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May 23, 2024
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How to Maximize Savings with Prevailing Wage Fringe Credits: A Comprehensive Guide for Contractors

May 23, 2024
min read

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Did you know you can significantly reduce your labor costs and payroll taxes by leveraging Prevailing Wage Fringe Credits instead of paying your workforce in cash?

If you're a contractor working on prevailing wage projects, understanding and utilizing these credits can save you thousands of dollars annually. But what exactly are Prevailing Wage Fringe Credits, and how can they benefit your business?

Let's dive in. Let’s start with the basics

What Are Prevailing Wages and the Davis-Bacon Act?

The Davis-Bacon Act, enacted in 1931, mandates that contractors and subcontractors working on federally funded or assisted construction projects pay their laborers and mechanics no less than the locally prevailing wages and fringe benefits for corresponding work on similar projects in the area. This law aims to prevent contractors from undercutting local wage standards and to promote fair competition by ensuring that all bids are based on the quality of service and efficiency, not on lower labor costs.

Prevailing wages are the standard wages set by government agencies for specific types of work within various geographic areas. These rates ensure that workers on public works projects receive fair compensation, reflecting local labor market conditions.

Contractors working on federal projects must pay their employees the "prevailing wage." These rates vary by county and are established by federal and state governments.

Prevailing wages typically have two components:

  1. Base Rate: The basic hourly rate.
  2. Fringe Rate: Additional benefits can be paid in cash or as employer-sponsored benefits like health insurance or retirement plans.

Prevailing Wage Fringe Credits are part of compliance requirements under the Davis-Bacon Act and related laws. Contractors on federally funded construction projects must pay their workers prevailing wages and fringe benefits. These benefits include health insurance, retirement plans, vacation pay, and other benefits. Their value is credited toward meeting the total prevailing wage obligation.

Understanding Fringe Benefits in the Context of Prevailing Wage

Fringe benefits are additional compensation beyond regular wages, including health insurance, retirement plans, and vacation time. In prevailing wage projects, fringe benefits ensure workers receive fair compensation. This levels the playing field, preventing unfair competition based solely on wages. Employers must provide a comprehensive package, including hourly rates and non-monetary compensation.

Calculating Fringe Benefits

Calculating fringe benefits involves various factors, such as contribution amounts and credits. Contributions refer to the actual monetary amount an employer contributes towards providing specific fringe benefit programs for their employees. To calculate fringe benefit credits, employers must understand how much they contribute towards these benefits for each employee's work hour.

Why You Shouldn't Pay Your Fringes in Cash

Many contractors pay the prevailing wage, including the fringe portion, in cash. While legal, this approach is financially inefficient. Here's why:

  1. Double Payment: If you already offer benefits and pay the full fringe in cash, you're effectively double-paying.
  2. Tax and Liability Savings: Paying fringes in benefits reduces your employer tax and workers' comp liability, typically cutting labor costs by 5% or more.

How to Utilize Fringe Credits?

There are two primary ways to reduce labor costs using fringe credits:

  1. Traditional Benefit Plans (TBPs): Standard employer-sponsored plans like 401K programs or health insurance. To qualify for fringe credits, TBPs must meet specific criteria.
  2. Prevailing Wage Benefit Plans (PWBPs): Benefit plans designed specifically for prevailing wage contractors, allowing for variable contributions based on the type of project (public or private).

How Much Could You Save?

Your savings depend on the size of your workforce and the amount of prevailing wage work you do. For instance, a scaffolding contractor with 25 employees doing 10% prevailing wage work can save significantly by paying fringes in benefits rather than cash.

Example Scenario: Calculating Savings with Fringe Benefits

Consider a worker who is entitled to a prevailing wage of $50 per hour, which includes a $35 base wage and a $15 fringe benefit. If the contractor pays the entire $50 in cash, and the payroll burden (including taxes and insurance) in the relevant state is 25%, the total labor cost rises to $62.50 per hour [$50 + (0.25 x $50)].

However, if the contractor pays the fringe benefit portion through funding employee benefits, the total labor cost is reduced to $58.75 per hour [$50 + (0.25 x $35)]. When you multiply these savings across hundreds of employees working 40 hours a week over several years, the contractor can reduce bid costs by hundreds of thousands of dollars.

Contractors can also use existing benefit plans to fulfill their fringe benefit obligations. For example, if the contractor sponsors a group health plan and contributes $500 per month or $6,000 annually, the hourly value of the health benefits is $2.88 (calculated based on a 2,080-hour work year: 40 hours/week x 52 weeks). This $2.88 per hour can be credited toward the employee’s $15 fringe benefit.

In this scenario, the health plan covers a portion of the fringe benefit obligation. To avoid paying the remaining fringe benefits in cash, contractors can consider additional benefits, such as contributions to retirement plans, to make up the difference.

By properly calculating fringe benefit credits and following local guidelines, businesses ensure fair compensation packages for their employees while meeting legal obligations. This strategic approach not only ensures compliance but also optimizes labor costs, providing a significant financial advantage.

How Lumber Can Help

  • Our team of experts has assisted hundreds of contractors in fully leveraging fringe credits, optimizing benefit programs, and prevailing wages to maximize savings. Many of our clients see annual savings in the thousands of dollars.
  • Lumber’s AI audit bot assists contractors by auditing their Certified Payroll reports and flagging potential compliance issues.
  • Lumber Payroll is among the few construction payroll products that utilize AI to process payroll, reducing manual processes by 95%.
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