Generally speaking in most states, if you are a contractor doing work for an exempt entity like a school or a church, or if you are the church or school or other exempt entity, you are better off using a separated contract approach. It is generally better to separately state the charges for labor and materials.
Why is that? In many states, the contractor is deemed to be the "consumer" of materials they use in building a structure. So if the contractor enters into one lump-sum agreement say to build a new school for $10M, then the contractor will generally be liable for tax on purchases of steel, lumber, etc. Even though those materials would be exempt from the tax if they had been purchased directly by the school.
Another case with these type of facts has come up in Georgia. This is the headline from CCH: "Contractor's Purchases for Exempt Hospital Authority Were Taxable"
"The Court of Appeals of Georgia has held an Illinois contractor liable for Georgia sales and use taxes on purchases it made for a tax-exempt Georgia hospital authority because the purchases were made in the performance of the contract. The court found that Georgia law does not provide for a "derivative" sales tax exemption based on any agency relationship that the contractor had with the tax-exempt authority."
The contractor argued that it was functioning as the "agent" of the hospital when it bought materials. The contractor lost at every level from the administrative all the way to the appeals court. It appeared the appeals court was sympathetic to the contractor's plight, but said the legislature would have to cure this problem. Let us know if you'd like a copy of this case.
The better solution is usually for the school to enter into separate contracts with the contractor, or it may even be better for the school to buy the materials itself without even using the contractor in the middle.