Contractors: Satisfying fringe obligations for government contracts

Contractors: Satisfying fringe obligations for government contracts

If you are looking to save tax dollars, win more government contracts and attract top talent in a competitive employment environment, the opportunity is there – and it smells like Davis-Bacon.

Davis-Bacon. It may sound delicious, but you will not find it in your local grocery store or butcher shop. However, if you bid on government contracts, then you know we are referring to the Davis-Bacon Act and not a new food item.

In 1931, Congress enacted a federal law requiring employers to pay local “prevailing wages” on public projects, which applies to you if your company bids on constructing these projects (for service contractors, see “Service Contract Act” or “SCA”). And if you are familiar with bidding government contracts, you know that the lowest bid is the frontrunner.

The typical trades involved in using federal or state dollars that would adhere to Davis-Bacon include – but are not limited to – road builders, electricians, plumbers and carpenters. These construction contractors have minimum hourly requirements for wages and benefits (also called “Fringe Rate” or “Prevailing Wages”). This Fringe Rate could range from $0.50/hour to $35/hour (SCA is currently $4.80/hour), varying by state, county or trade.

How does an employer satisfy the fringe obligation?

Typical fringe benefits would include traditional benefits such as health insurance, life/disability, dental/vision, 401(k) contributions, paid vacation or other “bona fide” benefits. An additional way to meet the fringe requirement would be to pay cash as a substitute for benefits. Nearly half of employers currently provide cash as a substitute. However, these payments must be segregated as benefits, not wages, and would still be subject to the payroll burden (including FICA, FUTA, SUTA and Worker’s Compensation), which could be the difference between winning or losing the bid for your company and employees.

In the example below, a company with 150 employees is working 200 hours per month on government contracts. You can see the substantial difference that having a benefit plan in place would have on your bidding process:

No benefit plan Benefit plan
Base wage $15.00 $15.00
Fringe paid as cash $6.00 --
Total cash wage $21.00 $15.00
Payroll burden 25% 25%
Fringe contribution -- $6.00
Bid cost hourly $26.25 $24.75
Bid cost reduction -- 5.7%
Savings per hour $1.50
Hours per year 2,400
Annual savings per employee $3.600
Number of employees 150
Employer's annual savings $54,000
Expected contract duration savings (3 years) $1,620,000
(Example only, individual scenarios will affect your exact numbers.)

Depending on your number of employees and the current prevailing wage requirement, having a benefit plan in place could be the difference between winning and losing a contract.

How could a contractor who has a benefit plan in place maximize their offering?

Most employers are doing what they can but may not be aware of other options that can relieve their pain. The good news is there are more options and they can be tax-efficient as well.

What about the employers that are satisfying the entire fringe requirement with bona fide benefits?

In this case, you need to consider how strong your benefit package is at accomplishing two main things: increasing productivity in your workforce and attracting/retaining key employees. This is where an employer can separate itself from competitors and maybe even steal some talent along the way.

Certainly, the retirement plan, health insurance and life/disability insurance are important when it comes to filling most of the fringe rate. There are less common bona fide benefits that can add substantial financial benefit to your employees. Considering Health Savings Accounts, student debt assistance and group permanent life insurance could help enhance your benefit offering and retention of top talent.

If you are looking to save tax dollars, win more government contracts and attract top talent in a competitive employment environment, the opportunity is there – and it smells like Davis-Bacon.


To learn more, contact Bryan Hanning using the information below.

Bryan Hanning

Vice President
Insight Wealth Services

Bryan works with family businesses and is known for his collaborative approach, a global view of the financial challenges of business owners, and his deep knowledge of estate planning, risk management, and tax efficient strategies. In addition to his work with business owners, Bryan enjoys showing a wide range of clients how to maximize their wealth and positively impact the causes and communities they care for using tax-smart financial tools.

Bryan is a member of the Planned Giving Council at Wichita State University. He is a former member of an advisory council to the National Christian Foundation. He is a Certified Family Business Specialist and has been a part of a family wealth-counseling program for almost two decades.

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