A Smart Strategy

With the construction industry having been in a depressed state for so long, contractors are looking for ways to survive. Prevailing wage jobs may just be the key to survival until work in the private sector bounces back. Speaking with contractors who have always performed prevailing wage jobs, they all have the same complaint: Increasingly, contractors with little or no prior experience in a prevailing wage environment are starting to bid prevailing wage projects. 

In years past, contractors would typically see four or five competitors bidding on a prevailing wage job. That isn’t the case today. It’s not uncommon to have 20 or more contractors bidding on one prevailing wage project. With so many contractors fighting to win a bid, profit margins are significantly reduced, thus requiring contractors to bid on more projects. In many cases, contractors have to bid prevailing wage jobs where they have no prior track record. This can create a world of problems for the contractor who doesn’t understand prevailing wage dollars, compliance issues and regulations.

Understanding Fringe Benefits

So how does one separate oneself from the rest of the pack? The key is understanding the fringe benefits portion of prevailing wage projects. Fringe benefits are the portion of these wage jobs that an employer must use for their employees. The employer has 100 percent say (or complete control) as to how these fringe benefit dollars get distributed. For a union shop, these fringe dollars are typically used towards paying union dues. But how does the non-union shop use these fringe dollars? 

Typically non-union contractors elect to pay the fringe benefit dollars as additional cash wages. This makes employees very happy because they are making more money per hour. But how does cashing out fringe dollars affect the employer and project owner? By cashing out those fringe dollars, employers and ultimately project owners have increased payroll, which translates into higher workers’ compensation premiums and higher bid costs. For example: Take a contractor who elects to cash out fringe dollars. They have a base wage of $30 per bid hourly cost. Added is a $10 fringe amount that is paid as cash, which equals a $40 total hourly cash wage. Then you have a 25 percent payroll burden (or $10 hourly payroll tax burden). The total bid hourly cost would now be $50. So how does an owner allocate the fringe dollars in order to lower bid costs and workers’ compensation expenses? The answer is a qualified fringe plan. 

These qualified plans allow an employer to use the fringe dollars toward a retirement plan, healthcare or vacation. Here is an example of how a qualified plan can increase profits and allow more winning bids. Using the same numbers from the above example: base wage of $30 equals a total hourly cash wage of $30. Payroll burden percentage of 25 percent equals a $7.50 hourly payroll tax burden. The $10 fringe amount is now paid into a plan. This equates to a total hourly bid cost of $47.50, which is a $2.50 per employee/per hour savings.

From the above example, one can see the benefit of using a qualified plan for fringe dollars. Not only will an employer reduce workers’ compensation expenses, they will ultimately win more bids. In addition to wage savings and more successful bids, a qualified plan also will make sure the owner is in federal compliance.

The above is a straightforward example of using fringe dollars to benefit your company. The hard part is educating employees who are used to having those dollars paid out as cash to understand the ramifications. It’s important to explain how this approach will allow the employer to successfully bid more prevailing wage jobs, thus allowing employees to make a higher base wage compared to the private sector. 

I recently spoke with an electrical contractor who loved the idea of moving fringe dollars into qualified programs in order to save on their workers’ compensation expenses and lower bid costs. The only issue at hand was that by cashing out the fringe dollars, their workers were classified in the “over 28 dollar” class code and paying a lower workers’ compensation rate. Because the employer has a say as to where the fringe dollars are used, they decided to cash out enough of the fringe dollars to keep their “over 28 dollar” employees in that lower rate class code, while moving the remaining fringe dollar into a qualified plan. This allowed them to still take advantage of lower workers’ compensation costs (overall payroll was still reduced) and the lower bid costs.

Public work jobs are continuing to be a must for contractors trying to survive these tough times. But rather than just bidding as many public work projects as you can, go about it intelligently. Work smarter, not harder. Establish a plan for allocating the fringe benefits dollars to work in your favor, not against you. Save yourself the headaches and higher expenses, and start winning the bids you deserve and enjoying the increased profits. It’s a win-win for both the owner and contractor employees. 

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