Understanding the Davis-Bacon Act Expansion - Prevailing Wages for Offsite Construction

The Davis Bacon Act of 1931 (the “DBA”) is a federal law that requires contractors and subcontractors to pay locally prevailing wages to laborers and mechanics on federal or federally-assisted contracts in excess of $2,000 for the construction, alteration, or repair (including painting and decorating) of public buildings or public works.

A prevailing wage is the basic hourly rate of pay plus the fringe benefits provided to similarly employed workers in a given area (typically a surrounding city or county).

The DOL’s Wage and Hour Division (“WHD”) is responsible for determining the prevailing wage paid to various classes of laborers and mechanics employed on specific types of construction projects in each geographic region, called a “wage determination.”   Covered contractors and subcontractors must pay at least the prevailing wage set forth in the wage determination applicable to the class of laborers and mechanics performing work in the area where the worksite is located.

In addition, contractors and subcontractors must submit weekly certified payroll records to the contracting agency and post the applicable DBA wage scales along with the DOL’s Davis-Bacon poster at each covered job site in a prominent and accessible place where they can be easily seen by the workers.

The DBA applies to each federal government or District of Columbia contract in excess of $2,000 for the construction, alteration, or repair of public buildings or public work.  This includes buildings, structures, and improvements of all types that are carried on directly by authority of a Federal agency or with the funds of a Federal agency to serve the interest of the general public.

In addition, some Federal laws for construction that are funded through grants, loans, loan guarantees, and insurance are subject to Davis Bacon labor standards.  These “Related Acts” include many federally assisted construction projects in markets such as transportation, utilities, housing, and energy.

The DOL takes the position that the DBA applies to federal lease contracts that also call for construction of a public work or building.  The terms “public building“ and “public work” include every building or work, the construction, prosecution, completion, or repair of which is carried on directly by authority of or with funds of a Federal agency to serve the interest of the general public regardless of whether title thereof is in a Federal agency.

Some of the factors considered by the DOL in determining whether a lease is covered by the DBA include:

• Length of the lease;
• Extent of government involvement in the construction project;
• Extent the construction will be used for private rather than public purposes;
• Extent construction costs will be paid for by lease payments; and
• Whether it is written as lease to evade the DBA.

Yes, if the supplier meets certain criteria.

Currently, the manufacture or furnishing of materials, articles, supplies or equipment is not subject to DBA coverage if the business also supplies those materials to the general public, and the plant manufacturing the materials is not established specifically for a particular contract or located at the site of the work.

However, this exception applies to employees of companies whose only contractual obligations for on-site work are to deliver materials and/or pick up materials.  If the manufacture or furnishing of supplies is conducted in connection with and at the site of a DBA-covered public building or public work, the work is subject to prevailing wages.

What is different is the test for determining the exemption for material suppliers.

Under the DOL’s proposed rule, the exception for material suppliers will be determined according to a three-part test:  First, the contractor’s only obligations for work on the contract or project are the delivery of materials, articles, supplies, or equipment, which may include pickup in addition to, but not exclusive of, delivery.  Second, the contractor also supplies materials to the general public.  Third, the employer’s facility manufacturing the materials, articles, supplies, or equipment, is neither established specifically for the contract or project nor located at the site of the work.

The trouble with this test is the DOL also expands the site of work to include offsite construction even if the factory is not established for the contract or project.  As a result, offsite factories will need to determine when they are covered and when they are not.  The DOL currently has no guidance for ambiguities that may arise.  If the contractor gets it wrong, it could risk penalties and sanctions.

We think forcing businesses to compartmentalize is illogical and impractical.  The better approach is to maintain the single exception for all offsite modular construction.

DBA prevailing wage rates substantially increase the costs of construction.  According to a recent study by Beacon Hill Institute, “the current method used by the federal government to calculate “prevailing wages” under the 91-year-old Davis-Bacon Act adds at least 7.2% to the cost of federal and federally assisted construction projects and inflates wages by 20.2% compared to local market averages.”

