Prevailing Wages: The Davis-Bacon Act…What You Need to Know

by Preston Cavignac, PWCA

How it Started

The Davis-Bacon Act was implemented in 1931. U.S. federal law required employers to pay a set rate of prevailing wages on federally-assisted contracts worth over $2,000. The prevailing wage rate includes a base wage and an additional stipulated fringe benefit amount per hour. These “fringes” are meant to be paid out to employees either as supplemental cash wages or as bona-fide benefits.

The preferred way to handle the Davis-Bacon Act is to use these “fringes” to strengthen the employer’s employee benefit plans. These bona-fide fringe benefit contributions are made to a third party who aids in setting up the benefit fund plan/program. These plans must be pursuant to an enforceable commitment to carry out a financially responsible program, which is communicated to the employees in writing. Examples of qualified fringe benefits are payments for life, health, vision, dental and disability insurance, pension, vacation, holidays or sick leave.

How it Works

The employer takes the annual cost of benefits per employee, divides that annual number by 2,080 (hours in a work year), and develops an hourly rate, which is available to put toward a bona-fide benefit plan. If the employee works less than 2,080 hours, the annual cost of the benefits would be divided by the lower amount of hours worked.

Example: If an employer has a fully insured health plan and pays $4,160 in annual premiums per employee, they would be able to take $2/hour ($4,160/2,080 hours) as a credit against their fringe obligation and put it toward the bona-fide fringe benefit program for their employee.

In order for this credit to apply, employers must contribute the same amount of money to an insurance plan for all hours worked, regardless of whether they work on public or private projects. This is called the “Rule of Annualization.” This rule keeps firms from subsidizing 100% of bona-fide benefits plans. If an employer pays an amount toward a health insurance plan when their employees are on a federal project, but doesn’t contribute anything when employees  work on private projects, the employer can only take credit against its fringe obligation in proportion to the percentage of federal work.

Example: If an employer contributes $5/hour on federal projects and pays nothing on private projects, and 50% of the company’s work is subject to the Davis-Bacon Act, the employer can only credit $2.50/hour against the fringe.

All benefits must be accounted for on an hourly basis on certified payroll and are required to follow the rules regarding credits and debits.  It is recommended to always keep an audit trail.


To avoid calculation issues, use a provider that allows hour banking. This process converts employee benefits from a monthly benefit to an hourly benefit. These hours are accrued as hours are worked. Hour banking is very useful for reports and audits when abiding by the rules of Davis-Bacon.

If you have a self-funded plan, the easiest way to deal with Davis-Bacon is to change it to a funded plan. You can also submit the plan for approval to the U.S. Department of Labor’s Wage and Hour Division for their review. In order for an unfunded plan (no third party to act as paymaster) to be bona-fide, payments must be reasonably anticipated, must represent a commitment that can be legally enforceable, must be carried out under a financially responsible plan and must be communicated in writing to employees.


Many contractors choose to pay the fringe portion of the prevailing wage in cash, believing it’s the simplest way to comply with the law. But this option can be extremely expensive because it doesn’t allow the employer to realize cost savings associated with the preferred tax treatment of fringe benefits. Subsidizing your benefit plan with bona-fide fringe benefits can help employers protect their bottom line as well as provide rich benefits for employees. This combination will make the employer more profitable and help the company attract and retain valuable employees.