how dirt works companies are using fringe benefits to double profit

How Washington State Excavation Contractors are Doubling Their Profit Using Fringe Benefits

Nathan Bender CRPS™ | Oct 28, 2024

What is Prevailing Wage?

Since 1931 the Davis Bacon Act (and related state acts) require all contractors that are on jobs funded by the government to pay out a certain rate to most of their field employees, this rate is called prevailing wage. Every county has different rates (what costs $80 per hour in Tacoma costs $57 per hour in Kennewick). When you are on federal jobs you need to pay the HIGHER of the Washington state prevailing wage or the federal prevailing wage rate.

Washington does prevailing wage uniquely in that instead of having a “base hourly rate” and a “fringe benefit rate” they just give you one rate and rely on the companies to figure it out.

When Washington says you need to pay out $80 per hour for operators what that means is your entire benefits package is required to equal $80 per hour NOT that you are required to pay out $80 on their paycheck.

Alright now that we have gotten past all the boring stuff and you’re saying “Nate, I get it I’ve been paying out prevailing wage for 10 years I understand how it works! Just tell me how I can save money”. Let’s get DIG into the savings!

Step 1. DON’T PAY FOR BENEFITS TWICE

Step 2. Pay less in payroll tax

Okay, the single most common mistake I see is that contractors are paying all or some of their benefits twice.

The $80 per hour that the state requires you to pay has benefits baked into that price. If you are paying for benefits on top of this you are paying for benefits twice and destroying your profit margins.

How to calculate your fringe benefit rates -

There are 5 categories of fringe benefits that employers cover

Health and wellness (Medical, Dental, Life, etc.) – Whatever premiums that are EMPLOYER PAID – Do not count employee payroll deductions
Retirement (401(k), Profit Sharing, Pension, etc.) – Employer paid portions into the retirement plan that are irrevocably made to a trustee (this will be your 4% match)
PTO/Paid Holidays – Employer paid vacation or paid holidays (not your sick leave that is legally required)
Apprenticeship program – Employer paid contributions to an apprenticeship program
Other Bona fide programs – Other employer-paid benefits that qualify (this could be something like supplemental unemployment insurance if you do seasonal layoffs)

These are the benefits you want to make sure you aren’t paying for twice. I’m going to walk you through the process I’ve used to save millions of dollars for excavation companies around the Puget Sound.

Step 1. Figure out your company's benefit costs PER EMPLOYEE - We do this for free in our WH347 review for all excavation contractors in Washington State

That per-employee part is absolutely critical – On the form WH347 (certified payroll), the state does not allow you to claim benefits paid on an employee if you did not truly pay for that employee's benefit. If an employee opts out of insurance for example you need the figure out THAT employee's rate.

Insurance – Health, dental, life, vision, etc.

I’m going to use whole numbers to make everything nice and easy.

Let's say that you pay for 70% of your laborer's insurance and 100% of your operator's insurance and that your individual insurance is $10,000 per year and family is $20,000 per year (again simple numbers, stick with me).

Labor – 70%

$7,000 per year of employer-paid premiums for individual coverage

$14,000 per year of employer-paid premiums for family coverage

7,000 divided by 2080 (the number of hours worked in a full work year, the DOL is happy with you using this generally) = $3.36 per hour

14,000 divided by 2080 = $6.73 per hour.

Operator – 100%

$10,000 per year of employer-paid premiums for individual coverage

$20,000 per year for employer-paid premiums for family coverage

10,000 divided by 2080 = $4.80 per hour

20,000 divided by 2080 = $9.61 per hour.

You want to make 100000% sure that you aren’t paying for your insurance package twice. It is without question the biggest cost to employers on the fringe benefit side (and the numbers are easy to calculate).

These are the numbers that you can claim on your WH347 to show the state that you are paying out Prevailing Wage (PW) compliantly.

For operators (on family) you now would be paying them $70.39 on the paycheck and $9.61 in benefits.

For laborers (on the individual) you would be paying them $61.64 on the paycheck and $3.36 in benefits.

PTO/Paid Holiday

You cannot claim your sick leave which is a legal requirement as a fringe benefit UNLESS it is structured in a very particular way (we will cover this in another post).

But claiming your additional PTO/Vacation/Paid Holiday is fairly straightforward.

Keeping it simple.

Employees with less than a year get no PTO

1-2 years get – 1 week of PTO (40 hours)

2+ years – 2 weeks of PTO (80 hours)

The key thing to note here is that you must use the employee's “regular rate” which is their private pay rate.