No. The DBA requires contractors and subcontractors to pay prevailing wages to laborers and mechanics employed directly on the site of work. (Source: Davis Bacon Act, as amended, 40 U.S. Code § 3142(c)(1)).

The “site of the work” is the physical place or places where the building or work called for in the contract will remain; and any other site where a significant portion of the building or work is constructed, provided that such site is established specifically for the performance of the contract or project.

Historically, yes.  But this will change under the DOL’s proposed rule.  Currently, the site of the work does not include permanent, previously established facilities whose location and continuance in operation are determined without regard to a particular Federal or federally assisted contract or project.  (One exception was for factories that were located sufficiently near or adjacent to the worksite and established for the specific purpose of that project such as concrete batch plants).

Under the DOL’s proposed rule, the exception for offsite facilities is eliminated.  Instead, the DOL expands DBA coverage to offsite modular facilities where “significant portions” are constructed for specific use in a designated building or work, irrespective of whether the offsite facility operates separate and independent from the federal project.

The DOL defines “significant portions” of work to mean “entire portions or modules of the building or work, as opposed to smaller prefabricated components, are constructed and delivered to the place where the building or work will remain, with minimal construction work remaining on site other than the installation and/or assembly of the portions or modules.”  There is no guidance on when the DOL would consider “minimal” construction to be remaining.  The DOL also fails to distinguish between the many uses for modular, from housing to mobile facilities to containers, where construction methods differ depending on the product.  As it stands, the DOL leaves it to the contractor to make that determination.  If the contractor gets it wrong despite a good faith evaluation, it could face penalties.

Noncompliance with the DBA can be costly. Contract payments can be withheld to satisfy liabilities for unpaid wages as well as liquidated damages due to overtime violations of an associated federal law, the Contract Work Hours and Safety Standards Act (CWHSSA).  Contractors or subcontractors found to commit an “aggravated or willful violation” may be debarred from future contracts for up to three years. Falsification of certified payroll records or kickback of wages are subject to prosecution with penalties including fines and/or imprisonment.

In addition, the DOL proposes to include “anti-retaliation” provisions in its current regulations. This change almost certainly will expand the number of DBA claims against the contractor.

The DOL’s broad interpretation of “the site of work” will result in modular construction companies paying DBA prevailing wages for work performed both onsite and offsite.  Where DBA prevailing wages previously applied to employees directly onsite, the DOL’s proposed rule expands the prevailing wage rates throughout the manufacturing process irrespective of location.

This means construction costs and employee payroll and benefits costs will almost certainly rise.

For example, according to data compiled by the Bureau of Labor Statistics, the national median hourly wage for a carpenter is an estimated $23.20 p/hour, not including benefits.  By contrast, the DBA prevailing wage for a building and residential carpenter in Los Angeles County, California is $51.60 p/hour in base pay and $16.28 in fringe benefits.  In New York (the Bronx, Kings, New York, Queens, Richmond), the DBA prevailing wage rate for a similar carpenter is $54.75 p/hour in base pay and $46.43 in fringe benefits.

The higher costs required to implement DBA prevailing wages creates a competitive disadvantage for U.S.-based contractors compared to off-shored modular components suppliers that do not similarly face DBA rules.  As a result, the proposed rule, if implemented, could contribute to the diminution of the domestic modular construction industry that is increasingly sought by federal agencies as a cost-effective, climate-friendly, and community-oriented solution to housing and other building needs across the country.

While it is true that less than 10% of MBI members are active in the federal construction space, over half are active in projects with state and local funding, including educational facilities, offices, housing, and healthcare. Twenty-eight states have “Little Davis Bacon Acts” which also require prevailing wages. If the federal DBA is expanded to include offsite facilities, it is HIGHLY LIKELY that at least some states will follow the DOL’s lead.  If this proposed rule stands, and states follow with their own expansion, this could impact the volumetric modular industry in the United States by approximately $2 billion in lost project revenue, or nearly 20% of the total industry output!

