How Prevailing Wage Requirements Impact Your Construction Job Costs
- Cost Construction Accounting
- Nov 5
- 5 min read
Updated: Nov 11
You just won a $2M federal construction project with an 18% profit margin around $360K. Six months in, you're barely breaking even. By close, you've lost $150K.
What happened? Prevailing wage requirements. And you didn't account for the real costs.
Contractors see the higher wage rates and adjust their labor costs, assuming they're covered. But prevailing wage requirements multiply your costs through fringe benefits, payroll taxes, insurance premiums, and administrative overhead that most miss entirely.
Let's break down how prevailing wage laws impact your job costs and show you how to budget accurately to protect your profitability.
Understanding Prevailing Wage Laws
Prevailing wage laws require contractors on publicly funded projects to pay workers wages comparable to those prevailing in the area. The Davis-Bacon Act applies to federal projects over $2,000. Many states have similar laws for state and local public works.
When They Apply:
Federal projects receiving funding over $2,000
State and local public works (varies by state)
Even private projects receiving public funding or tax incentives
What's Included: Prevailing wage determinations specify base hourly wage rates by worker classification and fringe benefits (health insurance, pension, training funds). Rates vary by location, classification, and project type. Using incorrect rates in your bid costs you thousands either in lost profit or back wages and penalties.
The Direct Cost Impact: More Than Higher Wages
Here's what contractors miss:
Standard Carpenter:
Hourly rate: $30/hour
Employer taxes: $2.30/hour
Workers comp (15%): $4.50/hour
Total: $36.80/hour
Prevailing Wage Carpenter:
Base wage: $45/hour
Fringe benefits: $20/hour
Additional taxes on fringe: $1.53/hour
Workers comp on $65 gross: $9.75/hour
Total: $76.28/hour. That's 107% higher more than double. On a 2,000-hour job, that's $78,960 more than you budgeted.
The Fringe Benefits Trap
You have two options:
Bona Fide Benefits: Provide actual insurance and pension programs (most small contractors can't)
Cash in Lieu: Pay fringe as taxable wages, which triggers additional payroll taxes, higher workers' comp premiums, and increased insurance costs.
The real cost of $20/hour fringe: $24.53/hour. On a 20,000-hour project, that missing $4.53/hour costs you $90,600.
Insurance and Tax Multipliers
When gross wages double, percentage-based costs nearly double:
Workers' comp: $4.50/hour becomes $9.75/hour
State unemployment taxes increase
General liability premiums rise
The Hidden Costs That Kill Margins
Administrative Burden
Prevailing wage projects require:
Weekly certified payroll reports (not monthly)
Detailed tracking by worker classification
Three years of record retention
Time cost: 2-4 hours per week
For a 26-week project: $3,120 in admin overhead. For year-long projects: over $10,000.
Payroll Processing Complexity
Your electrician works three days on a federal job and two days on a private job in the same week. Your system must track hours by project, apply correct rates, calculate different fringe amounts, and generate separate certified payroll reports.
Costs you'll need:
Construction payroll software: $200-500/month
Implementation: $2,000-5,000
Ongoing training: $500-1,000 annually
Cash Flow Crunch
You pay prevailing wages weekly. You bill monthly. Payments arrive 30-45 days later.
Standard Project:
Weekly payroll: $40,000
Cash reserve needed: $80,000
Prevailing Wage Project:
Weekly payroll: $85,000
Cash reserve needed: $170,000
Additional working capital: $90,000
Plus retainage: On higher gross costs, $30,000-60,000 more gets tied up than normal.
Five Costly Mistakes to Avoid
1. Marking Up Standard Rates
You typically mark up labor by 15% for profit. You see prevailing wages are higher, so you increase your standard rates by 50% and apply your 15% markup. Seems logical, right?
Wrong. You're marking up the wrong base number.
Your overhead and profit should be calculated on the fully-burdened prevailing wage cost—including base wages, fringes, taxes, insurance, and admin overhead—not just an inflated version of your standard rate.
The Fix: Calculate total fully-burdened prevailing wage costs first (base + fringe + taxes + insurance + admin), then apply your markup percentage.
