Who do Prevailing Wage Requirements Apply to? Accounting for Prevailing Wage Costs Delta Base and Delta Fringe Direct Labor Method Other Direct Cost Method Indirect Labor / Overhead Cost Method Accounting and Billing for Prevailing Wage Deltas Resources Email Questions to A&I Method to Account for Deltas Calculating Deltas for 1 Employee Calculating Deltas for an entire firm Effect of Direct Labor Method Effect of the Other Direct Cost Method Indirect Labor or Overhead Cost Summary Effect of Methods on Billing Delta Base & Delta Fringe Effect of Different Multipliers Cost Proposal for Prevailing Wages DIR Determination Schedule DIR Predetermined Increase Example of Actual Hourly Rates Example of ICR, Fee, & Mulitpliers Example of Hourly Rates Example of Other Direct Cost Example of Indirect Labor/Overhead Cost Labor Documentation Requirements Safe Harbor Rate Federal and State Requirements Resources

GENERAL TRAINING MODULES

PREVAILING WAGES FOR ARCHITECTURAL AND ENGINEERING CONTRACTS (Part 1 of 2)

View Part 1 of the video for prevailing wages for Architectural and Engineering Contracts click here.

Welcome to the training module on Prevailing Wages for Architectural and Engineering Contracts, part 1 of 2.

In this first module, we will discuss general information on Prevailing Wages.

In the second module, will discuss specific accounting methods on how to account for Prevailing Wages.

Learning Outcomes

Here are the learning outcomes for this training module:

  • Why is this topic important to you?
  • What are Prevailing Wages?
  • Who do they apply to?
  • How do you account for prevailing wage costs?

Why is this Topic Important?

The reason why Prevailing Wages are important for A&E firms is so they can be in compliance with state and federal laws and regulations. We will discuss these laws and regulations in more detail in the second module.

In addition to being in compliance with the law, it is also important for A&E firms to understand how the accounting of Prevailing Wage costs impact their financials. There are three different methods to account for Prevailing Wages, and each one has a different effect on a firms financials.

So A&E firms have both legal and financial reasons to properly understand Prevailing Wages.

What are Prevailing Wages?

Let’s look at the definition. The California Department of Industrial Relations (DIR) defines Prevailing Wages as “hourly rates to be paid on public works projects to workers engaged in a particular craft, classification, or type of work within the locality or the nearest labor market area.”

So prevailing wages are wages set by the DIR and applied to workers on public works projects in certain locations, doing certain types of work, in certain job classifications.

In addition to this definition, it is also important to note that DIR Prevailing Wages can also require that Straight Time and Overtime be paid to employees, regardless of their status as exempt or non-exempt.

Who do Prevailing Wage Requirements apply to?

Prevailing wage requirements apply to A&E firms working on public works projects in California and contracting with Caltrans and/or Local Government Agencies when the public works project is over $1,000.

Accounting for Prevailing Wage Costs

Prevailing wage requirements apply to A&E firms working on public works projects in California and contracting with Caltrans and/or Local Government Agencies when the public works project is over $1,000.

  • The first step is to determine the Prevailing Wages by obtaining the Prevailing Wage “basic hourly rate” and “fringe benefit hourly rate” established by the DIR for the applicable locality and job classification.
    • Of note: When you are doing this on the DIR website, it refers to “fringe benefits” as “employer payments.”
  • The next step is you will determine the difference between DIR’s Prevailing Wage “basic hourly rate and fringe benefit hourly rate” and each affected employee’s normal “basic hourly rate and fringe benefit hourly rate.” So you will determine the differences.
  • Finally, you will choose one of the three approved methods to account for these differences.

So, the three steps are essentially to: determine the Prevailing Wage rates, determine the differences between the Prevailing Wage Rates and your staff normal rates, and then choose a method to account for the differences.

Delta Base and Delta Fringe

The payment of prevailing wages to employees can result in A&E firms paying amounts over their employee’s regular wages, benefits, or both. These additional amounts paid are referred to as prevailing wage deltas. The term comes from the delta symbol, meaning change, which is used to designate the differences.

