Prevailing wage obligations are the predetermined sum of wages and fringe benefits that construction companies are required to pay workers for a particular state or federal construction job. They’re based on a worker’s job classification, the Davis-Bacon Act and other labor regulations. Union construction companies don’t pay the fringe portion on an employee’s paycheck as wages, which reduces labor costs and lets them bid jobs more competitively. But non-union companies, the industry majority, for whatever reasons remain largely oblivious to this strategy.
“I’ve been doing this for 17 years and I rarely find advisors who know about this strategy,” says David Pacer, president of Overland Park, Kan.-based Trinity Planning Group. Neither do 90% of the new construction clients he meets with, he says. About half of Trinity’s 800 clients are construction companies, and the firm manages roughly $1 billion in assets—including about $400 million in retirement plan assets—through the Commonwealth Financial Network.
According to Pacer, non-union construction firms often duplicate their cost of benefits by failing to take a credit against the fringe portion of the prevailing wage they already pay employees. If employees receive $3.71 in fringe benefit costs per hour, this can translate into annual savings of $37,100 for a firm whose 50 employees do a total 10,000 hours in prevailing wage work.
Non-union firms also often overlook payroll tax savings, says Pacer. Let’s say an employer offers a $30 hourly base wage plus a $15 fringe benefit paid as cash. Assuming there is a payroll tax of 30%, the hourly payroll tax per employee is $13.50 ($45 x 30%). That puts a company’s total bid cost at $58.50 an hour ($45 + $13.50).
If the $15 is not treated as payroll, the total labor cost becomes $54 an hour. If employees receive $3.71 an hour in typical fringe benefits, including health insurance and vacation pay, the remaining fringe ($11.29) can be swept into the company’s 401(k) plan, says Pacer.
Trinity Planning Group’s three-phase Prevailing Wage Solution helps clients take credit for existing benefits, lowers their payroll tax burden and provides a full benefits review. “Our existing clients who do prevailing wage work all take advantage of this strategy because it saves them money,” says Pacer. “If you tell a construction company they can save 6% to 12% of their total labor costs on a job if they implement this strategy, that’s a number they can get their arms around.”
A big challenge, he says, is communicating to employees the benefits they don’t see on their paychecks. Employers who reduce hourly cash pay by $15 to pay for benefits must tell employees they’ll get the entire $15 (or most of it) put into their 401(k) plan rather than getting about $10.50 after taxes.
“At first some employees don’t like it, but soon they learn to love it,” he says. “It’s like a forced savings. They’re seeing their 401(k)s grow exponentially, very quickly. We have laborers that have $100,000 in their 401(k) after a few years because they do all prevailing wage work year round.”
Since prevailing wage contributions can be treated as employee salary deferrals for testing purposes, this enables owners and key employees to defer more of their own income into retirement plans.
Pacer emphasizes that advisors interested in building a prevailing-wage practice really have to understand how it works.
“You don’t want to just wing it,” he says.