Operator – $42 per hour (private rate) with 2+ years at your company

$42 per hour x 80(hours that he gets per year of PTO) = $3,360 per year.

Now take that $3,360 in cost and figure out the hourly cost.

$3,360 divided by 2080 (hours worked in a year) = $1.62 dollars per hour

Now do your guys get paid holidays? Let's say they get 5 paid holidays after a year with your company.

5 days per year x 8 hours of pay per day = 40 hours of pay.

Another $1,680 per year or $0.81

This means you are paying $2.43 per hour in PTO / Vacation for your operator, bringing our new rate to $67.96 per hour on the paycheck and $12.04 in benefits

Laborer - $28 per hour (private rate) with 0 years at the company.

In our little hypothetical this laborer wouldn’t have a fringe benefit rate for PTO/Holiday.

Bringing our labor rate to $61.64 on the paycheck and $3.36 in benefits.

Approved Apprenticeship Program

Employer-paid contributions made to apprenticeship or training programs that are recognized by the Washington State Apprenticeship and Training Council are allowed to be deducted and claimed as a fringe benefit on that apprentice.

This is unrelated to the requirement that some lead agencies(WSDOT, School districts, 4-year universities, etc) have where 15% of man hours are required to be paid to apprentices.

Rather this is when you send apprentices to a program that you pay in part or in full. You can claim those payments against their hours worked on public projects in the same manner we calculate above for health insurance.

Retirement – 401(k), Pension, Profit Sharing, Employee Stock Option Plan, etc.

Calculating the proper rate for your 401(k) match is a little trickier than the other options because it’s a % rather than an absolute dollar amount (which is why I typically recommend switching to an absolute dollar amount such as $20 per hour for operators and $10-15 for laborers).

At this point in our fictional scenario,

Operators:

$67.96 per hour on the paycheck and $12.04 in benefits

If you just decide here to pay your guys 67.96 per hour and match 4% on top of that you come out to $70.68 per hour (with the match) + $12.04 in benefits meaning you are paying $82.72 per hour instead of $80.

“But Nate we can just claim 2.72 in retirement plan credits and everything will sort itself out”

If you claim 2.72 in retirement plan credits then your 4% match will be 11 cents per hour too little. Meaning you are UNDERPAYING the prevailing wage. So how do we do the math?

I’m sorry in advance for the algebra, but this is the internal formula we use to calculate matches for fringe benefit purposes.

X / 1.04 Where X = your cash rate after calculating all of your other fringe benefits.

$67.96 per hour divided by 1.04

$65.35 per hour is the actual cash rate that you will be paying this hypothetical operator.

So how much is the match?

$65.35 X 0.04 = $2.61 per hour (this is your match)

Bringing it all together.

Your new operator rate = $65.35 per hour on the paycheck + $14.65 per hour in benefits = $80 per hour prevailing wage.

That 14.65 per hour is what you DON’T want to pay twice. I’m all for rewarding the hard-working employees who help build your company with you. But how can you do that if you can’t make money bidding on public works?

Are you paying for benefits twice? We can help you find out.

Feed the company first so the company can feed everybody else.

Laborers:

$61.64 on the paycheck and $3.36 in benefits

X/1.04

$61.64 divided by 1.04

$59.27 per hour x 0.04 = $2.37 per hour (again this is your match)

$59.27 per hour would be the new compensation rate on the paycheck for this hypothetical laborer

Bringing it all together

Your new laborer rate = $59.27 per hour on the paycheck + $5.73 per hour in benefits = $65 per hour prevailing wage.

Other Bona Fide Programs – Employer-paid contributions that qualify as “usual benefits”.

DOL asks that you reach out directly to them before calculating these as fringe.

An example of another bona fide program would be a supplemental unemployment benefit trust (SUB).

If you have a seasonal workforce that is laid off annually this can provide them with another few thousand dollars a month during their layoff period and you can claim the contributions into the trust as a fringe benefit.

Final thoughts:

These savings are an absolute game changer for civil excavation contractors. Allowing you to reinvest in your employees, bid more jobs, bid bigger jobs, AND still win them.

This is step 1 to building the highly profitable dirt works company of your dreams.

Step 2. Is changing your benefits plan to reduce payroll tax:

Which we will discuss later this week in part 2 of "Double your excavation companies profit using fringe benefits"

We will do a FREE review of your form WH347 to calculate the numbers of YOUR company. Which you can schedule here.

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