The difference between the DIR basic “(or base) hourly wage rate” and an employee’s actual “base hourly wage rate” is referred to as Delta Base.

The difference between DIR’s “hourly fringe benefit rate” and an employee’s actual “hourly fringe benefit rate” is referred to as Delta Fringe.

So Delta Base and Delta Fringe are another way of saying the differences between Prevailing Wage rates and normal rates as applied to base and fringe wages.

  • The Direct Labor Cost Method
  • The Other Direct Cost Method
  • The Indirect Labor Cost Method, which is also known as the Overhead Cost Method

It is allowable for a firm to use one accounting method for the Delta Base and a different accounting method for the Delta Fringe, provided the firm consistently uses the same methods respectively for billing on all contracts.

For those consultants who have not yet encountered deltas, an accounting method or methods must be established for the Delta Base and Delta Fringe. Firms must choose an accounting method or methods to use, and establish a written policy on how to account for the delta base and the delta fringe across all contracts.

As a guide to assist A&E firms in gaining a better understanding of how to account and bill for Prevailing Wages, A&I has developed a Prevailing Wage Interpretive Guidance that can be accessed at A&I’s website which is listed on our resources page at the end of this module.

Direct Labor Method

Now we will briefly discuss the three methods. In this module, which is just a high level overview, we will simply state what the methods are. In the second module, we will go into more detail and show you how the methods affect the Indirect Cost Rate.

The first method is the Direct Labor Method. For the Direct Labor method, the Deltas or differences are accounted for as direct labor costs.

Other Direct Cost Method

Prevailing Wage Deltas or difference are accounted for as Other Direct Costs.

The Other Direct Cost Method. For the Other Direct Cost method, Deltas are accounted for as Other Direct Costs.

Indirect Labor / Overhead Cost Method

Finally, The Indirect Labor or Overhead Cost Method. For the Indirect Labor/Overhead Cost Method, Deltas are accounted for as Indirect Labor.

Essentially, the name for each method states how the Deltas will be accounted for, as either Direct Labor, Indirect Labor, or Other Direct Costs.

Accounting and Billing for Prevailing Wage Deltas

Now that we have identified the three different accounting methods to account for Prevailing Wages, it is important to note that consultants should bill Prevailing Wage Deltas consistently with how they account for them.

Resources

These are the resources that A&E firms can refer to about Prevailing Wages:

The AASHTO Website which also provides accounting guidance and examples of indirect cost rate schedules.

The California Department of Industrial Relations Website which includes:

  • California Prevailing Wage Laws
  • Wage Determinations
  • Frequently Asked Questions

A&I’s Website which is where you will find:

  • Prevailing Wage Interpretive Guidance
  • Prevailing Wage Training Modules
  • Other interpretive guidance, webinars, and resources.

Email Questions to A&I

We hope this training module provided you with general information on Prevailing Wages and how to account for them.

The Other Direct Cost Method. For the Other Direct Cost method, Deltas are accounted for as Other Direct Costs.

If you want to know more, we encourage you to view the second training module where we will discuss in greater detail how the different accounting methods impact the Indirect Cost Rate.

If you have any additional questions about this topic or training module, you may contact us at the e-mail address shown here.

aefinancial.qandasupport@dot.ca.gov

PREVAILING WAGES FOR ARCHITECTURAL AND ENGINEERING CONTRACTS (Part 2 of 2)

Prevailing Wages for Architectural and Engineering Firms contracting with Caltrans and Local Government Agencies on Public Works projects. Part 2 of 2.

In the first module we introduced general information on Prevailing Wages for A&E firms. We welcome you to view the first module before this one to get a background on Prevailing Wages.

In this module we will discuss in greater detail the specific methods on how firms can account for Prevailing Wages.

