How to Manage Prevailing Wage Payroll in Construction

For construction companies working on government-funded projects, payroll compliance can quickly become a nightmare. Prevailing wage laws add layers of complexity, requiring precise wage calculations, extensive reporting, and strict adherence to regulations — any mistake can lead to penalties or even project disqualification. And while the work can bring in a steady stream for construction companies, it can also bring complexity in employee wages and payroll.

Prevailing wage laws set the base hourly payment for construction companies on government-funded projects. Failure to comply with these rules can lead to fines, penalties, and project delays. To take advantage of potentially lucrative government contracts, construction companies have to learn to manage prevailing wage payroll, even in its complexities. 

In this article, we’ll dive into prevailing wage payroll in construction, including best practices to overcome common challenges and how payroll software can streamline processes.

What is Prevailing Wage & Why Does it Matter?

In its most basic form, prevailing wage is the average hourly rate paid to similarly employed workers in the same job and geographic region. 

Prevailing wage applies to government-funded projects, with compensation levels set by local policymakers. The goal is to ensure government funds don’t undercut local wage and benefit standards to support job growth and provide value to taxpayers.

In construction, prevailing wage is governed by the Davis-Bacon Act, which requires contractors to pay prevailing wages to workers on federally funded construction projects. Under the act, construction companies can’t underbid on government contracts to secure work and provide sub-par wages to workers. Each state or city sets its prevailing wage rates, so construction companies must follow local laws. 

Companies and contractors on any federally funded construction project that costs more than $2,000 must follow prevailing wage laws, including constructing, altering, or repairing public buildings. That means companies have to pay their workers the prevailing wage in either cash or a combination of cash and fringe benefits.

Unlike standard payroll, prevailing wage payroll requires construction companies to ensure workers are paid at government-mandated wage rates, which vary by location, job role, and project type. This isn’t just about wage rates — it also includes fringe benefits, compliance reports, and audit tracking, making manual processing a major risk for errors. Employees working on a federally funded project must receive a prevailing wage payroll that follows the area’s prevailing wage rules. Prevailing wage payroll tends to be more complicated and often includes additional reporting to ensure compliance.  

Challenges in Managing Prevailing Wage Payroll

Construction payroll is already complex, and adding prevailing wage payroll can take it to the next level. Here are five common challenges of managing prevailing wage payroll:

• Accurate wage determination: Construction companies must understand current prevailing wage rates and regulations for their area and various job types. Even within the same geographic area, prevailing wage can differ based on the type of work being performed. A welder can have one prevailing wage, and a mason may have another prevailing wage, even if they work on the same project. Understanding the difference is crucial. 

• Complex reporting requirements: Regular payroll requires tax forms and other paperwork, but prevailing wage payroll requires even more documentation to ensure compliance. Gathering and storing those reports can be challenging. Construction companies have to gather and retain documentation about the work performed, the location and type of labor, and project details. 

• Fringe benefit calculations: Under the Davis-Bacon Act, companies can pay employees prevailing wage in cash or in a combination of cash and fringe benefits, such as health benefits, paid time off, and other perks. Tracking and allocating fringe benefits, especially understanding the value of those benefits, can be challenging. If a contractor pays part of the wage in cash and the rest in health benefits but miscalculates the benefit value, they risk non-compliance. Many companies struggle to track this manually, leading to underpayments or overpayments.

• Time tracking issues: Construction workers often don’t follow predictable schedules, and many employees are governed by labor union collective bargaining agreements. Even when following prevailing wage laws, work hour limitations and overtime rules still apply, adding another layer of complexity to time tracking and payroll. A worker can earn a prevailing wage for a project, but that rate needs to be adjusted if they work overtime.  

• Audit & compliance risks: If construction companies don’t pay prevailing wage, they can face fines and be removed from bidding for future government work. Staying compliant means keeping accurate records and following all local and federal regulations. A missing certified payroll report could result in a government agency withholding payments, or worse, barring the contractor from future projects.

How Payroll Software Simplifies Prevailing Wage Compliance

Calculating and staying compliant with prevailing wage is challenging, but it’s made easier with payroll software. 

Payroll software can help construction companies by automating wage classifications and rates to ensure compliance instead of manually calculating and coding jobs. Software also helps with fringe benefit tracking and reporting. Plus, it integrates with time tracking and job costing software to prevent errors and create consistent and accurate payroll records. 

What should you look for in prevailing wage payroll software? Here are five key features:

• Automated wage rate updates for Davis-Bacon & state laws. Software can automatically adjust when prevailing wage rules and rates change. hh2 automatically pulls updated wage rates based on the latest Davis-Bacon and state-specific requirements, reducing the risk of miscalculations.
  
  
• Accurate job classification tracking. Similarly, payroll software can automatically adjust an employee's job classification and check for errors or missing data to ensure compliance. hh2 checks for errors and consistency to ensure employees are tagged with the correct job classification. 
  
  
• Integration with ERP and accounting software. Look for payroll software that easily integrates with platforms like Sage, Viewpoint, and Procore to easily move financial records and ensure accurate reporting. hh2 integrates directly with Sage, Viewpoint, and other construction ERPs, eliminating duplicate data entry.
  
  
• Audit trail & digital documentation. Robust payroll software simplifies compliance tracking by organizing records and keeping an audit trail of when and why changes and payments were recorded. hh2 keeps real-time records of each change and update, making it easy to see what employees were paid and why.
   
• User-friendly dashboard. Payroll administrators have enough on their plates without having to learn complicated software. Strong payroll software is easy to learn and access all the features. hh2 offers a clean, intuitive dashboard so finance teams can easily jump in. 

How to Create a Compliant Payroll Process

Adjusting to prevailing wage payroll doesn't happen overnight; it requires a strategic process to ensure compliance and ease. To implement a compliant payroll process, follow these five steps: 

1. Determine the correct prevailing wage rates. Not every project qualifies for prevailing wage. Before jumping into payroll, ensure your project falls under prevailing wage rules. Then, check the local prevailing wage rates for your employees' work. Some types of construction work have different prevailing wage rates, which may or may not apply to your employees. 
   
   
2. Ensure proper employee classification. Based on job roles, make sure that employees are properly classified in your payroll system, including noting that the job falls under prevailing wage and which type of prevailing wage they are earning.
   
   
3. Accurately track hours and fringe benefits. Use time tracking software to accurately track when employees clock in and out of the project, including calculating overtime hours.
   
   
4. Use prevailing wage payroll software. Streamline the payroll process by using automated prevailing wage payroll software, such as hh2. This system will ensure records are accurate and compliant with current prevailing wage rules.
   
   
5. Regularly audit payroll data. Even with strong payroll software, regularly audit payroll data to ensure compliance. Make sure all records are attached to the correct project and employee and that all calculations are accurate. 

Managing prevailing wage payroll in construction is challenging, but it doesn’t have to be. With help from payroll software from hh2, construction companies can enjoy the ease of automated solutions.

Don’t let payroll compliance slow down your projects. Automate prevailing wage calculations, eliminate errors and ensure 100% compliance with hh2. Get a free demo today!