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The Basics of Prevailing Wages in Construction

Yancy Lassiter
Published Dec 18, 2023

For the past 80 years, prevailing wages have been a topic of hot debate in the construction industry. Established in the midst of The Great Depression, these laws were created to ensure people were paid a fair wage for their work. Nowadays, the practice involves setting minimum wage rates (set by either the federal or state government) for workers on construction projects funded by government entities.

Those in favor of these laws argue that they help make sure workers are paid a fair wage for their work, which can help to reduce poverty and promote economic growth. They also argue that these laws promote safety on construction sites, as workers are more likely to be well-trained and experienced when they are paid a fair wage. On the other side, opponents argue that the practice drives up the cost of projects, making it more difficult for important infrastructure projects to get funded.

Key Takeaways

  • Prevailing wage laws in construction are in place to make sure workers are paid a fair wage for either federal or state-funded public works projects.
  • To stay compliant, contractors need to understand wage rates, record-keeping requirements, classification of workers and job roles, timekeeping and payroll systems, and subcontractor compliance oversight.
  • If contractors are able to meet these requirements and take on prevailing wage jobs, they stand to gain several advantages.

What are prevailing wage laws?

Prevailing wage laws are regulations that require contractors to pay their employees a wage rate determined by the government for a particular locality and occupation. These laws apply to federal contracts and public works projects that are funded by state or local governments. Ultimately, the purpose of these laws is to ensure workers on public works projects are paid fairly and that contractors are not able to undercut each other by paying their employees less.

The U.S. Department of Labor determines the prevailing wage rate for each locality and occupation through a process called wage determination, which takes into account the wages paid to workers in similar occupations in the area. The prevailing wage rate is then published on the Department of Labor’s website.

State vs. Federal Laws

Along with federal prevailing wage laws, several states have their own prevailing wage laws that apply to state-funded projects. These laws are often similar to the federal laws, but they may have different wage rates or other requirements.

Some states also have laws that require contractors to pay locally prevailing wages, which are determined by local government rather than the state or federal government. These laws are designed to ensure that workers are able to keep up with the local cost of living.

Overall, these laws are an important tool in making sure people are paid fairly on public works projects. While they can certainly add to the cost of these projects, they’re in place to ensure workers aren’t exploited, and contractors are competing on a level playing field.

How to Manage Prevailing Wage Laws in Construction

Prevailing wage laws in construction can be complex and challenging to manage if you don’t know where to start. To make sure you’re staying compliant, it’s important to take the time to understand all of the applicable wage rates, documentation and record-keeping requirements, proper classification of workers and job roles, timekeeping and payroll systems, and subcontractor compliance oversight.

If this all sounds overwhelming, don’t worry. Here’s a simple breakdown of each of these components:

Research and Understanding of Applicable Wage Rates

To comply with the Davis-Bacon and Related Acts (DBRA), contractors must pay their workers the prevailing wage rate for their job classification. The Wage and Hour Division (WHD) of the Department of Labor sets these rates annually.

Before you start on a new public works job, take the time to research and understand the prevailing wage rates for your specific project and location. That way, there are no questions when it comes to payroll.

Documentation and Record-Keeping Requirements

On a similar note, you’ll have to maintain detailed documentation of your certified payroll records, including:

  • Hours worked
  • Wages & fringes paid
  • Total wage paid to each worker
  • Job classifications of each worker
  • Subcontractor’s compliance with prevailing wage laws.

It’s a lot of meticulous record keeping for sure, but failure to maintain accurate records can result in costly penalties and legal consequences. Certified payroll reports are normally reported on a WH-347. There are other solutions in the software market to help you do the reporting correctly too.

In the unlikely case of an audit, maintaining these records as you do for all of your project specific documentation will help protect you.

Proper Classification of Workers and Job Roles

Misclassifying your workers and job roles can carry significant financial penalties and legal consequences. Remember to keep in mind that all workers may not be required to be part of a certified payroll requirement.