Learning Outcomes for Prevailing Wages

These are the learning outcomes for this module:

  • To understand how different methods for accounting for Prevailing Wages affect the Indirect Cost Rate
  • To understand how to bill Delta Base and Delta Fringe under each accounting method
  • To know the documentation requirements for each method
  • To know the accounting methods available for use by Safe Harbor Rate (SHR) firms

Methods to Account for Deltas

To recap what we presented in the first Prevailing Wage Training module:

  • When there is a difference between the Department of Industrial Relations, or DIR, Prevailing Wage Rates and the employee rates then it is referred to as a Prevailing Wage Delta.
  • There are three methods that A&E firms may use to account for prevailing wage delta costs.
    • The Direct Labor Cost Method
    • The Other Direct Cost Method
    • Indirect Labor Cost Method, which is also known as the Overhead Cost Method
  • It is allowable for a firm to use one accounting method for the Delta Base and a different accounting method for the Delta Fringe, provided the firm uses the same method respectively and consistently across all contracts.
  • For those consultants who have not yet encountered deltas, they must choose an accounting method for the Delta Base and Delta Fringe and document it in a policy. The method must be consistently applied across all contracts.
    • Note: It is important for firms to understand the abilities and limitations of their accounting software in selecting an accounting method.

As a guide to assist A&E firms in gaining a better understanding of how to account and bill for Prevailing Wages, A&I has developed a Prevailing Wage Interpretive Guidance that can be accessed on A&I’s website which is listed on our resources page at the end of this module.

Calculating Delta Base For One Employee

Let’s assume John Smith’s hourly rate is $20.

The Prevailing Wage basic hourly wage rate for this classification established by DIR is $30

Therefore, the difference, or the delta in this case, is $10.

Calculating Deltas for an Entire Firm

Now in this example, we will show you how to calculate the total delta base and delta fringe cost for all employees for an entire year.

Let’s assume firm ABC has total combined employee hourly base wages of $1,000,000 which is a direct labor cost.

And the total combined hourly base wages and hourly fringe costs based on DIR’s Prevailing Wage rates is $1,020,000.

The difference or delta for the combined base and fringe in this case is $20,000.

In the following slides, we will show you how the method used to account for the Delta of $20,000 will affect the ICR.

Effect of Direct Labor Method

This illustration shows how the Direct Labor methodology impacts the indirect cost rate calculation.

As shown on the previous slide, the $20,000 delta is recorded in the Direct Labor account on the financial records.

We arrive at the indirect cost rate of 147.06% by dividing the total FAR allowable indirect costs of $1,500,000 / Total direct labor costs of $1,020,000.

Total FAR allowable indirect costs means that the costs are allowable in accordance with the Federal Acquisition Regulation (FAR), specifically 48 Code of Federal Regulations (CFR) Part 1, Chapter 31.

For those who are not familiar with indirect cost rate calculation, it is summarized as follows: Indirect cost rate = Total FAR allowable indirect costs / Total direct labor costs (billable and non-billable).

Effect of the Other Direct Cost Method

This illustration shows how the Other Direct Cost method impacts the ICR.

In this case the $20,000 delta, is recorded as an Other Direct Cost.

Under this method, there is NO impact to the indirect cost rate. As you can see the indirect cost rate remains the same at 150%. This is because the total FAR allowable indirect costs of $1,500,000 / Total direct labor costs of $1,000,000.

Indirect Labor or Overhead Cost Method

Next we will show you the impact to the ICR using the Indirect Labor/Overhead Cost method.

The $20,000 delta is recorded as Indirect Labor costs

The adjusted indirect cost rate, impacted by having the Prevailing Wage delta added to the Overhead costs, is 152%. This is calculated by dividing the total FAR allowable indirect costs of $1,520,000 / Total direct labor costs of $1,000,000.

Summary

As shown on the previous slides, each method affects the indirect cost rate differently.

  • Under the Direct Labor Methodology, the ICR is 147.06%.
  • Under the Other Direct Cost Methodology, the ICR is 150%.
  • Under the Indirect Labor or Overhead Cost Methodology, the ICR is 152%.

Typically you would associate the PW Rates as Direct Labor costs as the labor relates to direct projects. However, some firms may elect to use the Other Direct Cost or Indirect Labor methodology.

Later in this training we will go through detailed examples of applying the indirect cost rate from each methodology to a Cost Proposal.

