10 Questions with Reunion, Episode 6: Navigating Prevailing Wage & Apprenticeship Requirements in the IRA

Introduction

In episode 6, Reunion's CEO, Andy Moon, chats with Craig Smith of Wiley Rein to understand how buyers and sellers of transferable tax credits can borrow lessons-learned from the Davis-Bacon Act when navigating the IRA's prevailing wage requirements. The episode includes Craig's view on the November 2023 §48 ITC guidance, which included key PWA updates.

In Craig's view, it's important for transacting parties to strike the right balance between information and enforcement.

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Guest: Craig Smith, Wiley Rein

Craig Smith is a partner at Washington, DC-based Wiley Rein. Craig has dedicated a significant portion of his practice to the Davis-Bacon Act, which has several key parallels to the prevailing wage and apprenticeship requirements in the Inflation Reduction Act.

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Video

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Chapters

0:00 – Introductions

1:47 – Question 1: What are the PWA requirements for the purposes of IRA tax credits?

2:33 – Question 2: Are there substantive differences between the PWA requirements under the IRA and the Davis-Bacon Act?

3:29 – Question 3: How will the recent major updates to the Davis-Bacon Act – the first in almost 40 years – impact buyers of IRA tax credits?

5:27 – Question 4: What's the process for complying with DOL requirements?

7:46 – Question 5: How does a developer ensure they are using the correct timing of a wage determination?

8:55 – Question 6: How are developers documenting PWA?

10:09 – Question 7: How are buyers mitigating the risk of deviations from PWA requirements? How deep should they go with diligence?

11:42 – Question 8: What should developers keep their eyes on with respect to documenting PWA?

13:09 – Question 9: What is the role of consultants when it comes to documenting PWA compliance?

16:02 – Question 10: Under the Davis-Bacon Act, has it been common for a contractor to require subcontractors to submit certified payroll?

17:04 – Question 11: How does the PWA "cure period" work?

20:54 – Question 12: What is the after-the-fact process for locating and properly compensating a worker who was underpaid?

23:05 – Question 13: Any parting wisdom?

24:08 – Question 14: What has been the role, if any, of insurance when prevailing wages were not paid under the Davis-Bacon Act?

25:45 – Question 15: What should the clean energy market know about the November 2023 PWA guidance?

26:44 – Question 16: What can you tell us about the annual PWA reporting requirement during the recapture period?

27:25 – Question 17: The November Section 48 ITC guidance did not reference to the use of apprentices during the recapture period. Any insights on whether apprentices are a requirement for the alteration and repair period?

28:32 – Question 18: Any closing comments?

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Transcript

Introductions

Andy Moon: Hello and welcome to another episode of 10 Questions with Reunion. My name is Andy Moon, and I'm the co-founder and CEO of Reunion, the leading marketplace for clean energy tax credits. We work closely with corporate finance teams to purchase high quality tax credits from solar, wind, and other clean energy projects.

Today's guest is Craig Smith, a partner at the law firm Wiley Rein in Washington, D.C. Craig has significant experience in prevailing wage issues for federal contractors. 

We are excited to have you on the show, Craig. Can you start by sharing a brief introduction on you and your practice?

Craig Smith: Thanks so much, Andy. Delighted to be here. It feels just like just yesterday I got thrown into the world of federal prevailing wage requirements with the American Recovery and Reinvestment Act of 2009, which many people may remember pumped billions of dollars into the economy through grants and other agreements.

My practice has expanded to other types of prevailing wage requirements, which we're going to talk about today, in both the federal contracting space and other vehicles ever since. 

Andy Moon: This is a hot topic for many clean energy developers. For many of the current projects selling IRA tax credits in 2023, they tend to be exempt from prevailing wage and apprenticeship requirements, otherwise known as PWA, because construction on these projects started prior to January 29th, 2023. But PWA compliance is becoming a big topic for 2024 projects, which requires diligence.

Question 1: What are the PWA requirements for the purposes of IRA tax credits?

Andy Moon: Craig, will you summarize PWA requirements for the purposes of IRA tax credits?

Craig Smith: Sure. I think the key term to keep in mind is “Davis-Bacon Act,” which is what all this is based on. It's a nearly hundred-year-old law that directly imposes requirements to pay certain wages and fringe benefits to the laborers and mechanics – which are general terms – who work on federal construction projects.

That requirement has expanded to all sorts of other projects over the years, but the key points are the same: In a given area, you must pay certain wages and fringes to certain classes of workers over the lifespan of the project.

