The requirement to pay “prevailing wages” to covered workers is a perennial aspect of many types of government contracting, including construction contracts subject to the Davis-Bacon Act (“DBA”) and certain related laws (collectively referred to as the Davis-Bacon and Related Acts or “DBRA”). In recent years, Congress has also expanded the reach of prevailing wage requirements to new industries: clean energy projects seeking to take advantage of federal tax credits under the Inflation Reduction Act are required to ensure that prevailing wages are paid or may be forced to forfeit valuable credits. Semiconductor manufacturers — as well as manufacturers of materials and equipment used to make semiconductors — that seek to take advantage of the incentives established by the CHIPS Act are likewise required to follow the prevailing wage requirements of the DBA.
It was in this context that the Department of Labor (“DOL”) introduced a 222-page final rule, “Updating the Davis-Bacon and Related Acts Regulations,” that substantially rewrote the implementing regulations under the DBRA. Among other things, the final rule alters how DOL calculates the prevailing wage rates for each locality, and expands the definition of the “site of work” and categories of workers subject to the DBA. Moreover, the final rule imposes the DBA by operation of law on federal construction contracts that would otherwise be covered, but that nevertheless do not include the requisite FAR clauses and wage determinations used to inform contractors of the DBA’s requirements. The potential impact of these changes has not gone unnoticed: last month, two trade associations — the Associated Builders and Contractors of Southeast Texas, Inc. (“ABCSETX”) and the Associated General Contractors of America (“AGC”) — filed separate suits challenging multiple aspects of the final rule, including the changes to prevailing wage calculation methodology and the revised definition of the site of work. We expand on the final rule’s changes — and on the pending legal challenges — below.
Changes to Prevailing Wage Rate Calculations
Previously, DOL set a rate as the “prevailing wage” within a county when a threshold of 50 percent or more of applicable workers voluntarily reported that they were paid that rate. Otherwise, DOL would determine the prevailing wage by employing a “weighted average.” When calculating the prevailing wage, DOL also strictly limited the importation of prevailing wages from urban counties into rural ones.
The final rule adds a step to the original calculation process by lowering the prevailing wage threshold and altering how it could be calculated in rural and urban counties.
- The final rule states that the prevailing wage is still set when the majority—more than 50 percent — of workers are paid that rate. If, however, the same wage is not paid to more than 50 percent of workers, the prevailing wage will be set as the rate paid to the highest number of surveyed workers, provided this number is at least 30 percent of those surveyed. DOL will then use a weighted average to set the prevailing wage if no single rate is paid to at least 30 percent of workers.
- When survey data is too sparse to calculate the prevailing wage under the new 30 percent threshold, the final rule allows DOL to combine rural and urban rates to set a prevailing wage by considering rates from multiple adjacent counties.
- Finally, the final rule also permits DOL to make use of rates calculated pursuant to state prevailing wages laws, provided that the methodology used to calculate such rates is similar to DOL’s methodology.
Expansion of the Definition of “Site of Work” and Covered Workers
The final rule also modifies the definition of what constitutes the “site of work” and thereby expands DBA coverage to certain categories of workers and activities that were previously exempt. The “site of work” was previously defined as a location “where a significant portion of a building or work is constructed, provided that such site is established specifically for the performance of the contract or project.”
- Under the final rule, the definition of “site of work” is expanded to sites that are “dedicated entirely, or nearly entirely, to the construction of one or more ‘significant portions’ of a particular public building or work.”
- Based on this expanded definition, off-site activities or facilities that were previously exempt, such as permanent manufacturing facilities, could be subject to DBA requirements if they are “dedicated exclusively or nearly so” to the performance of a contract subject to DBA requirements.
Certain off-site worker activities that were previously exempt could also now be subject to DBA requirements with this expanded definition, because the definition of “site of work” was also modified in the final rule to apply to certain “transportation” activities between related worksites. As such, workers located off-site and often previously exempt from the DBA’s definition of “mechanics and laborers” such as material suppliers, surveyors, flaggers, and truck drivers could be subject to prevailing wage requirements under the final rule.
DBA Requirements Now Imposed on Contracts as a Matter of Law
The DBA is normally implemented through the incorporation of the relevant FAR clauses (e.g., FAR 52.22-6, Construction Wage Rate Requirements) and the applicable wage determination(s) (i.e., the document that lists the prevailing wage rate for each labor classification) into the solicitation documents.
Under the final rule, however, DBA requirements are imposed by “operation of law,” regardless of whether the FAR clauses and/or wage determinations were incorporated into the solicitation or final contract. This means that DBA coverage will apply even where the contractor did not have express notice of the prevailing wage requirements.
This change is particularly significant because offerors often structure their bids through reliance on specific labor rates. If contractors lack notice as to the applicability of DBA requirements, they could risk losing a contract during bidding because the cost of the contract is overstated or win a contract with insufficient funding to complete the project. Moreover, the DBA also applies to subcontractors. If prime contractors lack notice of DBA obligations and fail to inform their subcontractors of these requirements, subcontractors may be at risk of incurring unallowable cost obligations.
Trade Groups Seek to Enjoin the Final Rule in Court
As noted above, ABCSETX and AGC have filed separate suits challenging the final rule and are seeking injunctive relief in the Eastern and Northern Districts of Texas respectively.
In both lawsuits, the trade groups allege that DOL violated the Administrative Procedure Act (“APA”) by departing from the statutory text of the DBA. In particular, both groups argue that the revised methodology for calculating prevailing wage is contrary to the statute (on this point it bears mention that DOL’s imposition of the 30-percent “intermediate step” represents a return to DOL’s practice pre-1982, and is not an entirely new innovation). They also argue that the expansion of the “site of work” is likewise improper, because they contend that this expansion exceeds the plain language of the statute. And the groups further contend that DOL acted arbitrarily and capriciously by failing to adequately consider the numerous public comments received in response to the proposed rule. At bottom, both ABCSETX and AGC argue that the final rule will result in higher wage rates for covered workers, which they contend disregards the congressional intent of the DBA to preserve existing prevailing wage rates in localities where federally funded construction work is performed. Briefing on a pending motion for summary judgment in the ABCSETX case is scheduled to close in mid-January 2024.
The new DBA final rule could have wide-ranging impacts on industry, including on entities that previously did not have to be concerned with DBA (such as developers of clean energy projects or semiconductor fabs). In light of these new changes, contractors are advised to request information about the applicability of the DBA if a solicitation does not include it, so that they are able to accurately estimate their cost of performance.