Effect of Methods on Billing Delta Base and Delta Fringe

In this section, we will explain how to bill “Delta Base” and “Delta Fringe” under each method.

The first thing to understand when billing for Prevailing Wage contracts are the Multipliers

Multipliers are values that are multiplied against the Delta Base and Delta Fringe to determine the amount to be billed.

Each methodology utilizes a different Multiplier.

Effect of Different Multipliers

Starting with the Direct Labor methodology, the costs billed for Delta Base and Delta Fringe are multiplied by the Indirect Cost Rate and the Fee Rate. The equation is: (1+OH Rate) x (1+Fee Rate).

This is also known as the “Full multiplier.” It is called the full multiplier because it will reimburse the full delta costs plus the overhead and the fee.

For the Other Direct Cost methodology, because Delta Base and Delta Fringe are billed at cost, the multiplier is one. The multiplier is one because it will reimburse only the deltas.

The Indirect Labor/Overhead Cost methodology, the Delta Base and Delta Fringe cannot be billed under this method, because the Deltas are included as part of the overhead cost. For that reason the multiplier is zero.

Accounting Method Multiplied to
Direct Labor Delta Base or Delta Fringe *(1+OH)(1+Fee)
Other Direct Cost Delta Base or Delta Fringe *1
Overhead / Indirect Cost Delta Base or Delta Fringe *0

Please keep in mind that the reimbursement method must be consistent with the firm’s accounting treatment of such costs. The accounting method chosen affects how a firm is reimbursed for the deltas incurred, and it is the responsibility of A&E firms to provide support documentation for prevailing wage delta treatment upon request.

Cost Proposal for Prevailing Wage

Cost Proposal Example

This is an example of a Cost Proposal that you would use for a Prevailing Wage Contract specifically for Actual Cost plus Fixed Fee or Specified Rate Contracts. This would not apply to Lump Sum Contracts.

This form is also referred to as the ADM-2033 for contracts with Caltrans or the 10-H4 for contracts with Local Agencies.

These forms can be found on A&I and Local Assistance’s webpages, for which we will provide links at the end of this module on the resources page.

Cost Proposal Example 2

On this slide, the green highlighted area is formula driven so you do not need to enter anything in this area. The circled areas in red are the areas that you will need to complete, and the ones that we will focus on in the rest of this training.

Cost Proposal Example 3

Now we will focus on what to input within the first section, which is where the Prevailing Wage Rates established by DIR and predetermined future increases will be entered.

An example of the DIR Determination Schedule where the Prevailing Wage rates are obtained will be displayed on the next slide. Please also note that in this example, the Prevailing Wage rate reflects an increase in the second year that was predetermined by DIR. We will discuss predetermined increases in an upcoming slide.

For this spreadsheet, you should identify each employee on the project and include their classification and shift (i.e. first shift or second shift). For each employee there should also be multiple rows to represent the salary rates for each year of the contract.

Cost Proposal Example 4

In this section, within each row you will need to enter the Prevailing Wage hourly base rate and Prevailing Wage hourly fringe rate for the particular employee as it relates to their classification.

The other cells in this area will then automatically calculate.

DIR Determination Schedule

DIR Determination Schedule

This is an example of a DIR Determination Schedule obtained from the DIR website. The web address is:

https://www.dir.ca.gov/Public-Works/Prevailing-Wage.html

  • The DIR Determination number, which is dependent on the advertisement date of the contract, type of work, and the location of the project, is located in the upper left hand side of the schedule. You should record this number on the cost proposal.
  • To ensure the Consultant is using the correct DIR Determination Schedule, the advertisement date of the contract should fall between the Issue Date and the Expiration Date listed for each DIR Determination Schedule.
    • In this case, the advertisement date of the contract is September 1, 2016. The issue date of this schedule is August 22, 2016 and the expiration date is June 30, 2017. Therefore, this DIR Determination Schedule is applicable to this contract as the advertisement date is between those two dates.
  • On the DIR Determination Schedule there are different rates depending on the classification Groupings. Ensure that you select the correct grouping based on the employee’s job classification.
  • The cost proposal in the previous slide contains the following rates:
    • The prevailing wage Hourly Rate of $43.56 for the classifications in Group 1, and
    • The Fringe benefits hourly rate of $29.98 which is calculated by adding the costs under the columns: Health and Welfare, Pension, Vacation and Holiday, Training, and Other Payments.

