MBA White Paper Examines Impact of Davis-Bacon Wage Rates, Offers Recommendations

The Mortgage Bankers Association yesterday released a White Paper outlining the nature of practical impact of the current application of Davis-Bacon Act requirements that unnecessarily impede the creation of affordable rental housing and housing preservation under HUD/FHA-financed construction and rehabilitation projects.

The paper, prepared by MBA and its FHA Davis-Bacon Working Group, also offers recommendations for updating the Act to modern standards.

The paper notes the current application of the Davis-Bacon wage rates to HUD/FHA-financed projects creates “substantial barriers to the development of affordable rental housing, for example, by inflating costs and adding unwarranted administrative complexity.”

The Davis-Bacon Act is a Depression-era law enacted to address economic and social issues that arose during that period. Enacted in 1931, it requires certain general contractors and sub-contractors to pay prevailing wages on all projects receiving more than $2,000 in federal funding or with guarantees of a federal agency or financed from funds obtained by a pledge or contract of a federal agency.

The paper noted FHA programs significantly expanded after the 2008 Great Recession, including Sections 221(d)(4), 220 and 232 programs. One consequence, MBA said, is changes in the application of Davis-Bacon requirements that have increased costs or slowed the growth of federal housing assistance, even as the number of U.S. renter households has reached 37 percent–a 50-year peak.

The paper identifies several issues having a direct impact on the multifamily industry, including:

–Multiple Wage Determinations. MBA noted a recent shift in review and issuance of appropriate wage determinations for the HUD programs that is counter to long-standing practice, published policy and guidance. The shift has created a situation where HUD Labor Relations Specialists are undertaking what is called a “bucket” approach to evaluating multifamily residential construction in the determination of the applicable Wage Determination.

–Administrative Inefficiencies. The paper said HUD’s Labor Relations Specialists, who are responsible for reviewing and making determinations of standards applicable to HUD program activities and escalating complex prevailing wage applicability determinations, have shifted the timing of these reviews and issuances of determinations, creating significant adverse impacts on the affordability of multifamily rental housing, seniors housing and healthcare facilities housing the elderly. These shifts, MBA said, create doubts in the certainty of execution for the FHA programs; make it difficult for developers to obtain reliable construction bids; make it difficult to maintain cost estimates; create difficulties for developers to keep general contractors and subcontractors committed to a project; and create significant difficulties in achieving real-time appeals if an issued determination is not consistent with the type of project or changes after the transaction has closed and construction contracts are signed.

–Residential vs. Building Construction Type. “There is a problem with applying more expensive wage categories, which presume a more industrial construction than actually exists in housing construction Residential Davis Bacon Wage Rates are currently applicable to multifamily structures four-stories or less,” MBA said. “In light of advances in construction of multifamily structures, we believe that it would be appropriate to also permit multifamily structure of five stories to be considered residential construction.”

The paper offers the following recommendations:

–The Department of Labor should issue clear, written, publicly available guidance to all stakeholders regarding the appropriate method for wage determinations for residential housing. Specifically, such guidance should restore the prior policy and practice of favoring a single residential wage decision for multifamily housing projects, including incidental items, based on the overall residential character of the project.

–A reliable wage determination should be issued and locked in at the time of Firm Commitment. “The basic tenet of the FHA insured programs require that all construction costs and underwriting are complete at the time the Firm Application is submitted to HUD and an independent cost analysis is part of the application process,” MBA said. “When a wage determination is issued late in the process or even after a Firm Commitment there is typically limited ability to absorb additional cost. This type of change requires re-bidding by the general contractor and the subcontractors and creates issues with external contracts.”

–The Department of Labor should also revise its wage determination update process to effectively lock in wage rates earlier in the process (current rules do not lock in rates until the date the mortgage is initially endorsed).

–The Department of Labor/Wage and Hour Division should adopt a policy of not increasing the number of schedules for the project on appeal. “We urge DOL/WHD to adopt a policy of not increasing the number of schedules when a multiple-wage determination is reconsidered on appeal,” MBA said. “The appeals process takes time, and projects should be able to proceed during the time of an appeal with certainty as to the least-favorable possible outcome.”

–Training should be implemented to ensure that ROLRs and LRSs understand the responsibilities and authorities of the Office and its delegates so that appropriate and timely wage determinations can be issued without holding up Firm Commitments.

–DOL and HUD should reemphasize the chain of authority that has been granted to HUD through The Reorganization Plan No. 14 of 1950, AAMs No. 76, 118, 129 and 177 and delegations of authority. This chain allows for the administration of DBRA for HUD programs to be handled through HUD’s Office of Field Policy and Management, which oversees the Office of Davis Bacon and Labor Standards.

–Labor and HUD should work together to reduce the incidence of disruptive changes that occur late in the process, even after the closing of a transaction in some cases. We also urge Labor to provide more transparency to HUD and to stakeholders as to the Davis-Bacon policies and interpretations that apply to FHA-financed projects, and as to the relative roles and responsibilities of Labor and HUD personnel, including the scope of authority delegated to HUD.

–The Department of Labor and HUD should consult on the matter of what constitutes a Residential vs. Building wage determination based on the story-height standard, noting the story-height standard has not been modernized since 1985. Modern construction techniques and international building codes have evolved, increasing permissible building height for wood-framed multifamily construction (Type VA and VB) to 85 feet.

“It is appropriate that Davis Bacon Wage determinations for Residential vs. Building definitions be modified to reflect current industry building codes and standards of construction with the positive outcomes including but not limited to: Simplification of Administration of wages; Reduction in construction costs; Increases in community services and spaces; Increased production of affordable and workforce housing,” MBA said.