The Construction Counselor

This is the third post in a three-part series discussing the impact of the U.S. Department of Labor (DOL) final Davis-Bacon Act (DBA) Labor Standards rule changes that go into effect on October 23, 2023. One of DOL’s goals with the new rule was to create mechanisms to increase wage and fringe benefit rates on a more frequent basis. This post examines how the new rule impacts wages and fringe benefit rates.

The first post examined how the new rule expands DBA coverage. The second post examined how the new rule expands the scope of liability and recordkeeping.

The 1931 Davis-Bacon Act labor standards apply to contractors and subcontractors performing work on federally funded or federally assisted contracts in excess of $2,000 for the construction, alteration, or repair of public buildings or public works.

Key Takeaways

• Be prepared for raising wages, especially in rural areas, and note that DBA wages and benefits are more likely to mirror union rates going forward.
• Watch for more frequent updates to wages in your long-term contracts, such as in all task orders under IDIQs, and be prepared to seek equitable adjustments to contract pricing.
• If your business takes credit for fringe benefit plans, it is time to update calculations to annualize the fringe benefit value, make sure you do not take credit for plan administration costs, and get your unfunded benefit plans (e.g., vacation and holidays) approved by DOL.

Higher Wage Rates Expected

The new rule included several changes to how prevailing wage and benefit rates are set and updated. Together, the changes are intended by DOL to increase rates.

Rates Are Now “Prevailing” if Only 30 Percent of Workers Earn the Rate

The new rule redefines when a wage or benefit rate is “prevailing.” Under the old rule, for a rate to be “prevailing,” at least 50 percent of the workers in an area had to earn that rate. The new rule drops the prevailing threshold to 30 percent, which is expected to lead to adoption of local union rates as the prevailing rate, and therefore increase wages.

Mandatory Wage Increases Every Three Years

The new rule also imposes wage inflation requirements every three years through the use of Bureau of Labor Statistics (BLS) wage escalators (the Employment Cost Index).

Wage Surveys Can Now Combine Rural and Urban Areas, Be Statewide or Run Along a Highway Corridor

The rule allows DOL to structure its wage surveys in ways that will likely lead to increased wage rates, particularly in rural areas. DOL can now combine rural and urban areas with the same wage surveys, adopt state-defined prevailing wage rates, and create state highway districts for wage determinations.

Variable Wage Rates Are Considered Functionally Equivalent

The new rule allows DOL to count “functionally equivalent” rates as a single wage, like unions do in collective bargaining agreements, which will allow premium rates, such as “night premiums” or “zone rates,” to be included in the wage survey as functionally equivalent to the regular rate.

DOL Has Authority to Add New Worker Classification Without Input

The new rule allows DOL to fill gaps in wage determinations by adding new worker classifications and setting rates for them without gathering input from interested parties and surveyed wage data. This will reduce the need for contractors to ask for additional classifications through conformances, but also allows DOL to adopt arbitrary rates that could adversely impact contractors.

More Frequent Wage Determination Updates During Contracts

Under the new rule, wage updates are required whenever a contract is extended or modified to include newly scoped “substantial” construction work and when a contract is extended for a new period of performance, such as through exercise of an option. For indefinite delivery, indefinite quantity (IDIQ) contracts, schedule contracts and long-term operation and maintenance (O&M) contracts, prevailing wage updates will be required on an annual basis, and all task orders issued under those contracts must include the most recent wage determination.

In practice, these changes could lead to complex compliance scenarios that will increase the risk of inadvertent noncompliance. For instance, a contractor with an O&M contract and several task orders issued over time could have multiple wage rates applicable to current work.

Given the new frequency of wage updates in long-term contracts, there is increased risk that wage determination updates will be omitted by the responsible government official, which would trigger a variety of liability issues, as discussed in my second post.

New Hurdles for Companies Claiming Credit for Fringe Benefits

Unfunded Benefit Plans Must Be Approved by DOL

Contractors must obtain DOL review and approval of unfunded benefit plans (e.g., vacation, sick time, holidays) in order to count those benefits toward DBA fringe benefit obligations. If your business takes fringe benefit credit for unfunded benefit plans, make sure you submit the plans for approval by DOL.

Requires Annualization of Benefits

The new rule requires that the value of a fringe benefit plan be annualized, meaning that contractors must calculate the hourly value of the fringe benefits over the course of the entire year—regardless of whether the work is on public or private projects. This creates significant recordkeeping obligations for contractors that want to take advantage of fringe benefit plan costs.

Limits Creditable Plan Administration Costs

Under the new rule, a contractor’s own administrative costs do not count as creditable fringe benefits, even if they pay a third-party administrator (TPA). Third-party costs that are directly attributable to the administration and delivery of the fringe benefits to workers are creditable. If your company is using a TPA or taking fringe benefit credit for any administrative costs, it is time to reevaluate your process to confirm compliance with the new rule.

Conclusion

The Government Contracts and Grants Group at Fredrikson is closely monitoring the DBA rules and guidance. We welcome the opportunity to help you understand the impact of the new DBA rules on your business.

Our team regularly helps prime contractors, general contractors, subcontractors, and material suppliers pursue, negotiate, comply with, and resolve disputes related to government-funded infrastructure projects.