PREVAILING WAGE OVERHEAD RATE — WHY IT'S DIFFERENT AND HOW TO CALCULATE IT.
A contractor who uses the same overhead rate for prevailing wage and private work is either overpricing private work or underpricing prevailing wage work. Prevailing wage carries certified payroll administration, fringe benefit compliance, and wage classification overhead that private work does not. The correct approach is two overhead rates: a base rate for private work and a prevailing wage surcharge added to the base for public bids.
SPM builds separate overhead rates for clients who do both prevailing wage and private work. The prevailing wage rate includes all compliance overhead at the correct allocation.
THE COST STRUCTURE DIFFERENCES THAT MAKE ONE RATE WRONG FOR BOTH WORK TYPES.
Prevailing Wage Fringes Are Not in the Base Wage
On prevailing wage projects, the wage determination specifies a base hourly rate plus a fringe benefit amount per hour. The fringe benefit amount covers health insurance, retirement, apprenticeship, and other benefits required by the wage determination. Contractors can satisfy the fringe requirement by paying cash in addition to the base wage, by providing bona fide fringe benefits, or by a combination. The cash fringe payment or the cost of providing bona fide benefits is a direct labor cost on prevailing wage projects that does not exist on private work at the same base wage. This changes the fully burdened labor rate on prevailing wage work.
Administrative Cost That Belongs in Overhead
Prevailing wage projects require certified payroll reports submitted weekly to the awarding agency or general contractor. The certified payroll process — verifying wage classifications, calculating fringe compliance, preparing reports, and responding to compliance inquiries — takes 1–4 hours per week per prevailing wage project depending on crew size and complexity. At 3 hours per week at $55/hour for an admin or controller, that is $165/week or $8,580 over a 52-week project. This administrative burden is a fixed cost of prevailing wage work that should be in the overhead rate for prevailing wage bids.
Wage Classification Errors Are Back-Pay Liability
Workers on prevailing wage projects must be classified at the correct wage classification for the work they are performing. A worker performing work in a higher-classification trade who is paid at a lower-classification rate creates a back-pay liability equal to the wage differential for every hour worked at the wrong classification. Wage classification errors on a 6-month project with a 5-person crew are the kind of compliance failure that produces a $30,000–$80,000 back-pay judgment. The administrative overhead of maintaining correct classifications is a cost of doing prevailing wage work.
THE CALCULATION THAT PRODUCES ACCURATE PREVAILING WAGE AND PRIVATE OVERHEAD RATES.
The fringe benefit strategy: Contractors who establish a bona fide fringe benefit plan — union health and welfare or a qualifying employer-sponsored plan — can credit the bona fide fringe cost against the prevailing wage fringe requirement. This reduces the cash fringe payment required on prevailing wage projects and may be more tax-efficient than paying the full fringe in cash. SPM coordinates with the CPA on fringe benefit structure for clients who do significant prevailing wage volume.
FREQUENTLY ASKED.
