Contractors eligible for enhanced tax credits for energy projects, if they follow apprentice and prevailing wage rules

The real estate and construction industries are buzzing about the opportunities for enhanced Investment Tax Credits (ITC) for energy-related projects as included in the Inflation Reduction Act of 2022 (IRA). At the same time, both industries are confused about the criteria that must be met through the use of prevailing wage rates and registered apprentices.

Here is a summary of the prevailing wage and apprenticeship requirements of the IRA in order for the bonus 30% ITC to be awarded. Note that 6% is allowed even if the below requirements aren’t met but can increase to 30% for some projects.

Apprenticeship requirement

Relating to the construction of a qualified facility that produces energy from renewable sources, a certain percentage of the total labor hours must be done by qualified apprentices. (A qualified apprentice is an apprentice that is participating in a Registered Apprenticeship Program as defined by the National Apprenticeship Act.) Prior to Jan. 1, 2023, 10% of total craft hours must be performed by an apprentice. This increases to 12.5% of total craft hours prior to Dec. 31, 2023, and to 15% after Dec. 31, 2023. The apprentice-to-journeyworker ratio is subject to rules established by the Department of Labor (DOL) or applicable state apprenticeship program.

Every contractor or subcontractor who employs four or more individuals to perform construction, alteration or repair shall employ one or more qualified apprentices.

A contractor will be considered NOT to be in violation of these requirements if it makes a good faith effort to obtain a qualified apprentice from a registered apprenticeship program that is not met within five business days, or if it pays a penalty of $50 multiplied by total labor hours not satisfied by a qualified apprentice. This penalty can be increased by $500/hour if the Secretary finds that the failure was due to intentional disregard.

Under a registered apprenticeship program (credentialed by the DOL or a state agency), apprentices:

• Are paid on an incremental wage schedule based on experience and skill
• Receive a minimum of 2,000 hours or one year of on-the-job training
• Receive a minimum of 144 hours per year of classroom instruction
• Receive 1:1 mentoring and supervision

Prevailing wage requirement

Under the IRA, any laborers and mechanics employed by a contractor or subcontractor on certain renewable energy projects shall be paid at rates not less than the prevailing rates for construction, alteration or repair of a similar character in the locality in which such facility is located, for the duration of the eligible credit. A contractor who fails to satisfy this requirement can correct this by providing back pay, plus interest, and a penalty of $5,000 per worker who did not get the prevailing wage. If it is determined that a contractor engaged in intentional disregard of the prevailing wage requirement, the penalty is $10,000 per worker, and three times the back pay owed, plus interest.

Regulatory guidance that remedies the difference between non-compliance penalties and those under David-Bacon Act will be necessary.

Frequently asked questions

Will the prevailing wage requirement increase construction costs?

• There is no consensus on whether or not prevailing wage rules increase or decrease construction costs. While many workers earn more on prevailing wage projects than similar non-PW projects due to enhanced wages, benefits and pension contributions, this is not always the case. Some believe that without a prevailing wage, bid competition decreases on public projects, leading to the potential for higher costs.

What will the prevailing wage rates be and who will establish them?

• Currently only about half the states have prevailing wage laws; in the past, prevailing wage has only applied to public construction work. New regulations will define the rules and implementation to private commercial/industrial and residential projects.

If there is an increase in labor costs, will it be the same for union and non-union contractors?

• Prevailing wage is the hourly rate of wages and benefits paid to a number of similar workers in a geography, regardless of union status.
• Union wages are not automatically the same as prevailing wage but because the costs of pensions and benefits are included in the wage package, it is typically close.
• For open shop (non-union) contractors, a prevailing wage requirement does not guarantee that wages will be increased as many contractors pay at that level. The value of the benefit package paid to non-union skilled labor will be added to the hourly rate to determine if prevailing wage rates are met. If not, the hourly rate would need to be increased for work on designated projects.
• Even if a prevailing wage regulation raised wages by 10%, the impact on contract costs would be less than 2.5%. Thus, even if there is an increase in contract costs it is likely to be small—to the point of being undetectable.

What percentage of construction project costs are labor vs. material?

• Labor costs are 20% to 30% of construction contracts, according to the Census of Construction.

How will I know if the contractor meets the “registered apprenticeship” requirement in order to qualify for the bonus 30% ITC?

• Union apprenticeship programs are all registered.
• Some open shop (non-union) contractor apprenticeships are registered, and some are not. You will need to verify this with the contractor and there will likely be monitoring regulation defined.
• Home builders typically do not participate in registered apprenticeship.

To better understand ITCs or how other parts of the Inflation Reduction Act of 2022 impacts your real estate or construction company, contact us today.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.