Question 2: Are there substantive differences between the PWA requirements under the IRA and the Davis-Bacon Act?‍

Andy Moon: Are there substantive differences between the PWA requirements under the IRA and the prevailing Davis-Bacon wage requirements?

Craig Smith: It's a bit like if my son were to come to me and say, “Dad, you don't have to pay me an allowance, but every week you have to give me $5 for not doing anything.”

I've been hearing this argument that you just have to pay wages in accordance with the Davis-Bacon Act – you don't have to comply with the Davis-Bacon Act. For most folks, there's no real trade space between those two.

For a lawyer like me, who's thinking about enforcement and working with companies directly, there are some differences in the administration, record-keeping, and other obligations.

And the implementation has, so far, recognized these differences. By and large, though, if you're  thinking about what you need to make sure that people are getting paid, I don't see too much difference.

Question 3: How will the recent major updates to the Davis-Bacon Act – the first in almost 40 years – impact buyers of IRA tax credits?

Andy Moon: That’s very helpful. On that note, the first substantive updates in almost 40 years to Davis-Bacon and related acts became effective recently. Were there any major changes? If so, how will this impact buyers of IRA tax credits?

Craig Smith: There are two that should draw the [clean energy] market’s attention, both of which will take some time to be more salient and will require attention and diligence.

One is that DOL has reverted to a prior method of calculating the prevailing wage. They have certain methodologies where they ask, “Are most people in an area making a single wage rate?” For the last 40 years, if the answer was no, DOL just took a weighted average.

DOL has reinserted in that methodology a 30% threshold – a big plurality, if you will. Where I think you're going to see that make a difference is in geographic areas where there's a fair amount of union labor, but not a majority. At some point in the next few years – perhaps next year, perhaps in five years – the wage rate for iron workers or electricians pops up to reflect that change. Not a today change or a tomorrow change, but something developers need to account for.

The other change is that the site of the work that's covered – who's in the area where you must pay the wages – is steadily expanding. As modular construction continues to grow, the Department of Labor is focused on getting the same kinds of work covered at these secondary sites of work.  

It's going take a little while to see how these [site] changes play out in practice. If you are – to use an easy expression – delivering the windows for the building, [historically] that's just supply. I think when you start assembling things offsite, it's going to get more complicated and require more attention.

Question 4: What's the process for complying with DOL requirements?

Andy Moon: Let’s go into some practical details. Let’s say you’re a developer and trying to make sure you get the correct labor calculation. How should you think about the geography of work, and what’s the process for ensuring that you're complying with DOL requirements? 

Craig Smith: Geography is the easiest place to start because wages are set first by geographic area under the Davis-Bacon Act. Counties are the most common dividing line. For example, you'll see a given county is in wage determination 12345, along with three or four other counties. (There are some projects that, of course, cover multiple counties or other geographic areas. But let's save that for the 201 interview. For now, you can just think about one county.)

Then you must understand what kind of work is being done, because there are four Davis-Bacon wage determination types. They're fairly self-explanatory – building, highway, residential, and heavy. Of course, at the edges, it can get tricky. But DOL has provided some guidance that solar and wind projects should use heavy.  

When you click through the website where these are published, www.sam.gov, you'd start with heavy. Then, you look at who's going to do the work. DOL has recognized we don't have a labor category for installer of solar panels or fabricators of wind turbines. So, really distilling – do we have electricians? Do we have iron workers? What are the trades involved? From there you go down, and it'll have a wage rate and a fringe benefit rate.

A key factor to bear in mind is fringes can be paid as part of a cash wage. A developer doesn’t have to run out and sign everyone up for a 401(k) and a health plan. Instead, the dollars they’re spending per worker per hour must match up with what's in that wage determination. 

Question 5: How does a developer ensure they are using the correct timing of a wage determination?

Andy Moon: Another common question is the timing of the work. You mentioned that the prevailing wage for ironworkers might increase. How does the developer ensure that they are using the correct timing of the wage determination?

Craig Smith: The lodestar is when construction of the facility begins or the other work where the installation work is being done.There are cases at the edges, but for getting familiar with the concept, a developer should think about when they are going to start swinging hammers or digging shovels.

What's important to realize is you'll be able to go online and see the wage determination today. The challenge, then, is you'll already have the contracts, you might have already bought long-lead items, you already have pricing – the project is going to be well-advanced.  

Therefore, understanding the mechanism to confirm you have the right wage determination and if there are any changes [will be important]. That process exists for a federal construction contractor who, say, gets a contract from the General Services Administration to construct a building. It's a little painful, but everyone knows what it is. Under the IRA, [the process is less defined]. It’ll be important to have a plan if that situation arises. 

