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The Davis-Bacon Act changes present a chance for startups to disrupt construction tech

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Manish Kumar

Contributor

Manish Kumar is the co-founder and CTO of Lumber, a construction workforce management platform built for contractors.

The U.S. construction landscape looks much different this week compared to last Friday following the amendments to the Davis-Bacon Act that went into effect on Monday.

While these amendments primarily concern contractors of federal construction projects, they still present a unique opportunity for construction technology startups to offer innovative solutions to help legacy construction firms navigate the complexities of compliance with this historic piece of legislation.

New grounds, new challenges

The Davis-Bacon Act, originating in 1931, mandates that contractors engaged in federal construction projects pay their workers prevailing local wages and fringe benefits. This applies to all contracts exceeding $2,000 for public building and public works construction, harking back to the act’s roots in the Great Depression.

The core objective of this act has been to safeguard workers on federal construction projects from being underpaid, ensuring they receive fair compensation for their labor.

However, the intricacies of this piece of legislation have always posed challenges. Initially, the Department of Labor applied a 30% rule to determine prevailing worker wages and benefits, but this approach evolved over time. In 1983, the Reagan administration discontinued the 30% rule, opting for a weighted average wage rate based on geographic areas.

August 2023 saw amendments to the act that reintroduced the contentious 30% rule, among other changes, which went into effect on October 23.

The implications of these amendments are broad, particularly because construction payroll involves many components such as certified payroll, minimum wage, prevailing wage and union rates, all of which vary from state to state. For companies, compliance requires adhering to the wage determinations for the specific county or state where the construction occurs, which often leads to varying pay rates for the same worker depending on their location.

Furthermore, the act requires construction firms to classify their workers according to the work they perform. Misclassification can result in substantial penalties and back payments.

In 2022, the Department of Labor led a federal investigation of a Jersey City electrical subcontractor and found that they had paid 11 electricians a lower rate and fringe benefits because they were misclassified as laborers. This led to a recovery of $799,479 as back wages and benefits from the company.

Yet another example of misclassification happened in 2021 when a Chesterfield Township–based electrical subcontractor violated the Davis-Bacon Act by paying electricians, laborers, and apprentices on a federal construction project less than the required prevailing wage rates and benefits.

The Davis-Bacon Act also demands that construction firms maintain certified payroll records for at least three years. Furthermore, they must be prepared to present subcontractors’ payroll records alongside their own for auditing purposes.

This documentation can be extensive. Payroll and time-tracking applications will need to be tailored specifically for construction firms that need to adapt to the weekly certified payroll requirement for federal projects. Companies will need to maintain certified payroll records for at least three years, present subcontractors’ records, and ensure proper worker classification. Documentation of laborer details, classifications, work hours, hourly rates, and fringe benefits must be maintained meticulously.

Additionally, if a specific worker classification isn’t available, the construction firm or contractor must formally request its addition from the Department of Labor.

How tech can fill the gap

What the Davis-Bacon Act amendments make clear is that the construction industry quickly needs tailored technology solutions. Construction firms will need to rethink their payroll and time-tracking systems.

Startups can leverage automation, specifically robotic process automation (RPA), to help address some of these challenges by providing construction firms with a unified view of all their labor data.

RPA can automate the collection, storage, and retrieval of data, pulling information from various sources such as payroll systems and subcontractor records, and centralizing it in a unified database. This saves time and reduces the risk of data discrepancies and errors. This unified database can then serve as the central point for implementing compliance procedures with all laws, not just the Davis-Bacon Act.

Another pressing challenge in ensuring compliance with the Davis-Bacon Act is keeping up with the frequent changes in prevailing wage rates. This necessitates constant monitoring and adjustment of payroll, which can be resource-intensive and error-prone if done manually.

To address this, tech startups can employ vector databases and retrieval augmented generation (RAG). Vector databases can be used to store compliance regulations in a structured and easily retrievable format. By maintaining a repository of prevailing wage rates and related data, construction tech startups can ensure that their solutions are always up-to-date and accurate.

This is a crucial advantage in a field where compliance is paramount.

RAG takes information retrieval to the next level by combining the capabilities of LLMs with the ability to retrieve specific and relevant information from structured databases. This combination lets one quickly and accurately access the latest compliance regulations, prevailing wage rates, and other essential data.

Compliance is slowly becoming one of the most important factors in construction, so solutions that facilitate compliance stand to play a pivotal role in the industry’s future. It’s crucial to recognize the broader implications of digital transformation on the sector as a whole, as the construction industry is on the brink of a significant transformation and this legislative change is just one piece of the puzzle.

By embracing technologies such as vector databases and RAG, construction technology startups and established players can create solutions that simplify the compliance process, reduce the risk of errors, and provide construction firms with the tools they need to thrive in a complex regulatory landscape.

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