Please make notes of these two hourly rates, $43.56 (Base) and $29.98 (Fringe) as they will be used in the upcoming slides.

DIR Predetermined Increase

DIR Predetermined Increase

https://www.dir.ca.gov/OPRL/2016-2/PWD/Increases/Northern/NC-063-3-9-Pre.pdf

For each DIR Determination Schedule, there may also be a related Predetermined Increase which will be added to either the Prevailing Wage hourly base rate, Prevailing Wage hourly fringe rate, or both as of a specific effective date.

The DIR Predetermined Increase that you see is related to the DIR# mentioned in the previous slide. It is effective July 1, 2017 and shows a total increase of $2.05, which includes $1.46 allocated to the base hourly rate and $0.59 to the fringe hourly rate.

Prevailing Wage rates on Cost Proposals should properly reflect increases as applicable.

Example of Hourly Rates

Example of Hourly Rates

In this section the consultant should enter the employee’s actual hourly base rate and estimated hourly fringe rate.

The actual hourly base rate will go under the column “Base Salary – Straight,” and the estimated hourly fringe rate will go under the column “Estimated Fringe.”

Note: upon billing, estimated hourly fringe rates should be restated at actual hourly fringe rates

The rest of the columns in this section and the adjacent section to the right dealing with Deltas will self populate.

Cost Proposal Example

For each employee, there should be multiple rows to represent the hourly rate effective for each year of the life of the contract.

When entering the information, you will enter the effective dates and the actual hourly rate for the first year of the contract.

Next you will enter the effective dates and the escalation increases for each subsequent year of the contract. Then, subsequent years’ hourly rates will automatically self populate using the escalation increases.

Example of ICR, Fee, and Multipliers

Example of ICR, Fee, and Multipliers

In this section, in the upper right hand corner, you should enter the applicable Indirect Cost Rate, Fee, and Multiplier which will be used to automatically calculate the Loaded Hourly Billing Rates.

Typically, for a Cost Proposal on Prevailing Wage contracts, unless a firm maintains a single or combined rate, you will only need a field office rate and not a home office rate.

You will also need to include in this section the appropriate Prevailing Wage multiplier for delta base and delta fringe, which as covered in the previous slides, is dependent on how you account for the deltas in your financial system.

Accounting Method Multiplied to Indirect Cost/Overhead
Direct Labor Delta Base or Delta Fringe *(1+OH)(1+Fee) (1+1.4706)*(1+0.7)=2.6435
Other Direct Cost Delta Base or Delta Fringe *1 1
Overhead / Indirect Cost Delta Base or Delta Fringe *0 0

This summarizes the multipliers used for the different accounting methods again.

The multiplier for the Other Direct Cost and the Indirect Cost/Overhead methods will always remain the same at 1 and 0 respectively.

1 meaning the delta base and delta fringe are recovered dollar for dollar as Other Direct Costs, and 0 meaning the delta base and delta fringe will be removed because they are recovered in the Overhead by the Indirect/Overhead Method.

The multiplier for direct labor will change depending on your ICR and the fee. In this example, the full multiplier is 2.6435, and it will be used in the next slide.

Example of Hourly Rates

Example of Hourly Rates

In these examples, we will use non-exempt employees that are eligible to receive Over-Time at either timeand-a-half or double-time, and exempt employees that receive Over-Time at straight time.

The first example we will go over is the Direct Labor Method which treats delta base and delta fringe as direct labor.

In the top right corner, the Multiplier that is to be applied to both delta base and delta fringe is 2.6435 from the previous slide, and it should be entered in both the “Applicable Multiplier Delta Base” and the “Applicable Multiplier Fringe” sections.

This multiplier will automatically calculate the Prevailing Wage delta base, delta fringe, and Loaded Hourly Billing Rates.