Question 6: How are developers documenting PWA?

Andy Moon: How are developers currently documenting this PWA?

Craig Smith: There's a wide range of ways to do it. Let me give you some context from Davis-Bacon, which has been around for a long time.

Some companies do it in a manual way, perhaps in Excel. They have an admin who keys all [the information] in. Some have automated systems. Others rely on payroll and plan to extract the data (although I'd say make sure you can do that before you try it).

As you get further and further down the subcontracting chain – and this is important to realize – some companies are flatly unaware of [the requirements]. A partner of mine and I were on a project some years ago, for example, and we were talking with a third- or fourth-tier subcontractor who had never heard of the Davis-Bacon Act.

This is critical for a taxpayer [who is buying tax credits] to know because they are one step further removed from a prime contractor or general contractor.

Question 7: How are buyers mitigating the risk of deviations from PWA requirements? How deep should they go with diligence?

Andy Moon: Because the taxpayer is the one that's on the hook for deviations from the PWA, how are buyers mitigating risk? Are there situations where they can rely on the representations from the EPC or construction company? How deep does the buyer need to go on the diligence side?

Craig Smith: People get into this business because they have some appetite for taking risks and investing. I think buyers need to think carefully about their appetite for risk and the information available to them.  

A compliance lawyer would say you must have detailed documentation of every hour worked by every person on this project. You must have contact information. You must know what's going on week by week because that's the gold-plated way to make sure you're handling compliance. But, as your investors and buyers probably know, you pay for that.  

So, the question is, what's your risk tolerance? A certification may be effective if it's a company you know is familiar with Davis-Bacon or it's a tax credit seller who's using a contractor you know is sophisticated.

I think it’s the right blend of information and enforcement that's going to work with me where the investment still makes sense.

Question 8: What should developers keep their eyes on with respect to documenting PWA?

Andy Moon: We’ve heard that contemporaneous documentation is one of the key elements in ensuring that documentation is sufficient. What are some other points that you would advise developers to keep an eye on as they are documenting PWA?

Craig Smith: Let me give you a variation of that contemporaneous documentation item, which is you've got to make sure everyone knows that this requirement applies. How would someone who's just there to install solar panels know? So, the first consideration is making sure everybody knows what we're supposed to be doing in terms of wages.

Then, you want to understand how these [construction] companies are tracking payroll. What [information] are they accumulating? Maybe [the developer] is not getting the information on a real-time basis, but they should understand the [payroll] process, so they can go back and reconstruct it.

You don’t want to hear, “We had some electricians who came in and paid their guys in cash, and they've all disappeared to the wind.” You don’t want to end up $5 per hour short on a multimillion-dollar tax credit and be unable to find the workers.

Question 9: What is the role of consultants when it comes to documenting PWA compliance?

Andy Moon: I understand what you say when some developers are tracking this manually with spreadsheets, while others are using their certified payroll. What is the role of consultants when they are involved in ensuring that PWA documentation is happening?

Craig Smith: Let me talk about that certified payroll term for just a second, because that may be new to a lot of folks. Under the Davis-Bacon Act itself (and some of the “related acts” that impose the requirements), every week a contractor and subcontractor who are covered has to prepare what's called a “certified payroll,” which lists out all the Davis-Bacon covered workers, their hours by day, how much they got paid, and someone certifies under the Federal False Statements Act that Davis-Bacon wages and fringes have been paid. You can think of that, again, as a gold standard.

But [certified payroll] is not required under the IRA. That's clear. However, the government will tell you it’s a really good idea.

So, when understanding what kind of information you might get, you might see some companies give you certified payrolls, or maybe they use the certified payroll form. Viewers can see the PDF online by searching WH-347. Some companies are sending PDF after PDF. Other companies have moved ahead in how they handle it.

With that context in mind, consultants can help on a few fronts. They can help you wrangle all the information because you might be learning this on the fly. If it's a more construction-oriented consultant, they can help you assess if the labor categories that a contractor has chosen are realistic. Are these workers, for instance, really journeyman ironworkers?

You could also have consultants who help with automating the process of consolidating unstructured data. They could take whatever [data] they get from the general contractor – who's just going to roll up everything from the subs – and put it into a single, clean report. You could, for enough of these projects, have a consultant who builds a light website that handles this.

There is a range of services out there that someone could build, depending on their familiarity with the Davis-Bacon Act. Perhaps they are just technically proficient and can help you automate a workflow. 

Question 10: Under the Davis-Bacon Act, has it been common for a contractor to require subcontractors to submit certified payroll?

