Transfer Pricing Tool
for Construction

Transfer Pricing for Construction: OECD Methodology

Construction and engineering groups typically have relatively straightforward transfer pricing structures compared to technology or pharmaceutical companies. The dominant intercompany transactions are subcontracting services, equipment leasing, and project management fees. Cost Plus is the primary transfer pricing method for construction services because the cost base is readily identifiable and the functions performed are typically routine — the entrepreneurial risk and IP (design, engineering, project methodology) reside with the principal or lead contractor.

For intercompany subcontracting, the Cost Plus method applies a markup to the actual costs incurred by the subcontractor (labour, materials, equipment, overhead). Typical arm's length markups for construction subcontracting range from 5% to 12%, depending on the specialisation required, the risk borne by the subcontractor, and the market conditions. Highly specialised subcontractors (piling, tunnelling, MEP installation) tend to command higher markups than general contractors performing routine civil works. The markup must reflect the functions performed, assets used, and risks assumed by the subcontractor — OECD ¶2.39–2.55 provides the framework for Cost Plus analysis.

For equipment leasing between group entities, the CUP method is preferred because heavy construction equipment rental rates are widely available from market sources (equipment rental companies, industry benchmarks, tender databases). Adjustments may be needed for equipment age, condition, maintenance obligations, and utilisation rates. Joint venture and consortium arrangements are common in construction — where related parties participate in the same project, the allocation of revenue, costs, and profit must be arm's length and documented. IFRS 11 classification of these arrangements affects the accounting treatment and can interact with transfer pricing requirements.

Recommended Method: Cost Plus Method

For construction entities, the cost plus method is typically the most appropriate transfer pricing method. This tool pre-selects this method based on industry best practice and OECD guidance. Typical arm's length ranges for construction are 5–12%.

Typical Construction Intercompany Transactions

Intercompany subcontracting — One group entity subcontracts construction work to a related-party entity in a different jurisdiction. Cost Plus based on actual project costs is the standard approach. Preferred method: Cost Plus Method.

Equipment leasing — Group entity leases heavy construction equipment to related project companies. CUP applies where market rental rates for equivalent equipment are available. Preferred method: CUP (Comparable Uncontrolled Price).

Project management and engineering — Centralised project management, engineering design, and technical oversight services provided to project subsidiaries. Cost Plus for routine management. Preferred method: Cost Plus Method.

Regulatory Context

Construction TP is typically lower-risk than technology or pharma but gains attention when cross-border subcontracting is significant. Posted worker rules, permanent establishment risk from construction sites (OECD Article 5(3) — 12-month threshold), and withholding taxes on service fees add complexity.

Limitation: This tool supports Cost Plus for subcontracting and CUP for equipment leasing. For profit allocation in complex joint venture arrangements, consult a specialist.