In fact, many management employees on a certified job do not fall under the requirements of this, but you need to do the research to ensure you are classifying this type of employee correctly.

Timekeeping and Payroll Systems

To ensure accurate record keeping and compliance, make sure you’ve got a reliable timekeeping and payroll system. Additionally, you’ll want to make sure you have a way to generate certified payroll reports that meet the requirements of the WHD.

If your payroll system can’t generate these reports, you’ll have to fill out the WH-347 for the record keeping requirements you need up to a general contractor if you are a subcontractor, or up to an owner if you are a general contractor.

Subcontractor Compliance Oversight

If you’re a prime contractor, it’s up to you to oversee your subs’ compliance with prevailing wage laws. You’ll need to have accurate monitoring systems in place to make sure they are paying their workers the applicable prevailing wage rate and keeping accurate records of their certified payroll reports.

Common Pitfalls in Compliance

Common Mistakes SMBs Make with Prevailing Wage Laws

It’s not uncommon for small and medium-sized businesses (SMBs) to face challenges with prevailing wage laws. Some common issues include:

  • Not understanding the scope of the prevailing wage laws and their applicability to their business.
  • Failure to accurately classify workers as employees or independent contractors.
  • Not accurately determine the prevailing wage rate for their trade and location.
  • Forgetting to maintain accurate and complete payroll records.
  • Failure to submit certified payroll reports as required by law.
  • Not providing workers with required fringe benefits.

To avoid these mistakes and ensure compliance your best bet is to simply follow all guidance from the Department of Labor and other resources.

Consequences of Non-Compliance

Non-compliance with prevailing wage laws can carry severe consequences for both contractors and subcontractors. These penalties can include fines, liquidated damages, civil or criminal prosecution, and debarment from future government contracts. Additionally, investigations into non-compliance are time-consuming and costly.

To avoid these consequences, make sure you’re regularly reviewing the Federal Register and staying up-to-date with any changes to prevailing wage laws.

What happens if you don’t meet the requirements in prevailing wage laws?

The good news is, you have some options to be able to meet the minimum wage as determined by the wage determination for the job you would be on.

Combination of Hourly Rate Plus Fringes

Wage determination will show the wage you have to pay an employee on the job. If you’re currently paying a wage less than the minimum wage, you could easily increase the rate for the employee on the specific job to meet the minimum required.

Another option you have is to increase the fringes you’re paying to the employee to combine into the total wage. If you do plan to go down this route, be sure to do more research to make sure the fringes you’re paying can be used as part of the wage in your jurisdiction to meet that minimum wage.

Financial Implications

If you don’t pay the required prevailing wage, you may face financial penalties, including unpaid wages, compensation for liquidated damages, and interest on unpaid wages. What’s more, you might be required to pay attorneys’ fees and other legal costs associated with defending against claims of noncompliance.

Legal Repercussions

Noncompliance with prevailing wage laws can also lead to legal action. If you violate these laws, you may be subject to prosecution and could face fines or even imprisonment. Additionally, you may be subject to debarment on prevailing wage projects.

Risks to Future Contracts and Business Opportunities

Noncompliance with prevailing wage laws can also damage your reputation and future business opportunities. Potential clients may view you as unreliable or untrustworthy – not to mention the negative publicity from non-compliance, which can further damage their reputation.

The Advantages of Doing These Jobs

If you are able to handle the requirements of prevailing wage work, you can easily gain an advantage over other contractors who are apprehensive about doing these jobs.

As an added benefit, being able to correctly do these jobs will also help you better understand your wages and the fringe benefits you offer your employees – oftentimes one of the biggest costs for your business. The more you can understand this data, the better you’ll be able to create accurate estimates for future contract opportunities.

Further Reading

Yancy Lassiter

Yancy Lassiter, a CPA with a degree from the University of Texas, has 12 years under his belt as a Controller and CFO in the construction industry; he’s your go-to guy for finance in the building industry.

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