Andy Moon: Going back to certified payroll, has it been common under the Davis-Bacon Act for a contractor to require subcontractors to submit certified payroll?

Craig Smith: It’s a contractual requirement, so there's no getting around it. Think of a reverse cascade: payrolls are supposed to make their way to the contracting or the grant-making agency.

If you have a contractor who is familiar with the federal space, they may be the simplest pathway because they already have a workflow for it. Others might say, “We do [certified payroll] for federal projects, but we are not doing them for your project.”

Certified payroll gives you a frame of reference for the type of information you’ll want to have for in-process monitoring and if there are questions five years later when the IRS comes calling to reconstruct what happened.

Question 11: How does the PWA "cure period" work?

Andy Moon: One item that's been talked about a lot in the context of IRA credits is the cure period. If a taxpayer or a developer is determined that workers were not paid prevailing wage, the tax credit is not automatically repealed. There is a chance for the prevailing wage failure to be cured by paying the worker the difference in wages plus an underpayment rate plus an additional $5,000 for each worker that was underpaid. Can you comment a bit on the cure period and, practically, how would it work?

Craig Smith: My comments are generally about how poorly thought out this is. Let me try, however, to help folks think about how to approach the cure mechanism. I’ll contrast it with a regular Davis-Bacon project where, even with the most compliance-oriented companies, people get underpaid. This is hard. So, I want people to understand that this is going to be really hard because you don't have some of the infrastructure from federal projects.

Typically, under Davis-Bacon, the Department of Labor would determine that, let’s say, some workers were paid wages from an outdated version of a wage determination. You would owe them all $2 an hour more for some number of hours, and you would remit the funds. Then, if you can’t find the workers – and this is also true in the services space – you can pay the money over to DOL, and they will try to find the workers.

So, there are two principal differences for any type of cure. One, the proposed guidance is written as though the [buyer] is paying [the cure]. Although the tax credit investor is technically responsible – I think everyone understands that – they don’t have an employer and/or independent contractor relationship [with the workers].

Some companies, especially if they’re publicly traded, have internal controls. It'd be a nightmare for them to pay the workers because they’re not their employees.

I hope that, as the [PWA] rules get finalized by the Internal Revenue Service, this will get fixed. (The comment period is open). If not, taxpayers may need to think about how they’re potentially going to be paying people.  

The second principal difference is the mechanism for paying workers you can't find. It's one thing in the middle of a project to realize there's been a mistake, and you're able to arrange for a back payment. It’s another thing when the project is over – perhaps there's a challenge to the tax credit years later. In this case, you’re trying to find the workers.

So far, all the IRS has said is in their proposed rulemaking is, “Look to state law for how you would pay these people.” I find that deeply unsatisfying, and I hope that gets resolved by the time anyone has these issues.  

The good news, as you mentioned, is we're just now starting to see projects come online that are subject to these requirements. It's going to be some time before we're trying to do after-the-fact fixes.

Right now, projects should have mechanisms in place for validating in-process compliance. They should be able to handle shortfalls in the ordinary course of back pay, whether it's on a paycheck or a special payment. It's going to be a lot easier to catch these [shortfalls] in the moment. 

Question 12: What is the after-the-fact process for locating and properly compensating a worker who was underpaid?

Andy Moon: If there was an underpayment on prevailing wage, I assume the first course of action would be for the developer to make the buyer whole because the developer has a fulsome indemnity. The developer would have a strong incentive to play a role in curing the underpayment of wages.

If that is not able to happen, I thought you had mentioned that the penalty can be paid to the DOL, which will make their best effort to locate the folks who were underpaid. Can you talk through those mechanics? 

Craig Smith: That's how we work in the ordinary course of a Davis-Bacon project. [With the IRA], we don't have that mechanism. Instead, let's say I'm a developer or an investor, I have an uncooperative general contractor, and I don’t have legal recourse. In this case, it’s important to know where the project is located and to engage local counsel who’s familiar with construction projects in that jurisdiction.

This won't be the first time that workers are discovered to be owed money after the fact [in that jurisdiction]. So, for the time being, the best advice we have is look to state law, just like the proposed rules from the IRS say to do. It's not a satisfying solution, but it's the best one that we have. 

The other point to consider is that, although they’re on opposite sides of the bargain, the developer (the seller of the credits) and the buyer have aligned interests. They both want to ensure everyone’s getting paid the correct rate. As you move further from that core transaction under the IRA, however, people have other things to do in life. So, you ultimately need to make sure that everyone is rowing in the same direction.

Question 13: Any parting wisdom?

Andy Moon: Craig, you've been in this space for along time. Is there anything that I could have asked or anything that we missed in this discussion today about prevailing wage?

