The Construction Counselor

This is the second post in a three-part series discussing the impact of the U.S. Department of Labor (DOL) final Davis-Bacon Act (DBA) Labor Standards rule changes that go into effect on October 23, 2023. With the rule changes, DOL aimed to accelerate and streamline enforcement by attaching responsibility to those with the deepest pockets, holding upper-tier contractors accountable for lower-tier errors, increasing recordkeeping obligations, and claiming the right to inspect voluminous records on demand.  

The first post examined how the new rule expands DBA coverage. The final post will examine how the new rule impacts wages and fringe benefits.

The 1931 Davis-Bacon Act labor standards apply to contractors and subcontractors performing work on federally funded or federally assisted contracts in excess of $2,000 for the construction, alteration, or repair of public buildings or public works.

Key Takeaways

• Companies that use special purpose entities for construction projects need to reassess compliance risk because the new rule takes aim at the owners of special purpose entities, such as LLCs, partnerships and JVs, defining them as “prime contractors” that are strictly liable for all downstream noncompliance.
• General contractors are now also “prime contractors” that will be held strictly liable for noncompliance and should evaluate subcontractor compliance monitoring programs and contract indemnification terms.
• Higher-tier contractors can now be held responsible for lower-tier subcontractor noncompliance in certain instances and need to reassess their own monitoring and contract indemnification terms.
• Owners and prime contractors must read their contracts and grant agreements closely because DBA obligations will now be read into all contracts, even if they were omitted by the government.
• Recordkeeping obligations significantly increased, along with the duty to keep those records until three years after the prime contract is closed out, so it is time to update record retention policies.
• DOL has new authority to demand records related to DBA without initiating an investigation or other compliance action, and if you do not oblige, you could forfeit the right to provide the records later, so consider DOL requests carefully.

Increased Risk of Noncompliance

Prime Contractors, Which Include Owners, Affiliates, Partners and General Contractors, Are Liable for Subcontractor Violations

The new rule goes after the deep pockets behind special purpose entities by defining “prime contractor” broadly to include controlling shareholders and member entities (LLCs, LPs) that hold a prime contract, the joint venture itself and partners of the joint venture that hold a prime contract, and any contractor (e.g., general contractor) that has been delegated all or substantially all the responsibility for overseeing DBA compliance. All those entities are now “prime contractors,” and they are ALL strictly liable for subcontractor DBA violations and could even face debarment for subcontractor malfeasance.

Expect to see enhanced compliance monitoring and contractual indemnification obligations from higher-tier contractors. If your company relies on special purpose entities, like LLCs, LPs and JVs, for construction projects, make sure the allocation of responsibility is considered and resolved at a contractual level.

Higher-Tier Subcontractor Liability for Lower-Tier Subcontract Violations

Under the new rule, upper-tier subcontractors can be held liable for lower-tier subcontractor DBA violations if they were responsible in some way for those violations, such as if they were reckless in monitoring compliance or had knowledge of the noncompliance. In addition, the bad acts of lower-tier subcontractors may subject upper-tier contractors to debarment.

DOL was encouraged by industry to adopt a “good faith effort" standard or allow higher-tier contractors to rely on “self-certification” by their lower-tier subcontractors, but DOL declined to adopt those softer standards.

Instead, DOL cautioned higher-tier subcontractors to choose their lower-tier subcontractors wisely, monitor them and act if they see noncompliance. DOL explained that it will find higher-tier subcontractors responsible if they repeatedly and recklessly fail to flow down DBA obligations, know about subcontractor violations and do not act, or are “inattentive” to DBA compliance.

DBA Labor Standards Are in the Contract, Even if They Are Not

Even if the contracting officer forgets to include the DBA clauses or wage determination in your contract, the new rule states that those requirements will be read into the contract “by operation of law.” As a result, contractors could find themselves dealing with immediate back pay obligations and increased contract costs that were not considered in the project pricing.

If DBA requirements are “read into” a contract, then contractors on federal construction contracts can seek equitable adjustment from the federal government agency that awarded the contract. For prime contractors, this is a complicated and time sensitive process designed to make the contractor whole for changes in the scope or cost of work on a contract.

For lower-tier contractors surprised by DBA obligations, the potential and process for contract price adjustments will be defined by contract terms. Subcontractors are likely to find themselves involved in time-consuming and expensive negotiations related to DBA risk allocation and indemnification.

On federally assisted construction projects, such as HUD or IIJA projects, there is no federal agency at the top of the contract, and therefore, no avenue to seek government funding of an equitable adjustment for increased costs. This will likely lead to increased disputes among grantees and contractors.

Cross-Withholding

To enforce payment demands for back wages and penalties, DOL can now withhold funds from all contracts held by a responsible contractor including contracts with other agencies.

Whistleblower Protection

The new rules contain an anti-retaliation provision that allows penalties against contractors who retaliate against workers who complain of DBA violations. The new rule allows DOL to reinstate workers and make them whole, such as through back pay and compensatory damages.

Enhanced Debarment

The new rule standardized debarment requirements stemming from DBA noncompliance on federal contracts and federally assisted projects. Debarment is now mandatory on all DBA projects in the same instances.

Significant Increase in Recordkeeping Requirements

The new rule increases the volume of employee data that contractors must maintain for DBA projects. The rule includes a long list of detailed information that must be maintained for each worker, including for each hour worked, the worker’s classification, hourly rate, deductions taken and wage paid, and daily and weekly number of hours actually worked. Additional detailed requirements apply to fringe benefit recordkeeping, as noted above. Contractors must also keep all copies of bids, proposals, agreements, modifications and amendments. The volume of documents required to be maintained by DBA contractors is now extensive, amplifying the risk of inadvertent noncompliance.

The new rule explains that required records must be retained for at least three years after all the work on the prime contract is completed. This means that a subcontractor that completed its work during the first year of a five-year prime contract would be required to maintain these records for at least seven years after completing work. These extensive recordkeeping obligations will no doubt extend many years past the current record retention policies of many contractors. The record retention requirements will likewise prove complicated for special purpose entities and small business subcontractors to manage.

Provide Records Upon Request or Lose Ability to Present Those Records in Dispute Later

The new rule expressly requires contractors to make all the records outlined above available upon request by DOL, as well as “any other documents necessary to determine compliance.” The rule is intended to make sure contractors understand that they must provide all records in their possession when asked to do so by DOL, even when DOL does not initiate an investigation or compliance action first. Contractors that withhold any records—regardless of the reason—will be prohibited from submitting those records in the future in the event there is an investigation, audit or compliance action.

Conclusion

The Government Contracts and Grants Group at Fredrikson is closely monitoring the DBA rules and guidance. We welcome the opportunity to help you understand the impact of the new DBA rules on your business.

Our team regularly helps prime contractors, general contractors, subcontractors, and material suppliers pursue, negotiate, comply with, and resolve disputes related to government-funded infrastructure projects.