Under the proposed rule, the DOL seeks to broaden the geographical areas where it surveys wages for purposes of making a wage determination.  Based on this approach, rural counties could be combined with municipalities to create a larger region for determining wage rates.  This has the potential effect of increasing prevailing wages in rural areas with a lower wage scale compared to large municipalities.

In its preamble, the DOL cited the increasing popularity of modular construction as the very reason for expanding the DBA to offsite modular facilities.  Again, under the current regulations, offsite modular construction is traditionally not covered by the DBA.  In an effort to broaden its regulatory reach, the DOL is now redefining the “site of work” to specifically include offsite modular construction so that both onsite and offsite work performed on or in connection with a federal or federally-assisted construction contract will require the payment of prevailing wages to covered workers.

Congress did NOT pass any legislation authorizing this expansion. The DOL’s is attempting to expand the law’s scope by reinterpreting its regulations.

We strongly contend the DOL cannot change the law through a rulemaking without clear Congressional authority.  Congress originally delegated authority to the DOL to promulgate reasonable regulations implementing the statutory provisions of the DBA.  However, because the DBA applies only to laborers and mechanics who are employed “directly on the site,” the DOL’s expansion of the DBA to include offsite workers contravenes the express language of the Act.  While the agency has some authority to implement and enforce the DBA’s provisions, it is not entitled to legislate or rewrite the law itself.  Congress has spoken to the precise question at issue, and despite two amendments to the Act, it has not passed legislation expanding the scope of the DBA beyond workers employed directly on the site.

Two reasons: it’s unjust and it doesn’t work.

First, the DOL is using its rulemaking power to legislate an expansion of the DBA despite opposite language in the law and established court precedent squarely ruling against the DOL on the issue. Nevertheless, the DOL is once again attempting to do what Congress and the courts have not permitted it to do, simply because it has seen the increased use of and federal support for modular construction in public buildings and works. We believe the DOL should abide by the actual law and not target an industry for its success.

Second, the DOL’s proposed rule assumes modular is equivalent to general construction with respect to wage rates and fails to account for the industry’s factory construction and assembly methods. As a result, the DOL’s revised rule will apply prevailing wage rates derived from the general construction trades to modular construction where the workflow, skills, risks, and activities are distinct from the segregation-of-trades model followed on site.

Additionally, given that the DOL’s current wage determinations do not account for modular construction methods (because offsite modular work has been exempt until now), the prevailing wages do not reflect market rates in the modular industry.

The DOL proposes to fill in the gaps by adding new classifications on its own (via a “conformance”) without waiting for requests from contractors who understand the local labor market. To determine the prevailing rate, the DOL proposes to rely on a method rejected in the 1980s where a rate of pay for only 30% of the surveyed workforce will suffice as “prevailing” if it cannot find a single rate for a majority. Because the DOL traditionally looks to collective bargaining agreements for wage and benefits data, the prevailing wage for offsite modular work will reflect union rates applicable to a smaller proportion of the workforce rather than the overall labor market.

MBI’s Board of Directors recently voted unanimously to allocate funds from MBI’s war chest to fight this issue. MBI has submitted public comments on behalf of the industry, along with numerous member company letters that were also submitted. MBI plans to advocate and educate key Congressional leaders in an effort to modify and amend the proposed rule before it becomes final. If unsuccessful, MBI will seek a legislative and/or legal remedy.

First and foremost, stay educated and engaged about this issue. MBI believes this is the biggest threat to the industry EVER! We will also coordinate an industry effort to reach out to key Congressional leaders in our members’ districts and arrange factory tours when possible. This will be a lengthy and costly fight for the industry, and we are encouraging all our members to consider making a donation to MBI’s “Regulatory Relief Fund” to ensure our war chest funds are not depleted. Unfortunately, this is not the only issue we will have to address to protect the industry’s interests.