Valuation of taxable supply

Hi, refer section 15 of CGST act 2017 (value of taxable supply)

It should be only on service charges

No.... the contractor is doing rightly as per GST Act.

As per Section 15(2)(a) , the Value of supply shall include any taxes, duties, fee levied under any law except under GST law.
& As per Section 15(2)(c) , any amount charged by supplier in respect of supply of goods or services at the time of or before delivery of goods or services shall be included in value of Supply.

Note : GST is not applicable when expenses reimbursement is done in capacity of Pure Agent . As per Rule 33 of CGST Act , the Pure Agent does not use the goods or services procured for the provision of his services or his own interest , neither intend to hold nor hold any title in goods & Services.
But in your case you are liable to charge wages +PF+ESIC as per Act & the same being put before contractor for reimbursement (on which you hold title) . So you cannot be cover under Definition of pure agent .