Governmental entities that enter into contracts with Davis-Bacon requirements must include the required prevailing wage rate clauses in the contracts or subcontracts. In addition, governmental entities must also verify for each week in which work is performed under these contracts or subcontracts that the contractor or subcontractor submitted the required certified payrolls. It is important for governmental entities to understand this process as it is a required item for auditors to review when performing single audits for programs with this requirement.
Understanding Davis-Bacon requirements from a contractor’s perspective
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 |
3,600 |
|
| Annual savings per employee |
$18,000 |
|
| Number of employees |
150 |
|
| Employer's annual savings |
$540,000 |
|
|
|
|
| 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.
Governmental entities that enter into contracts with Davis-Bacon requirements must include the required prevailing wage rate clauses in the contracts or subcontracts. In addition, governmental entities must also verify for each week in which work is performed under these contracts or subcontracts that the contractor or subcontractor submitted the required certified payrolls. It is important for governmental entities to understand this process as it is a required item for auditors to review when performing single audits for programs with this requirement.