The scary things contractors do (or don’t do) to save money

Words: John AllenCompetition for government contracts (jobs covered by the Davis-Bacon Act, state prevailing wage, and living and responsible wage ordinances) can be a little scary. The vast majority of government contractors are honest, hardworking people who use their creativity — and often rely on technological advances — to trim costs on public works projects. But contractors with the best of intentions can run into issues with the regulations that apply to government contracts simply by not being aware of them or misinterpreting them. In the past few months it seems there have been new proposed rules or directives published on a regular basis, so it’s not easy to keep your footing as the government contracting regulatory landscape shifts.

And from time to time, some government contractors can unintentionally end up out of compliance just given that they don’t know what they don’t know. Some examples of recent government investigations include:

South Dakota forestry contractors ordered to pay more than $541,000 in back wages to 66 workers on Black Hills National Forest projects. A DOL news release states: “The charges brought by the investigating agencies include conspiracy to defraud the U.S. government by underpaying workers employed on federal contracts with the Forest Service for work in the Black Hills National Forest. A federal grand jury indictment stated that, since January 2008, the nine owners of the logging companies devised a scheme to violate immigration law and defraud the Forest Service by underpaying workers and conducting other unlawful activities. This process allowed the companies to underbid their competitors for the contract work.”

Contract to Cheat. McClatchy Newspapers conducted a year-long investigation into the practices of federal contractors, and in September published a series titled “Contract to Cheat.” The series explores the misclassification of workers as independent contractors as a means of cutting costs on bids and jobs. “In North Carolina, nearly 45 percent of the 826 companies taking part in construction of federally funded or backed affordable apartments during the recession deducted no taxes from laborers and mechanics. In Texas, as many as one-third of the companies on federally funded projects appear to have misclassified workers.”

Among the many unfortunate things about these examples — lack of worker protection, workers not being paid a fair wage, and the government not collecting taxes on jobs it had funded — is the fact that there is a way for government contractors to legally trim payroll costs, save money, and submit more competitive bids.

On government contracts, prevailing wages set by the DOL are listed for each job classification. The hourly wage is expressed in two parts: the base wage and an amount intended to be used to provide benefits for workers on government contracts. This is often referred to as “the fringe.” When fringe dollars are used to provide benefits for hourly workers, they are essentially removed from payroll and therefore exempt from several taxes and assessments.

Contractors on prevailing wage jobs can choose to pay the fringes as additional cash wages, and many do because it appears to be the easiest way to comply with the law. But cash wages paid to workers are subject to payroll taxes such as FICA, FUTA, state unemployment taxes and (in most states) Workers’ Compensation insurance. Although rates for the latter two vary, the additional cost to employers for these taxes is typically around twenty-five cents on every dollar paid in wages. Simply by providing employees a bona fide benefit plan, the contractor can reduce payroll costs. This creates substantial savings over the life of a contract.

Here’s a simplified example: A contractor who has a yearly payroll of $400,000 for prevailing wage work could realize savings of as much as $25,000 in taxes by providing a bona fide benefit plan rather than paying the fringe benefit amount to the employee in cash. Benefits that might be included in such a plan are retirement accounts (401 (k) or pensions), health insurance, vision insurance, dental insurance and life insurance.

There’s no denying that the examples of contractors using illegal tactics to save money are scary. And in the long run, these companies didn’t save a dime because they were hit with court costs, fines, and ordered to pay back wages and taxes. Penalties for violations are steep, and can include debarment from working on any federally-funded contract for up to three years.

Not taking advantage of a means of saving on payroll costs is just as scary, especially when using fringe dollars for benefits protects your workers by providing them with health insurance (now required under ACA for every individual) and helping them save for retirement.

In this ever-changing landscape of healthcare reform and local, state, and federal laws, having an experienced partner is vital. For 30 years, The Contractors Plan has been helping contractors submit leaner bids to win more jobs. We provide our clients and their brokers with quarterly updates on issues and trends that may affect business. We are in regular contact with officials at the Department of Labor and the IRS, and we monitor developments on the state level as well. When you choose The Contractors Plan, you can rest easy knowing that we’ll keep you informed and alert you to any changes that may be on the horizon.

Whether your company is new to public works projects, or has been working on them for years, it’s crucial to seek assistance from an experienced partner. Resources are available to help you bid more effectively while remaining compliant with relevant legislation.

Visit www.thecontractorsplan.com to learn more.

The scary things contractors do (or don’t do) to save money

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