and profit; the Classifier's mixed-contract bucket calculator.