With more than 70,000 new companies registering with the Central Contractor Registration (CCR) in 2009, contractors are finding it more challenging than ever to stake their claim in the public sector.
As the number of bidders on government contracts increases, the dollar amount separating successful bidders from the rest of the field is shrinking. According to John Mielke, vice president of Associated Builders and Contractors’ (ABC) Wisconsin Chapter, one local contractor reported losing a bid on a $30,000 job by only $300. The firm also lost a bid on a $500,000 job by $6,000. “We’re seeing increasingly tight margins on jobs,” Mielke says. “Every dollar counts.”
How do contractors cut costs without sacrificing quality? One option is to take full advantage of the provisions of the Davis-Bacon Act, a law that applies to all federally funded construction projects with a value of more than $2,000, as well as to all projects funded in part or in full by the American Reinvestment and Recovery Act (ARRA).
The Davis-Bacon Act requires all contractors and subcontractors performing work on federally funded construction contracts to pay their laborers and mechanics the prevailing wage rates and fringe benefits for corresponding classes of laborers and mechanics employed on similar projects in the area. Prevailing wage rates and fringe benefits are determined by the U.S. Secretary of Labor, and are specified in the terms of the request for bid.
The base wage rate must be paid to the worker in wages, but the fringe portion may be used to pay fringe benefits or allocated as additional cash wages. When contractors use the fringe portion of the prevailing wage to provide “bona fide” benefit plans to their workers, these dollars are taken off the payroll and are exempt from payroll taxes such as FICA, FUTA and SUTA, as well as workers’ compensation. Benefits that might be included in a bona fide benefit plan are retirement plans and medical, dental, vision, disability and life insurance.
While rates for SUTA and workers’ compensation vary from state to state, a conservative estimate is that payroll taxes and workers’ compensation add 25 cents to each dollar paid as additional cash wages. The savings realized by using the fringe benefit portion of the prevailing wage can be enough to bridge the gap between winning and losing a bid.
“We have saved nearly $250,000 since implementing a prevailing wage benefit plan approximately six months ago. I am optimistic that we’re going to save nearly $1 million in our first year with the plan,” says Carol Kolona, vice president and chief financial officer of Kolona Painting and General Construction, Inc., Waianae, Hawaii.
“My employees, who initially were skeptical about moving the fringe from their paycheck to the plan, are now my biggest supporters. Some of them have even brought their statements to work—they are bragging about and comparing the growing size of their retirement plans, which is helping evangelize what we are doing.
“It’s a real win-win situation; we are saving money and making our bids more competitive, and our workers are thrilled about the amount they are able to save for retirement,” Kolona says.
Several recent news reports projected that SUTA rates will rise this year, even doubling in some states, making a strong case for using fringe dollars to implement bona fide benefit plans for hourly workers. Using these dollars to provide medical insurance also complies with mandatory health insurance legislation passed earlier this year. As a result of health care reform, in 2014 construction employers with more than 50 employees will be required to offer health care coverage to their employees, which can be paid for with fringe dollars via a prevailing wage benefit plan.
“Masonry is very competitive. We’re seeing a lot more bidders for public works jobs, and we’re even seeing bidders from out of state,” says Susie Holland of Holland & Holland Masonry, Shelbyville, Ill., which recently started a prevailing wage benefits program.
“The savings on our payroll taxes help us to bid much more competitively,” she says. Some workers also decided to add elective deferrals into the company’s 401(k) plan.
Holland & Holland is currently working on three prevailing wage jobs and preparing bids for two more. “The stimulus funds have been good to us,” Holland says.
Using Apprentices on Davis-Bacon Jobs
Another way contractors can cut payroll costs when bidding on projects is by using apprentices to reduce composite crew costs. However, Mielke cautions that contractors need to participate in apprenticeship programs for the right reasons. “Getting involved with apprenticeship programs is a three- to five-year commitment,” he explains. “Contractors need to be concerned about training, rather than looking for a short-term way to reduce labor costs.”
Apprentices are paid a percentage of the journeyman wage, which results in lower composite crew costs. The percentage an apprentice is paid increases depending on hours in the program, until he reaches journeyman status and is paid the full journeyman wage. On federal Davis-Bacon projects, apprentices are entitled to receive fringe benefits in accordance with provisions of the apprenticeship program in which the worker is enrolled.
If the approved program is silent on fringe benefits, apprentices are allocated the full fringe amount for their classification, even if they are paid apprentice wages. In other words, while apprentices are paid lower base wages, employers still have the full fringe benefit amount to allocate to bona fide benefit plans on the worker’s behalf.
However, contractors should be aware that this may not be the case for projects funded by state dollars in states with their own prevailing wage laws. In Wisconsin, for example, the ABC apprenticeship program allows contractors to pay a percentage of the fringes on Davis-Bacon projects.
The confusion surrounding apprenticeship programs comes into play when the requirements for acceptable ratios of apprentices to journeymen on a job vary by trade from state to state. On federal Davis-Bacon projects, apprentices must be employed and individually registered in a bona fide apprenticeship program registered with the U.S. Department of Labor, Employment and Training Administration, Bureau of Apprenticeship and Training, or with a federally recognized State Apprenticeship Agency. Apprentices who are in the first 90 days of probationary employment in such an apprenticeship program also can be used if they are not individually registered in the program, but have been properly certified to be eligible for probationary employment as an apprentice.
In Wisconsin, for example, contractors can contribute a specified amount per hour toward a training trust fund. This allows employers to build up a balance to pay for training provided by approved apprenticeship programs, and it assists in managing cash flow. Contractors can take credit against the fringe benefit portion of the wage for funds contributed to approved apprenticeship training programs, which helps them utilize the entire fringe benefit and maximize payroll savings.
With nearly three-quarters of the $308 billion appropriated for construction and infrastructure projects in the ARRA scheduled to be spent by the end of fiscal year 2011, opportunities in the government sector will continue to be significant for the foreseeable future. Companies must do everything they can to be in the best position to win these jobs.