Commentary: Earn Higher Profits By Getting Creative with Wage Determinations
No matter which news source you follow, the story is the same: economic recovery for the construction industry is trailing behind other sectors. As a result, contractors are searching for every possible means to lower bidding costs to win more jobs. Many merit-shop contractors may not be aware of how to use the flexibility afforded by wage determinations on projects to which the Davis-Bacon Act applies.
About the Davis-Bacon Act
Here’s a brief primer on Davis-Bacon:
• Applies to all contracts funded in whole or in part with money from the American Recovery and Reinvestment Act of 2009 (also referred to as the ARRA or “stimulus package”).
• Applies to any federal contract over $2,000 for the construction, alteration, or repair of public buildings or public works.
• Sets minimum wages to be paid to various classes of laborers and mechanics employed under these contracts. Under the provisions of the act, contractors or their subcontractors must pay workers employed at the jobsite no less than the locally prevailing wages and fringe benefits paid on projects of a similar nature.
• The Secretary of Labor determines local prevailing wage rates.
• In general, these wages are comprised of two parts: a per-hour base wage and a per-hour fringe-benefit allocation.
• Contractors doing Davis-Bacon work can pay any combination of cash wages and fringe benefits as long as the total equals or exceeds the base wage plus fringe benefit amount from the wage determination.
Creating Payroll Savings
So how can you use the Davis-Bacon Act and wage determinations to create savings? Employers decide how to satisfy the wage obligation—what they will offer and contribute for their employees, which might include vacation and holiday time, an approved apprenticeship program, bona-fide fringe benefits, or cash and have it treated as wages.
When the fringe portion of the wage is used as intended— to provide benefits for hourly workers—this amount is exempt from payroll burden including FICA, FUTA, SUTA, workers compensation and general liability. In general, this saves contractors as much as 25 cents on each dollar not paid as additional cash wages. Here’s an example of how much you could save simply by providing bona-fide benefits for your hourly workers:
Sample Calculation: In this example, the company has 15 employees doing prevailing wage work. These employees work approximately 1,000 hours each per year. The fringe amount above the base rate is $10/hour, and the average additional payroll cost when paying fringe dollars as cash wages is 25%.
15 employees x 1,000 hours = 15,000 total hours
15,000 hours x $10 = $150,000 in additional payroll expense s
150,000 x 25% = $37,500 in savings
Maximizing Payroll Savings