Prevailing wage and apprenticeship requirements: Best practices to follow and pitfalls to avoid

Overview of PW&A requirements

Prevailing wage and apprenticeship requirements kick in when construction begins, which can be determined by either the physical work test (significant work performed) or the five percent safe harbor (5% of total cost incurred). Once construction starts, the continuity requirement mandates continuous construction or efforts.

Prevailing wages must be paid to on-site laborers and mechanics for construction, alteration, and repair during the credit period. This includes remodeling, renovation, structural repairs, and replacement of fixed components. Maintenance work after a project is in service is not considered construction, alteration or repair.

Wage rates are locked in when a construction project starts and don't need updating unless the contract's scope changes or is extended. However, wages for long-term service contracts must be refreshed annually.

Apprentice requirements apply only during the construction period before a project is in service. The rules include:

• Labor hour test: 12% of labor hours by apprentices if construction began in 2023, 15% after.
• Ratio requirement: Daily apprentice-to-journey worker ratios set by DOL or state.
• Participation requirement: Employers with four or more workers must have at least one apprentice.

If apprentices cannot be found for a project, the good faith effort exemption applies for a full year.

Exemptions

Prevailing wage and apprenticeship requirements do not apply to projects with a net output of less than one megawatt (alternating current) or projects that began construction before Jan. 29, 2023.

Recordkeeping requirements

Certified payroll isn't required but can be agreed upon. Reporting should be at least quarterly to avoid penalties. Final regulations contain a list of records needed to show compliance with PW&A requirements.

Penalty and cure requirements

A great component to PW&A is the ability to cure if you find yourself not compliant. There is an opportunity to get the project back into compliance by making back payments to underpaid workers and paying fees to the government.

Best practices and common mistakes to avoid

With the final regulations for PW&A released, our specialist and legal specialist at Norton Rose have found a series of areas that contribute to compliance where project owners make mistakes and best practices to avoid these errors.

Application to EPC, O&M, LTSA and supply agreements

When implementing PW&A, there are common errors people make when it comes to specific rules into practice and best practices to keep in mind to ensure proper compliance.

• EPC agreements: In EPC agreements, wages are locked in at signing unless there's a significant scope change or extension. Some refresh wage rates for minor changes to stay compliant. Note, that work like site clearing may still be considered "construction" under Davis-Bacon rules, even if not for tax purposes.
• Operations and maintenance (O&M) and long term service agreements (LTSA): Since this type of work typically starts after a projects is in service, there are no apprentice requirements, except for commissioning work.
• Supply agreements: The delivery of goods or equipment does not typically fall under the scope of PW&A requirements.

Intentional disregard factors

Intentional disregard means knowing or willful noncompliance, which can lead to significant penalties. However, if a taxpayer corrects wage shortfalls and pays penalties before filing the tax return claiming tax credits, it's assumed there was no intentional disregard. This allows taxpayers to fix errors before filing. To determine intentional disregard, there are a list of factors in the regulations at which the IRS will look:

• Whether there is a pattern of repeated or systemic failures to comply.
• Whether compliance was reviewed at least quarterly.
• Whether shortfalls were cured promptly.
• Whether procedures were in place for employees to report suspected failures.

Areas of contention in contract negotiations

When negotiating contracts, clearly define obligations and risk sharing, including who claims the tax credit and who bears the most risk. Some prefer statutory references, while others define terms to simplify reading and minimize changes. Negotiate record retention, audit cooperation, and penalty fees, specifying responsibility and any fee caps. This includes how much the contractor will assist the owner during an audit and what records they will retain and allow the owner to use.

Financings and sales

Despite initial concerns, these projects are being financed readily. However, financing parties have some requirements:

• Third-party audit report: A third party must audit all labor hours at the project's end and report any penalties or co-payments.
• Third-party monitors: Financers want a third-party monitor, like a construction manager or EPC contractor, present during construction.
• Project owner takes risk: Financing parties expect the project owner to assume compliance risk.
• Tax credit purchasers want no risk: Tax credit purchasers typically want no risk on their part.

When it comes to build-transfer agreements, where one party builds the project and then sell it to the party who will operate the project before it’s placed in service, the developer provides the purchaser with all records before the project is placed in service, ensuring the purchaser has all necessary information for operations.

Tax credit insurance 

Tax credit insurance is available for PW&A risk and the policy generally favors the financing party. Typically, coverage for PW&A includes compliance with the rules, with exclusions for work done outside of contract. Like financers, insurers require a third-party audit report to extend coverage.

Project labor agreements

Regulations offer a penalty safe harbor for laborers, mechanics, and apprentices under a "qualifying project labor agreement,” though not all union agreements qualify. If there is a "qualified project labor agreement," the $50 per hour apprenticeship penalty and the $5,000 per underpaid worker per year penalty are waived if correction payments are made before the taxpayer files their return.

Importance of complete data and scalable compliance tools 

Filing for PW&A credit heavily relies on work papers from many different primes and subcontractors. Additionally, there are different requirements for PW&A credit filings and IRS audits: IRS audits need personal identifiable information (PII), while PW&A filings do not and must exclude PII due to privacy rules. This makes it difficult when gathering labor data from all clients, projects and contractors to exclude PII for privacy reasons because this gathered data can’t be used for an IRS audit. When PW&A was introduced, it was clear a secure platform with a tool to assemble work papers and inform contractors of their requirements was needed.

To satisfy recordkeeping requirements there are several options. Taxpayers can collect and retain relevant records themselves, have a third party collect them or have taxpayers, contractors and subcontractors all retain their own information. Involving a third party to gather records is the most scalable process that avoids the risk of PII being overshared and violating privacy laws and allows unredacted data to be readily available in the event of an IRS audit further down the road.

To handle these nuanced rules, Baker Tilly has developed a web-based portal for maintaining compliance to IRA PW&A requirements. Our compliance portal ingests data from LCP Tracker, a trusted cloud-based prevailing wage and workforce compliance management solution. We then leverage this data to evaluate compliance as the project is executed.

When pursuing PW&A credits, evaluate applicable rules based on credit type and construction start date, and include PW&A requirements in bid documents. Ultimately, pre-planning and proactive compliance management are key to maximizing credits and minimizing penalties.