Example of Other Direct Cost

Example of Other Direct Cost

For all examples, the DIR Determination and Employee information are the same.

Under the Other Direct Cost Method the Field Office Rate is 150%, which we previously calculated on slide 7, and the multiplier is 1.

The new rate and multiplier should be entered in the top right hand corner of the cost proposal as was entered for the previous example.

Once entered, the rate and multiplier will automatically be applied to the delta base, delta fringe, and the loaded hourly billing rates.

Example of Indirect Labor/Overhead Cost Method

Example of Indirect Labor/Overhead Cost Method

Under this methodology the Field Office Rate is 152%, as we previously calculated on slide 8, and the multiplier is 0.

The new rate and multiplier should be entered in the top right hand corner of the cost proposal as in the previous examples. Once entered the rate and multiplier will automatically be applied to the delta base, delta fringe, and the loaded hourly billing rates.

Documentation Requirements

In order to be eligible for reimbursement, Caltrans requires a written prevailing wage policy detailing the consultant’s accounting treatment of the deltas. The Prevailing Wage policy must be on company letterhead, dated, and certified by an appropriate officer that has the understanding and knowledge of the firm’s accounting policies.

The policy can be as simple as a few sentences, as long as the accounting method used for Delta Base and Delta Fringe are clearly stated. The method chosen for Delta Base can differ from Delta Fringe, they don’t need to be the same.

If a firm has their ICR audited, the firm must ensure their CPA tests the accounting treatment of prevailing wage deltas against their Prevailing Wage Policy and includes a disclosure note in the audit report on how the firm treats their deltas.

In addition, in order to be reimbursed by the contracting agency, the firm’s method used for billing deltas should be consistent with their Prevailing Wage accounting treatment and policy.

Documentation Requirements

Firms utilizing a Safe Harbor Rate of 110% and participating on a prevailing wage contract are also required to have a prevailing wage policy.

Because the Safe Harbor Rate is not based on the development of the firm’s actual Overhead rate, firms utilizing the SHR can only be reimbursed for the prevailing wage deltas as either, an Other Direct Cost or as an Indirect Labor Cost.

Federal and State Requirements

Federal Requirement:
Davis-Bacon Act (40 U.S.C. Section 3141 set by U.S. Department of Labor)

State of California Requirement:
California Labor Code Sections 1770-1771 set by California Department of Industrial Relations (DIR)

Higher Rate - State vs Federal
California Code of Regulations 16001 (b)

If you would like to learn more about federal and state requirements pertaining to Prevailing Wage, please refer to the Davis-Bacon Act, the California Labor Code, and the California Code of Regulations.

Resources

American Association of State highway and Transportation Officials (AASHTO) Uniform Audit & Accounting Guide for Audits of Architectural and Engineering Consultants, 2016 Edition:

https://audit.transportation.org/?siteid=43%3Fsiteid%3D43

United States Department of Labor

https://www.dol.gov/

California Department of Industrial Relations (DIR)

https://www.dir.ca.gov/Public-Works/Prevailing-Wage.html

California Labor Code

https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=LAB&division=2.&title=&part=7.&chapter=1.&article=2.

California Code of Regulations - Prevailing Wages:

https://www.dir.ca.gov/t8/16001.html

Local Assistance Procedural Manual Form:

http://www.dot.ca.gov/hq/LocalPrograms/lam/forms/lapmforms.htm

These are additional resources that A&E firms can refer to specifically related to prevailing wages:

On A&I’s Website you will also find:

  • Prevailing Wage Interpretive Guidance
  • Prevailing Wage Training Modules
  • Other interpretive guidance, webinars, and resources.

We hope this training gave you an understanding on how to account for Prevailing Wage rates on Prevailing Wage Contracts using the three different methodologies: Direct Labor Method, Other Direct Cost Method, and the Indirect Labor/Overhead Cost Method.

If you have not watched the first module, we encourage you to watch it as it discusses general information on Prevailing Wages and is a great tool to either introduce people to Prevailing Wages or to view them from a high level.

Should you have any questions or feedback, please feel free to contact us at the e-mail shown here.