Significant Davis Bacon / Prevailing Wage Opportunities for “Best Practice” Construction Firms

Mention prevailing wages to an open shop Contractor, Development firm or General Contractor and watch them shut down like a Toyota Executive. They begin to talk about how much more jobs like this cost to produce than do jobs that are not prevailing wage; agreed, not the point. The point is to fish where the fish are, and succeed landing them with frequency.

With funding scarce on so many projects, pulling in funds from the American Recovery and Re-Investment Act of 2009, Davis Bacon of 1931 or other such federally funded, or state funded programs stipulating a prevailing wage can become a strategic imperative. Accept that prevailing wage must be paid on these projects, but do it in a creative way to leverage your bid. This kind of creativity can be the difference between a 1st place payday and everyone else.

There is a smart strategic play that I do not see many open shop construction firms utilizing when they bid on these types of funded projects. Please be cognizant Union Shop’s are already using this technique, as they are set up for it. If an open shop wants to compete with a Union Shop on Davis Bacon or other like funded projects they need to employ the same weapons and thus cost structures to be competitive. Before I get into the details please indulge a brief primer on prevailing wage for those firms not entirely engaged in these types of funded projects.

With respect to Davis-Bacon and related Acts contractors must pay laborers and mechanics employed directly on the job site at the least locally prevailing wages (including fringe benefits). This would be listed in the Davis Bacon wage determination section of the contract for work performed. Remember the Davis Bacon “Prevailing Wage” is the combination of the basic fringe local hourly rate AND any fringe benefits listed in the Davis Bacon wage determination. To check prevailing wages in your area go to the Davis Bacon Wage Determinations Web Site.

The construction firm has an obligation to pay the “prevailing wage” listed in the contract for each laborer or mechanic on the job site either in a total cash wage, or a combination of cash wage AND a predetermined employer provided fringe benefit. Prevailing wage must be paid for all hours worked on the job site.

Here’s where the wheat separates from the chaff, or what I like to call the leveraged differentiator. Most non-union construction firms pay the fringe benefit portion in additional cash wages. The best practices construction firm knows and understands that there is another way to comply with the law, resulting in a wage costs savings in excess of 20%. Imagine cutting your bid by 20% on the labor component while your competition is overpaying to comply with Davis Bacon like prevailing wag e acts. As you read this which firm are you?

The Strategy Works Like This :

Instead of paying the full prevailing wage for say a carpenter (Carpenters & Soft Floor Layers) at the full rate of $ 78.98 (Residential – Manhattan), a best practices firm would split the rate as stipulated in the Davis Bacon General Decision County Index, or contract by what is stipulated. In this example the split is $43.02 for real wages, and $35.96 for fringe benefits.

By paying the fringe rate of $35.96 in benefits instead of cash the Best Practices Construction firm saves on the following:


Social Security and Medicare Taxes     
Federal Unemployment Taxes
State Unemployment Taxes
Workers Compensation Premiums
General Liability premiums (if based on payroll).

How much could you save if you didn’t have to pay all of the above expense burdens on the full rate of $78.98, but instead paid the above expense only on the split labor rate of $ 43.02 of the real wage rate? The answer is big dollars, enough to be the difference between getting the bid or not! I had one client say to me, prevailing wage is prevailing wage, or $78.98 is $78.98. True but how about all of those indirect costs above the $78.98 that needs to be absorbed and priced into the bid like all of the taxes and insurance premiums. Paid on top of the $78.98. On some construction trades the workers compensation premium alone is 10% of wages paid.

The other advantage you may encounter is when on prevailing wage jobs the contractor’s tend to extend these jobs out a bit longer because of the increase in wages. If you carve out the fringe rate and not pay them in cash equivalents that motivation decreases.

To bid on Federally funded jobs a contractor should register with the General Contract Registration CCR
The CCR eliminates the need for contractors to apply separately to each federal agency. Once you are registered at the CCR, the contractor can bid on construction opportunities listed on the Federal Business Opportunities web site Federal Business Opportunites. I recommend that you sign up for email alerts within this web site. You can get pretty granular in terms of type of jobs and work you wish to pursue and within what state. It’s worthwhile to check out especially armed with levering the split rate technique that most open shop construction firms have no idea on how to execute.

In Summary:

A) This is a strategy that gives open shop construction firms pricing tools that put them on par with their Union competitors.
B) Calculate the split rate and provide “bona fide” fringe benefits for that prevailing rate job only, for laborers and mechanics.
C) Deduct the above taxes, fees and insurance premiums from the fringe rate component to achieve your savings, lowering your labor component of your bid making you more competitive.
D) The savings is not a result of a lower prevailing wage rate, but lower indirect wage costs above the prevailing wage rate, (i.e. taxes, fees, and insurance premiums).
E) If you are a G.C. firm biding on these federally & state funded programs push your open shop trades to comply with B & C, to capture and apply D so your bid is that much more competitive. You will lose to firms that are employing this technique (minority), and you will beat the firms that are not (majority).

I plan more future articles on these types of topics. I find it critically important putting our clients in position to win. Their success is definitely our success as we are all on the same food chain. If this topic was helpful let me know so I can get off my insurance coverage soapbox every now and again.

Kind regards,

Insurance Mic

Comments

[Ted Sweeney]

This is a very interesting strategy. Would you say that this method would apply to contracts and wage determinations under the Service COntract Act as well?

Thanks