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The $15,000+ dollar bill lying on the sidewalk…
Last week, we had a WOW moment at Miter. We ran some numbers, and we discovered that our customers are saving a ~ mind-boggling ~ amount of money using Miter’s automatic prevailing wage fringe credits:
- The average public works contractor on Miter is saving $30,000+ annually
- Nearly all Miter customers have reduced labor costs by 3-5% on public works jobs
- Our top savers are saving over $1 million annually
Needless to say, it was a fist-bump-heavy day at Miter. We LOVE when our customers save money…it’s literally why we’re in business.
But here’s the kicker: before switching to Miter, most of our customers had NO IDEA what a prevailing wage fringe credit was. We wrote this guide to demystify prevailing wage fringe credits and explain how public works contractors can use them to reduce labor costs by up to 5% and increase profits on public works jobs.
What is a Prevailing Wage Fringe Credit?
A Prevailing Wage Fringe Credit is a reduction in payroll taxes and workers’ comp expenses achieved by paying part of the prevailing wage in the form of benefits instead of cash.
Prevailing wage fringes: a refresher
On most public works jobs, contractors are required to pay their employees the “prevailing wage”. Prevailing wage rates vary by county and are established by federal and state governments.
Prevailing wages typically have two components: (1) the base rate and (2) the fringe rate (a.k.a “the fringe”). Both are defined as a $/hour rate, but the fringe can be paid in cash OR in the form of employer-sponsored benefits like health insurance or retirement plans.
Why you shouldn’t pay your fringes in cash
Most contractors, especially those new to prevailing wage, pay the entire prevailing wage - even the fringe portion - in cash. While it’s legal to do so, we at Miter strongly advise against it. Why? Because you’re leaving money on the table!
There are 2 good reasons to pay your fringes in the form of benefits instead of directly to employees as cash:
- If you currently offer benefits to your employees and you pay the full fringe in cash, then you’re effectively double-paying a portion of the prevailing wage. In other words, you’re paying above and beyond what’s required by the government, putting you at a disadvantage when bidding against other contractors.
- Even if you don’t currently offer benefits to your employees, you could save money by paying the fringe in the form of benefits and thereby reducing your employer tax and workers’ comp liability. By paying the fringe in the form of benefits instead of cash, employers typically reduce labor costs by 5% or more.
How to utilize fringe credits: TBPs vs PWBPs
There are two primary ways contractors can take advantage of fringe credits to reduce labor costs on public works jobs: (1) Traditional Benefit Plans (TBPs) and (2) Prevailing Wage Benefit Plans (PWBPs).
Traditional Benefit Plans (TBPs)
Traditional Benefit Plans (TBPs) refer to standard employer-sponsored benefit plans like 401K programs or health insurance. Employers typically contribute to TBPs on a $/month or % of earnings basis. For example, an employer might contribute $200/month toward an employee’s health insurance or 1% of gross earnings toward a 401K.
To qualify for fringe credits, a TBP must meet certain criteria. If a TBP meets these criteria, employers can calculate the per-hour fringe credit for a specific prevailing wage:
- Calculate the annual employer contribution to the TBP
- Divide the annual contribution from Step 1 by 2087 (the number of work hours in a year, according to the IRS) to calculate the hourly employer contribution rate
- Calculate the “cash in lieu of fringe”, i.e., how much of the fringe you must pay in cash
- If an employee’s hourly “in kind” compensation is greater than the fringe rate, you aren’t responsible for paying any of the fringe in cash
- Otherwise, subtract the employee’s “in kind” rate from the fringe rate
Prevailing Wage Benefit Plans (PWBPs)
PWBPs are benefit plans designed specifically for prevailing wage contractors. Unlike TBPs, employers contribute to PWBPs at different rates depending on whether an employee is doing prevailing wage work or not.
PWBPs allow employers to scale their benefit contributions up on public sector/prevailing wage projects and down on private sector projects. In doing so, these employers pay the entire fringe portion of prevailing wages in the form of benefits instead of cash, resulting in increased tax and workers’ compensation savings relative to partial offsetting of the fringe.
Some employers use PWBPs as a supplement to TBPs, while others use PWBPs as a complete replacement for TBPs. Either way, PWBPs are typically the best way to optimize labor costs on prevailing wage projects. However, PWBPs typically require more work to set up and administer, especially if an employer hasn’t invested in specialized software and support.
How much could you save?
Your savings will depend on the size of your workforce and how much prevailing wage work you do. Miter’s Savings Calculator can help you figure out how much you’d save by utilizing fringe credits on prevailing wage jobs.
To illustrate, let’s take a look at a fictional scaffolding contractor: Miter Scaffolding Co (MSC). MSC has 25 employees and does 90% private work and 10% prevailing wage work. The graphic below demonstrates how when MSC pays its fringes in benefits instead of in cash, its prevailing wage labor costs decline 6%, saving the company $10K+ annually.
How Miter can help
Miter’s HR & payroll software helps prevailing wage contractors take full advantage of fringe credits and save thousands every year. We work closely with our customers to optimize their benefit programs and prevailing wages to maximize savings and profits on public works jobs.
The result? Most of our public works customers see thousands in savings every year by switching to Miter. Sign up for a free savings consultation - we’d love to help you save!
