By Adam Bonsky, contributor
Many contractors who turned to publicly-funded projects two years ago probably thought they'd be shifting their focus back to private sector work by now. But with economic recovery taking longer than anticipated, and certain areas of the country lagging behind, concrete and asphalt contractors are discovering they may be bidding and working on prevailing wage jobs for the foreseeable future.
Now shrinking state and federal budgets are making these projects less plentiful as well, and competition is exploding. Contractors who once saw five bidders per project are now competing with 20 bidders. With rising concrete prices, contractors are squeezed and forced to find other ways to cut costs and gain a competitive edge. One way to do this is by using the fringe portion of the specified prevailing wages on covered jobs as intended, to provide benefits for hourly workers.
Using Prevailing Wages to Trim Payroll Costs
The Davis-Bacon Act applies to all federally-funded construction projects with a value over $2,000; and to all projects funded in part or in total by ARRA funds, regardless of project size. It requires all contractors and subcontractors performing work on federally-funded construction contracts to pay their laborers and mechanics not less than 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. Thirty-one states have their own prevailing wage laws, often referred to as "little Davis-Bacon Acts."
When contractors use the fringe portion of the prevailing wage to provide "bona fide" benefit plans for their workers, these dollars are taken off the payroll and are therefore exempt from payroll taxes such as FICA, FUTA and SUTA as well as workers compensation and general liability. Examples of benefits that might be included in a bona fide benefit plan are retirement plans and medical, dental, vision disability, and life insurance. Although there are variances in the rates for the last two, conservatively these taxes represent an additional 25 cents on each dollar paid as cash wages. Here's an example of how much can be saved by removing these dollars from payroll:
Sample Calculation
For purposes of this example, the company has 15 employees doing prevailing wage work. These employees work approximately 1,000 hours each per year. The fringe amount above the base rate is $10/hour and the average approximate additional payroll cost when paying fringe dollars as cash wages is 25 percent.
15 employees X 1000 hours = 15,000 total hours
15,000 hours X $10.00 = $150,000 in additional payroll
$150,000 X 25% = $37,500 Company Savings
Savings realized over 5 years: $187,500
Savings realized over 10 years: $375,000
Hour Banking Offers Unique Approach
Prevailing wage benefit plans also offer some other unique features which are attractive to contractors affected by the seasonal nature of their jobs, which is common in the concrete industry. For example, workers can "bank" hours during peak work periods, then use their excess hours to maintain coverage during slow periods (such as inclement weather and layoffs). Three to six months of health benefits can be banked and employers only pay for actual hours worked, ensuring you don't overpay for benefits.
Strongform Inc.
Pennie Astle, president of Strongform, Nationwide Industrial Builders, is a contractor who decided to aggressively pursue prevailing wage work two years ago. "Prior to that time, prevailing wage jobs only accounted for about 10 percent of our business," she says. "But with the slowdown in the economy, I decided it was time to learn more about public works jobs." While researching the laws and regulations that apply to prevailing wage projects, Pennie came across the website for The Contractors Plan.
"I saw information on the website about using the fringe to provide benefits for workers, and how that could lower payroll burden," she says. "I called to find out how to use this at Strongform."
With 45 employees, the cost savings for Strongform were significant. "By using this strategy, and taking these dollars off payroll, we were able to submit bids that were much more competitive," Pennie explains. "We won jobs that I know we would have lost if we hadn't reduced our payroll burden."
From SIMPLE to a "Bona Fide" 401(k) for Prevailing Wage
Prior to working with The Contractors Plan, Strongform had a SIMPLE plan - which is not compatible with the requirements for a bona fide benefit program. SIMPLE IRA and SIMPLE 401(k) plans are statutorily prohibited from contributions which vary between job classifications by an hourly rate. "For any contractor thinking about setting up a prevailing wage benefits program, I recommend looking for a company that will act as a resource and a partner," Pennie says. "For us, working with someone who specializes in setting up and administering these plans was invaluable. We could rely on them to help ensure we were in compliance with all the laws that apply to bona fide benefits plans."
Another advantage Pennie found to working with a specialist in prevailing wage plans was the ease of implementation and subsequent administration. "Basically, it was as easy as 'read and sign'," Pennie says. "The Contractors Plan took care of all of the correct documents - everything was provided for us. The enrollment forms were easy to use, and the fact that they were available in both English and Spanish was a huge convenience." While Strongform is headquartered in Minnesota, the company performs work nationwide, so having access to forms and information online was especially helpful. "Making the switch was not difficult at all," Pennie says.
Good for Workers, Good for the Company
Implementing a bona fide benefits plan yields advantages on many levels for companies like Strongform. The most apparent and immediate cost savings is the reduction in payroll burden. Since Strongform works all across the country, they were able to further reduce their costs in states that allow companies to put more than the specified fringe amount toward benefits. This is allowable on all federal prevailing wage projects, as well as in certain states.
An additional cost savings for Strongform was realized by counting fringe dollars contributed to hourly workers' retirement accounts toward the company's profit-sharing match. This means Strongform can continue doing the match, just as they did before, but it costs them significantly less to do so.
Employee Response
Some contractors may hesitate to implement a bona fide benefits plan for fear that workers will be unhappy when they see the lower numbers on their weekly checks. But Astle found that her employees were enthusiastic about saving for retirement.
"We had very positive reaction from our workers," Pennie said. "Almost all our guys make voluntary contributions, as well." Pennie attributes this in part to the way the company's 401(k) plan was designed. "There are a variety of funds to choose from, and the investment choices are easy to understand and use," she says.
Saving Money, Helping Workers, Enhancing Competitive Edge
For contractors searching for ways to cut costs and improve their chances of winning bids on government jobs, implementing a bona fide benefits plan can help. It also provides valuable benefits for hourly workers by providing them with a way to save for retirement, as well as the protection offered by medical, vision, dental, and life insurance. And regardless of economic conditions, it makes good business sense to reduce costs and sharpen your competitive edge when bidding on public works projects, which is highly likely to be the only work available to asphalt and concrete contractors for the foreseeable future.
About the author
Adam Bonsky is EVP of government markets for Fringe Benefit Group, which has been helping government contractors design and administer fringe benefit programs since 1983. He may be reached at [email protected].
