The engineering and construction industry is continuing to urge Congress to repeal government agencies' 3% contract withholding mandate, now set to take effect Jan. 1, 2013.

The provision, part of a 2006 law, mandates that federal, state and local government agencies withhold from contractors an amount equal to 3% of the contract value. It applies to agencies that spend $100 million or more per year on goods and services.

Industry officials have been fighting against the withholding mandate at least since it was enacted. They say the requirement would squeeze or wipe out their profit margins on certain government work.

Support for repeal is strong in the House. A bill introduced  by Rep. Wally Herger (R-Calif.) has 241 co-sponsors as of Sept. 14.  It would not require a revenue-raiser to offset the cost of repeal. Majority Leader Eric Cantor (R-Va.) in an Aug.  29 memo said  the House "will move quickly this fall to repeal this burdensome requirement...."

In the Senate, David Vitter (R-La.) introduced a repeal bill identical to Herger's. Vitter's proposal has 11 co-sponsors.

Sen. Scott Brown (R-Mass.) has a repeal bill that includes an offsetting $39-billion cut in unspecified discretionary spending. Brown's plan has picked up more support than Vitter's, drawing 22 co-sponsors.

It's unclear how the issue will play out on Capitol Hill. Advocates of 3% repeal have the votes to get the Herger bill through the House, but are well short of the needed majority in the Senate.

The requirement originally was to take effect at the beginning of 2011, but the 2009 American Recovery and Reinvestment Act delayed the effective date until the start of 2012. In May, the Internal Revenue Service extended the deadline again, and the requirement now is to take hold on Jan. 1, 2013.

Although the Obama administration hasn't endorsed full repeal of the 3% provision, the issue is on its radar screen. President Obama's proposed "American Jobs Act."  which he announced on Sept. 8, would grant a further one-year delay for the withholding requirement, so that it would kick in at the start of 2014.

That proposed extension would be a positive development for the construction industry, but construction companies' prime goal remains getting rid of the withholding mandate altogether.

The industry was well-represented at a Sept. 14 Capitol Hill press conference organized by the pro-repeal interests, which include the U.S. Chamber of Commerce and other industries.

Terry Neimeyer, chairman and CEO of KCI Technologies Inc., an engineering firm based in Sparks, Md., said the withholding requirement is "not good for jobs, it's certainly not good for my company....." He said it would mean his firm would have to extend what amounts to "an interest-free loan" to the government of $2 million to $3 million.

Neimeyer said that in turn would prevent KCI from hiring 100 more engineers for its staff and also could put the firm's internship program in jeopardy.

In addition, Neimeyer said the withholding mandate would have a "flow-down effect," as prime contractors would withhold payments to their subcontractors, many of which would not have cash-flow volume as strong as primes'. He said KCI subcontracts-out about 25% of its work.

Steve Reynolds, chief financial officer of ELDECO Inc., a Greenville, S.C.-based electrical contractor, said that "3% is a lot to a construction company." Reynolds said construction companies' average profit margin in 2008 was 3% and in 2009 was 2.2%, citing data from the Construction Financial Management Association.

Rich Spicer, vice president with Tyler Construction Group, Columbia, S.C., also spoke against the 3% withholding.  "This is just going to kill cash flow for our company," he said of the mandate.

Obama did take another step aimed at helping federal contractors--on Sept. 14, he set a new policy goal for federal agencies, to have them cut the time it takes to pay contractors to 15 days after the agency receives the contractor's invoice, from 30 days.

"We think that's a great idea," says Rep. Mick Mulvaney (R-S.C), who chairs the House small-business contracting and workforce subcommittee.  But he adds that the 3% withholding should be repealed, too.