Prevailing Wage and Apprenticeship Requirements w/ David Burton

Prevailing Wage and Apprenticeship Requirements 

Overview

This video is one of the lessons on the current US tax credit structure from our online financial modeling courses.

One key takeaway from our lesson which  provided a high level overview of the current US tax credit structure, was the role of the prevailing wage and apprenticeship requirements, or PWA. Qualifying for the PWA increases the value of the base credit to the full rate.

Learn more about the impact of the INR and US tax credit structures in our tax equity and hybrid structures financial modeling course.

Video

Video Transcript 

In the previous lesson, we provided a high level overview of the current US tax credit structure. One key takeaway was the role of the prevailing wage and apprenticeship requirements, or PWA. Qualifying for the PWA increases the value of the base credit to the full rate. The full rate equals 30% for the ITC and $27.50 per megawatt-hour for the PTC. This is a five times multiplier for the tax credit. Our second key takeaway was to seek tax advice.

Prevailing wages are made up of hourly wage rates and benefits. These differ by labor classification, type of construction, and project location. In other words, an electrician working on a project in West Virginia will have a different compensation level and type of benefits compared to an equipment operator in California. The wage determinations are set by the US Department of Labor and based on data from the Bureau of Labor Statistics. You can search for the wage determinations in the sam.gov site referenced in the video description below.

If you claim you paid the prevailing wages but the IRS discovers you failed to, a true up-payment can cure that failure. The affected workers must be compensated for the difference between the stated prevailing wage and what was actually paid, simply the shortfall. The workers will receive the shortfall plus additional interest. The interest equals the sum of the federal short term rate and a 6% interest rate. The federal short term rate is published quarterly by the IRS.

As an example, let’s assume the stated prevailing wage for the electrician is $100,000 annually, but only $90,000 was actually paid. The shortfall is $10,000 per year. The additional rates are then applied to the shortfall. The federal short term rate is 5%. We add it to the 6% interest rate. That’s 11% interest to be paid on top of the shortfall, which equals $11,100 for the electrician. In addition to the direct payment to the laborers, the project must pay the IRS $5,000 per laborer affected for every year the prevailing wage was not paid. In total $16,100 must be paid if the underpayment spanned only one year. The IRS has the authority to call the failure to pay prevailing wages intentional. This covers, for example, repeat offenders with a poor track record of paying prevailing wages. In this case, the correction payment to the worker is multiplied by three, increasing the payment to $33,300. Additionally, the IRS payment changes from $5,000 to $10,000 per laborer per year.

Construction often spans multiple years. What about ongoing work on the facility? How long are you truly bound by these requirements?

The prevailing wage requirements must be met throughout the construction period, but also during the ongoing alteration and repairs within the tax credit tenor. This excludes routine maintenance work done by O&M contractors, such as cutting the grass. It applies to work that restores functionality, for example, an inverter replacement or even replacing a broken solar panel. Once the project is placed in service for tax purposes, the prevailing wage resets. A new prevailing wage will be in effect at the time of alterations and repairs. The electrician’s $100,000 prevailing wage at the start of a project could be $120,000 at the time when the alterations are needed. When electing the ITC, a prevailing wage must be paid during the first five years after the project is placed in service. If not, the tax credit is subject to recapture. With the PTC, the tenor is extended to 10 years, but no recapture considered.

The second part of the PWA apprenticeship outlines three requirements, first of which is the labor hour requirement. For projects that started construction in 2023, the minimum proportion of apprenticeship hours to total labor hours is 12.5%. If total labor hours for 2023 equals 1000 hours, a minimum of 125 hours must be completed by apprentices. For construction starting in 2024 and afterwards, the ratio increases to 15%. The start of construction is defined by either meeting a physical works test or the 5% safe harbor rule. Under the physical works test, work of a significant nature must have started, for example, work on the foundations for wind facilities. You can qualify for the 5% safe harbor provision by incurring 5% of the total cost of the facility. In addition to the labor hour requirement, the rules also dictate a ratio requirement. It directs programs to follow Department of Labor standards for apprentice to journey worker ratios to ensure apprentices receive the appropriate supervision. Lastly, the participation requirement states that any project with at least four laborers must have at least one apprentice.

I imagine this will drive up demand for apprentices. What do you think happens if none are available at the start of construction, Hayden?

Well, you can be excused from the apprentice requirement if you formally request apprentices from a registered apprenticeship program but none are available. This approach is referred to as good faith efforts. However, the request must be resubmitted every 120 days until construction is completed.

Similar to a prevailing wage requirement, penalties can cure the failure to meet this requirement. The penalty is calculated at $50 per labor hour short of the apprenticeship requirements, or $500 per labor hour if deemed intentional by the IRS. For more specific information regarding the three apprenticeship requirements, please refer to the link provided in the video description below.

Do prevailing wage and apprenticeship requirements apply to all projects regardless of size, even my planned rooftop solar installation?

No! Unless you are planning a facility with a nameplate capacity of one megawatt AC or above, you are exempted from both prevailing wage and apprenticeship requirements. For utility scale projects, penalties are a source of risk for the project sponsor, but minor compared to the potential loss of tax credits. The question remains, who takes this risk and is accountable? Will the EPC or the O&M contractor agree to indemnify for the risk? Will the EPC or the O&M contractor have the financial resources to satisfy the indemnity if the issue is not discovered until an IRS audit years in the future?

The prevailing wage and apprenticeship requirements are filled with details and reading the fine print. This lesson highlighted the essentials, but know there are further requirements on a project by project basis, so our suggestion to get real tax advice still stands. Okay, you might be a bit too junior now, Owen. For now, I will go with a safer option.