For many states, prevailing wage laws are a fact of life for contractors working on publicly funded jobs. Still, compliance requirements are fairly complicated and often misunderstood. Mistakes and missteps can yield expensive consequences for your construction business. This post breaks down what you need to know about the history of prevailing wage, common compliance challenges, and tools for strengthening your process.
What is Prevailing Wage?
Defined by the U.S. Department of Labor, prevailing wage is the average wage paid to similarly employed workers in a specific occupation in the area of intended employment.
It was first established in 1866 when the National Labor Union called on Congress to demand the 8-hour workday. Fast forward to 1931, and we see the Davis-Bacon Act, a federal US law establishing requirements to pay laborers local prevailing wages on public works projects.
Does your state have prevailing wage laws? Let’s see…
States WITHOUT prevailing wage laws include:
Alabama, Arizona, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Mississippi, New Hampshire, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota, Utah, West Virginia, and Wisconsin.
Don’t see your state on that list? If you’re working on federal projects, it’s still important to understand prevailing wage. Let’s dig a little deeper into how it’s determined and why compliance is crucial.
How is Prevailing Wage Determined?
Today, the Wage and Hour Division (WHD) conducts surveys of local wages to determine the prevailing wage rates that are included in wage determinations.
By July 1st of each year, the Division of Labor Standards releases a final Annual Wage Order, listing prevailing wage rates per county for applicable occupational categories.
The rate is calculated based on Contractors’ Wage Surveys, where contractors voluntarily provide information about their projects.
There are two types of wage determinations:
General Wage Determinations
Determined by the WHD, general wage determinations reflect wage rates prevailing in a specific geographic area for certain types of construction. They are available online for contractors to incorporate into contracts or post at the jobsites of covered projects. These do not expire.
Project Wage Determinations
Project wage determinations are issued at the request of a contracting agency. They apply to the named project only and typically expire within 180 calendar days from the date of issuance. An agency must request these by submitting an SF-308. While uncommon, if you believe you need a project wage determination, consult with WHD.
Quick note: Federally funded projects use the SAM wage order. These rates differ from state wage orders used for state and locally funded projects.
The Importance of Prevailing Wage Compliance
Now that you’re familiar with prevailing wage, it might seem fairly straightforward: pay workers the right rate for the right job…right? Not quite. For construction companies, prevailing wage laws aren’t optional. They’re the cost of doing business for publicly funded projects. And as any contractor knows, compliance is layered (and time-consuming).
Financial Risks of Noncompliance
While facing potential legal action may seem frightening, what’s likely more concerning are the financial implications of non-compliance.
Payment Delays: If your certified payroll is incomplete (or inaccurate), GCs and owners can withhold payments.
Penalties: Misclassifying workers, failing to pay fringe benefits, or omitting subcontractors from certified payroll can lead to hefty penalties. This case from 2023 required a contractor to repay over $600,000 in back wages to 84 workers…yikes!
Disqualification: Beyond financial consequences, repeat violations can disqualify you from bidding on federally funded projects.
Common Compliance Challenges
Negligence isn’t always to blame for prevailing wage mistakes. More often than not, it’s the fault of nuanced compliance requirements. Contractors often get tripped up on:
Worker Classification: One of the most common errors is misclassifying the type of work performed. For example, if a worker spends half of the day on heavy machinery and half of the day doing general labor, those hours must be paid at different rates. Coding all hours as “laborer” would be incorrect and could result in underpayment.
Subcontractor Oversight: You carry the ultimate responsibility for prevailing wage compliance, even if the work is performed by subs and their own teams. Subcontractors who underpay, omit workers from certified payroll, or misclassify employees are a liability. To avoid wage disputes or withheld payments, review subcontractor certified payroll and verify worker classifications.
Recordkeeping: Certified payroll reporting requires meticulous documentation. Timecards must accurately reflect start and stop times, equipment operated, and hours worked by classification. Fringe benefits need to be clearly documented, and you must retain records. Without the proper documentation, you’re susceptible to withheld payments and fines. An efficient payroll software system like eBacon can help automate repetitive tasks while securely storing documentation and certified payroll reports.
Independent contractors: Prevailing wage applies to more than just your employees. Regardless of tax status, anyone performing labor on a covered project is subject to prevailing wage requirements, including 1099 workers. Misclassifying employees or independent contractors may result in violations of worker protection laws under the Fair Labor Standards Act.
Strengthening Your Compliance Process
Staying compliant requires a reliable (and repeatable) system. To reduce risk, make sure your team can:
1. Identify the correct wage determination.
2. Consistently file certified payroll reports on time (every time).
3. Track subcontractor documentation to confirm their compliance.
4. Maintain accurate records of hours, jobs, and worker classifications.
5. Remain transparent with workers by posting wage rates on-site and ensuring they’re fairly compensated.
Tools for Easier Compliance
Software Support
Compliance takes time. You need someone to manage it, file accurate and timely certified payroll reports, and correctly log supporting documentation into your systems. To reduce that burden, many contractors invest in specialized solutions built specifically for construction.
Platforms like eBacon provide tools to streamline certified payroll reporting, automate wage determinations, and more. Reducing the manual guesswork, these platforms are built to help you catch errors before they become compliance issues.
Software won’t replace internal oversight, but it’s a powerful way to stay on top of risk, free up your team, and ensure projects aren’t stalled by compliance challenges.
Financial Expertise
When it comes to keeping in compliance, payroll software paired with an industry financial expert will provide the greatest support.
Where eBacon will optimize your systems, New Lyfe Accounting (NLA) will help you see your full financial picture.
At NLA, we’re here to help you understand your numbers, manage cash flow, and keep your financials on par with your long-term goals.
From bookkeeping engagements to Controller and CFO partnerships, our team specializes in construction-specific accounting services. We know certified payroll. We know construction software. We know prevailing wage requirements.
Compliance is about protection for your business, your workers, and your reputation. The best approach is one that’s proactive, building strong processes and leveraging tools and relationships that simplify the complicated parts of construction accounting. To learn more about our services, schedule a free Strategy Session.
This post was created in collaboration with our friends at eBacon, a software platform helping construction professionals simplify payroll compliance.
Solve For Today. Prepare For Tomorrow.
New Lyfe Accounting is a specialty firm helping small to mid-sized construction organizations navigate the industry’s unique financial landscape. From customized bookkeeping services to holistic CFO partnerships, we’re more than just an accountant. NLA operates as an extension of your team, strengthening your organization with financial s
