Your piece of the economic stimulus pie 

The American Recovery and Reinvestment Act (ARRA) is sending hundreds of billions of dollars hurtling toward Main Street, USA, to stimulate job creation, enhance services, and build or rehabilitate infrastructure. But, as with any federal funding, this money comes with strings attached.

Many of the jobs and projects earmarked for funding fall under the auspices of the Davis-Bacon or McNamara O’Hara Service Contract Act. Both these Acts require allocation of fringe benefit obligations by prime contractors and subcontractors. In effect, these Acts say that as a contractor working on a federal project you have an obligation to provide a “bona fide” fringe benefit program or provide the cash equivalent to the workers on government funded jobs. Given the nature of this type of business, which is generally 100 percent employer-paid with rich plan designs and involving multiple product lines and revenue streams, this creates a powerful opportunity for a market savvy, sophisticated producer that isn’t afraid to step out of their comfort zone. Those courageous few have the opportunity to take their businesses to revenue levels they thought were unattainable as well as gain entrŽe to companies whose size and scope were previously just pipe dreams.

A contractor’s fringe benefit obligation may be satisfied in several different ways. It may be paid in cash as additional wages, allocated to a “bona fide” health and welfare program, allocated to a “bona fide” retirement program, and for DBA contractors it may be allocated to an apprenticeship or training program, utilized to fund paid vacations, or a combination of all of the above. The latter two methods are fairly rare and generally only take up a small fraction of the total fringe. The most prevalent method, and least advantageous, is discharging the fringe benefit obligation through cash wages. This model creates a tremendous additional payroll burden for employers through FICA, FUTA and SUTA obligations. However, in many cases the heaviest burden is felt in Workers’ Compensation and General Liability Insurance which are functions of gross payroll.

Many contractors, even when faced with increased labor costs directly related to this method of discharging their obligation, elect to pay the fringe in cash because of the compliance aspect as well as the administrative burden that they incur. Educating these contractors about prevailing wage benefit programs is a significant opportunity for brokers interested in growing their business Ð helping open shop contractors understand how they can reduce their costs, decrease their bid and remain compliant by implementing a fringe benefit wage program should certainly pique their interest.

For benefits to be considered “bona fide” they must be:

• Specified in writing and communicated to covered employees;
• Be a group benefit plan;
• Convey a benefit to the person actually performing the work;
• Be irrevocable;
• The payments must be made to a third party or trust; and
• Accounted for on an hourly basis.

In the past, these administrative burdens, as well as the fear of audit by the Department of Labor (DOL) and the possible sanctions resulting from non-compliance have been a deterrent for many contractors when considering offering a compliant prevailing wage benefit program to their employees.

Should an audit be undertaken by DOL and a contractor found to be out of compliance, penalties range from the prompt payment of back wages and fringe benefit obligations to company debarment and even personal debarment from federal contracting. However, given the new economic reality many contractors are facing, the landscape is rapidly changing. Bidder lists for public work are growing rapidly as contractors scramble for the one entity that has increased spending exponentially during the recession, the federal government.

With the increasing number of bidders on government jobs, discharging fringe obligations in cash, on payroll, with the accompanying increased payroll burden is no longer a truly viable option if contractors are serious about winning bids. Competition is fierce and the difference in the winning bid and number two can be literally a few hundred dollars. It is incumbent on all contractors who are serious about operating in the government market to discharge their fringe benefit obligations in compliance with federal legislation as well as off payroll. Otherwise they may be wasting their time. Further, the discharge of fringes through benefits frees up cash, which helps with the bonding required on most public projects.

From a sales perspective for brokers, concept and administration are key components of the process. Benefits are important but not as important as solving a business problem and qualifying for the cost savings generated by proper discharge of the obligation outside of payroll. Partnering with a sophisticated third party administrator that specializes in this type of business is a pre-requisite. They should be able to guide producers into benefit and retirement plan structures that meet the “bona fide” definition as well as track benefits by employee, by hour paid. In the event of a DOL audit this will be critical and the administrator’s assistance is vital in proving the proper discharge of fringe obligations. They should also have the ability to receive all fringe dollars and disburse as directed, per employee, while maintaining firm accounting and compliance controls based on hours paid. It is also vital that the administrator has a presence inside the Beltway and has an ear to the ground for legislative or compliance changes that could affect clients with current contracts or that are bidding future contracts.

Just as contractors are finding their prospect base shrinking and watching revenue fall, so are many brokers. Both contractors and brokers are being forced into markets that might be unfamiliar in an effort to survive. The bulk of the ARRA funding is only starting to flow with most of it set to depart federal accounts in 2010. While the federal contracting sector has always been a tremendous opportunity, we may never see the opportunity emerging right now again in our lifetime. Not everyone will be agile or committed enough to lead their practices into opportunity and position themselves as subject matter experts on prevailing wage programs; most won’t. But those few who are willing to act decisively and commit the resources necessary may have an opportunity to breathe in the rarified air of success as they have never tasted it before. BrokersÉfollow the money.