Craig Smith: I want to reemphasize that companies who spend a lot of money to get this right still run into difficulties. So, [developers should] want to understand PWA requirements from a practical perspective.  

Before they start trying to quantify the risk and model it out, they should think about the right balance of information and enforcement. Some companies might look at this and determine they prefer a strong [with] liquidated damages. Others may want to be more proactive based on their comfort and understanding. But if you just look at this as, “Make sure people get paid the right wages and fringes,” that should take care of itself.  

I have a career in this field for a reason. It's because it's hard to do, even for those who work hard to get it right.

Question 14: What has been the role, if any, of insurance when prevailing wages were not paid under the Davis-Bacon Act?

Andy Moon: That's good feedback, Craig. I'd like to bring up a final item. Tax credit insurance is one area that buyers are using to mitigate risk on these projects. And tax credit insurance does cover qualification of the credit, which would include verification of prevailing wage and apprenticeship requirements.  

How have you seen this play out in Davis-Bacon projects where it’s been determined that prevailing wage was not paid. Has there been insurance available and, if so, how has it mechanically worked?

Craig Smith: It's a too early to see how it's playing out because we're less than a year in. I think this is a question for this time next year when we’ll see how [insurance] is getting bought and sold and if we’re running into these kinds of issues.

If nothing else, we'll have had our first tax filing season, and you can pay someone prevailing wages right away if there's a shortfall. The $5,000 or greater penalty wouldn't be due until tax day, so there is a time lag before we start seeing what's the reality on the ground. 

Andy Moon: Thanks so much, Craig, for coming on the show today. It's great to learn from your experience of working on federal contracting issues and certainly hope to work with you in the future.

Craig Smith: Thanks so much, Andy. This was a blast. Really appreciate it.

Question 15: What should the clean energy market know about the November 2023 PWA guidance?

Andy Moon: Hi, Craig. Happy new year – great to see you again.

Craig Smith: Great to be back.

Andy Moon: The IRS issued an update to Section 48 ITC guidance in November 2023, and it included some updates to the prevailing wage and apprenticeship guidance. We would love for you to give an overview to our audience on what they should know about the PWA.

Craig Smith: When we recorded questions 1 through 14, I said there were a lot of PWA pieces and processes that still had to be defined. Without going into too much granularity, the latest guidance brought some of those pieces together – in particular, around reporting and record-keeping.

There are some pieces, however, that may take more time. For example, we don't know how, in practice, the IRS is going to handle the returns that will include these tax credits. How the IRS will handle disputes is also an open question.

But it still felt like things are starting to come together.

Question 16: What can you tell us about the annual PWA reporting requirement during the recapture period?

Andy Moon: Is there anything in particular that buyers and sellers should be aware of? For example, there was a specific requirement for an annual PWA compliance report to the IRS. What does that look like?

Craig Smith: It's similar to an aggregated report of wages. Perhaps not surprisingly, the November update drew a parallel between the reporting requirements during the construction phase with the reporting requirements during the alteration and repair phase – that is, the recapture period – of a qualifying facility.

Question 17: The November Section 48 ITC guidance did not reference to the use of apprentices during the recapture period. Any insights on whether apprentices are a requirement for the alteration and repair period?

Andy Moon: On the topic of the five-year recapture period, the November guidance did not have any references to the use of apprentices during this period. Any insights on whether apprentices are a requirement for the alteration and repair period on 48 ITCs?

Craig Smith: One of the things that I do as a lawyer is go back to the start with the source text. And I'd say that is an area that isn't as crisply written in the IRA as some of the others when it comes to prevailing wage and apprentices.

For companies that are looking to be in this market, they should be focused on a final answer from the iRS in the Federal Register. And then any challenges to that, one way or the other, will take time to play out.

I think the most important thing to say is, "If we want to be risk averse, we should probably plan for apprentices." If that's not the direction you're going in, then you should have a plan ready if apprentices are part of the ultimate outcome. Within that plan, allocating risks and responsibilities will be an important discussion point.

Question 18: Any closing comments?

Andy Moon: Anything I haven't asked that I should have?

Craig Smith: I think it's important to pay attention to the Department of Labor, which recently published substantially updated Davis-Bacon rules. The market should follow these in-the-field developments.

Said differently, we don't want to over-focus on the IRS. We should keep an eye on Davis-Bacon rules and keep in mind that that there are changes afoot, even if they might feel like they're not quite as forefront as record-keeping or reporting.

Andy Moon: Thanks so much, Craig.

Craig Smith: Thanks for welcoming me back, Andy.