2. Forgetting Fringe Tax Cascade
You see the wage determination requires $20/hour in fringe benefits. You add $20/hour to your labor budget. Done, right? Not even close.
When you pay fringe benefits as cash to workers, that $20/hour becomes taxable income. This triggers employer payroll taxes (7.65%), increased workers' comp premiums (calculated on the higher gross payroll), and higher insurance costs.
That $20/hour actually costs you $24.53/hour. On a 20,000-hour project, you just missed $90,600 in your bid.
The Fix: Calculate the true cost of cash-in-lieu fringe payments: fringe amount + employer taxes on it + increased workers comp + increased insurance.
3. Not Tracking by Classification
You have six carpenters on the job. You track all their hours under one cost code: "Carpenter Labor."
Problem: Prevailing wage rates vary by classification. A journeyman carpenter might be $48/hour, an apprentice $36/hour, and a foreman $52/hour. If you're not tracking separately, you can't catch cost overruns or verify you're staying within budget.
Your job cost reports won't reflect reality, making it impossible to know if you're profitable until it's too late.
The Fix: Set up cost codes by specific classification (Carpenter-Journeyman, Carpenter-Apprentice, Carpenter-Foreman) and track every worker's hours separately.
4. Monthly Reviews
On private projects, you review job costs monthly. It works fine, you catch issues and adjust.
On prevailing wage projects, monthly reviews are four weeks too late.
If costs are tracking incorrectly for four weeks, you've burned through budget without realizing it. By the time you see the problem in your monthly report, you're already 160 hours (per worker) over budget with no way to recover.
The Fix: Review job cost reports every single week. Compare actual hours and rates to budget by classification. Catch problems in week one, not week four.
5. Wrong Wage Determination
You see prevailing wage base rates are 50% higher than your standard rates. So you increase your labor budget by 50% and think you're covered.
But you forgot about fringe benefits, the additional payroll taxes on those fringes, the higher workers comp premiums, the increased insurance costs, and the administrative overhead.
That 50% wage increase actually becomes a 107% total cost increase when you factor in everything.
The Fix: Never estimate prevailing wage costs by simply multiplying your standard rates by a percentage. Calculate the full burden: base wage + fringe + taxes on fringe + workers' comp on total gross + insurance + admin overhead. Only then do you know your true cost.
How to Budget Accurately
Verify Project Requirements
Before you start calculating costs, confirm the prevailing wage requirements apply to your project and understand which wage rates your estimating team used in the bid. The rates can vary significantly by location and project type.
Calculate True Costs
For each trade classification:
Base wage rate
Fringe benefits
Employer taxes on gross (7.65%)
Workers' comp on gross
Additional insurance (2-3%)
Admin overhead (3-5%)
TOTAL ← Markup this number
Set Up Job Costing
Create cost codes that separate components:
5110: Direct Labor – PW Base
5111: Direct Labor – PW Fringe
5112: Payroll Taxes – PW Premium
5113: Workers' Comp – PW Premium
5120: Administrative – PW Compliance
Track by worker classification (Carpenter-Journeyman, Carpenter-Apprentice, etc.).
Add Contingency
Build in 5-10% contingency on prevailing wage labor for wage modifications, misclassifications, compliance issues, and timeline extensions.
Verify Working Capital
Before bidding, calculate:
Weekly payroll at prevailing rates
Multiply by 2-3 weeks (payment lag)
Add retainage holdback
Total = Working capital needed. If you don't have it in cash or credit, don't bid.
Protect Your Business
Prevailing wage requirements multiply labor costs through components most contractors miss in their bids. Understanding true costs before bidding isn't optional, it's survival.
The difference between profitable projects and catastrophic losses is accurate job costing that tracks every component separately and reports weekly, not monthly.
Need help setting up job costing for prevailing wage projects? Construction Cost Accounting specializes in helping contractors track these complex costs accurately and protect profit margins. We'll help you set up proper cost codes, implement weekly reporting, and ensure your system catches problems before they destroy profitability.
Contact CCA today for a consultation. Don't learn these lessons the expensive way.
