While the U.S. economy continues to rebound from the Great Recession, other trends are emerging within the construction industry as trade contractors react to an influx of new work opportunities. As one of Ohio’s largest general contractors, Ruscilli Construction Co. has identified one particular trend that is causing concern over its potential for increasing costs on projects governed by Davis-Bacon and prevailing-wage legislation. With more opportunities to bid on construction projects, subcontractors can be more selective in the projects they pursue, and many are choosing to avoid projects subject to the reporting requirements set by Davis-Bacon wage legislation. This could translate to higher costs and other risks for developers and public agencies.
The Problem
The Davis-Bacon and Related Acts (DBRA) apply to contractors and subcontractors performing on federally funded or assisted contracts in excess of $2,000 for the construction, alteration, or repair of public buildings or public works. Created to ensure that contractors on public works projects are paid the wage that prevails locally, federal law requires that contractors on public works projects submit weekly certified payroll reports to ensure government contract compliance.
Davis-Bacon reporting requirements have received their fair share of criticism from small construction businesses and trade contractors. Although the weekly wage reporting forms are relatively simple to complete, it is estimated that it takes approximately one hour to complete a form containing information about eight employees for a single job. Companies using 1099 employees are particularly affected by these reporting requirements.
Additionally, many popular accounting software programs used by small businesses (like QuickBooks) are not properly equipped to track and report on all of the required information necessary for these wage reports. Furthermore, the reporting process is not without its risks: Improperly filling out the required forms can lead to a cumbersome paper process that usually delays payment, affecting cash flow and working relationships with general contractors. Failing to understand and rectify errors quickly can lead to penalties and fees. All of these factors discourage many trade contractors from bidding on DBRA-governed projects.
As the U.S. economy continues to recover and improve, commercial contractors are enjoying increasing breathing room as the country begins to invest again in construction. There are more projects being planned and more opportunities to bid on them. This is having an adverse effect, however, on some projects governed by DBRA laws. With more projects available for bid, many trade contractors have more opportunity to select their preferred projects. When given a choice, the number of trade contractors willing to bid on DBRA-governed projects over non-DBRA projects is decreasing. When subcontractors are interviewed on the subject, they reveal that the hassles and costs associated with required wage reporting is a key factor in these decisions.
Other economic indicators show that disparate growth rates in construction employment and industry growth further compound the issue. Experts forecast a total non-residential increase in construction spending of up to 9% in 2015, which is in line with increases in previous years. Construction employment, however, continues to increase by only roughly 3.5%, which is similar to the construction employment increase of 2.6% that the United States saw from 2013 to 2014. This means that although there are more and more construction projects available for subcontractor bid, there are not necessarily enough trade contract laborers available to meet all the demand. These factors are positioning subcontractors to have greater liberty in selecting their preferred jobs than they had four to five years ago. When faced with limited staff and the options of paperwork-heavy jobs versus those that are not, more and more subcontractors are choosing projects not governed by DBRA.
Effects on Developers
Ruscilli saw evidence of this trend increase in the fourth quarter of 2014, especially among carpentry, drywall, and masonry subcontractors. One of the primary concerns around this trend for general contractors and their clients is the potential for increasing costs from skilled and unskilled trade subcontractors. Those who are willing to bid on DBRA programs may have the opportunity to adjust their rates upwardly according to the laws of supply and demand, which can indirectly raise costs for developers.
Developers of publicly funded construction projects are at direct risk of cost increases as well due to other factors. Our experience with projects governed by Davis-Bacon legislation has shown us that general contractors with limited experience with these programs often underbid them. The reporting requirements are complex and cumbersome, and misunderstanding the costs associated with these can translate to higher overall operations costs, which are usually passed on to the end client.
Additionally, inexperienced general contractors and construction managers commonly fail to account for the slowed billing cycles, payment lags, and delayed closeout payments resulting from the DBRA reporting processes as well. The financial stress this imposes on inexperienced general contractors can cause firms to recoup costs later in the construction process, with some even filing claims at the end of projects. In extreme cases, this can cause adversarial relationships and tension with clients and trade contractors on the jobsite.
Solutions
With fewer trade contractors willing to bid on publicly funded programs, general contractor firms and their clients will need to define solutions to control risks and cost increases.
To address the effects of this shrinking pool of trade contractors, Ruscilli is aiming to educate its clients on the potential impacts that this trend may have on estimates for DBRA-governed projects.
In selecting general contractors for projects governed by DBRA, developers and public agencies should consider a general contractor’s background and depth of experience with public projects. Choosing a general contractor or construction manager with solid experience in these programs will lower the risk of inaccurately low bids, cost and schedule overruns, and post-project financial claims.
Additionally, developers and public agencies should look for a firm with a solid financial and credit history. This indicates that a general contractor has a solid monetary footing and will be well positioned to absorb any payment delays resulting from the DBRA payment process without those passing payment delays on to clients.
As the U.S. construction industry continues to recover, developers and public agencies undertaking new projects need to understand the changing landscape of trade contracting. Limited labor pools and healthy construction project volumes are allowing subcontractors to be more selective in the projects they pursue. The hassles, expenses, and risks involved with projects governed by DBRA are enough to discourage many subcontractors from participating in these programs. Those willing to gamble on them often lack an understanding of these types of projects, or simply plan to increase their rates on publicly funded projects. Both can lead to increased costs for a developer.
Developers can avoid these risks by choosing a well-established general contractor that has plenty of experience with DBRA projects and a solid financial history. A stable, experienced firm will be well-equipped to develop the most accurate estimates, avoid cost overruns due to cumbersome reporting requirements, and withstand payment delays in DBRA projects without passing them onto their clients.
Mike Vasbinder is vice president of operations for Ruscilli Construction Co., a commercial construction firm that serves several markets including affordable and senior housing, multifamily residential, commercial, and industrial. He is a licensed architect with over 30 years’ experience in the construction industry and has been with Ruscilli for more than 10 years.
