A person calculating with a blue calculator beside a yellow cup and potted plant on a wooden desk.

Understanding Fringe Benefits and How to Calculate Them

On a Davis-Bacon project, fringe benefits are additional compensation required for workers working on federally funded or assisted construction projects. These benefits can be paid either as additional cash wages or through non-cash bona fide benefit plans. These plans include items like health insurance, pensions, and vacation pay. Proper documentation must be maintained to show how the fringe was provided in order to remain compliant with federal labor standards.

If you're a contractor or subcontractor working on a federally funded construction project, you must understand fringe benefits and how they impact payroll compliance. The Davis-Bacon Act requires that workers on public works projects receive fair wages, including base pay and additional fringe benefits.

Many businesses struggle with correctly calculating fringe benefits on Davis-Bacon projects when dealing with certified payroll reports. Whether you're figuring out how to calculate fringe benefits or determining what fringe pay is required for your project, having a solid understanding of these requirements is essential for compliance and financial planning.

What Are Fringe Benefits?

Under the Davis-Bacon Act, contractors working on federally funded projects must pay workers a prevailing wage, including a basic hourly rate and fringe benefits. These fringe benefits are additional payments that cover things like health insurance, retirement contributions, vacation pay, and other legally required benefits.

Essentially, fringe benefits represent compensation beyond direct wages. Contractors have two options for providing these benefits. They can either pay the required fringe benefits directly to employees as additional wages or provide benefits through a plan or trust fund, such as health insurance or a pension program.

For businesses, understanding what fringe pay is in construction means recognizing that fringe benefits are a mandated part of certified payroll compliance, not optional perks.

How to Determine the Required Fringe Benefits on a Davis-Bacon Project

Calculating fringe benefits depends on whether you provide benefits directly or compensate employees in cash. To ensure compliance, contractors must understand how to allocate and report these wages properly.

Step 1: Determine the Total Prevailing Wage Rate

Every federally funded project has a prevailing wage requirement set by the Department of Labor. This rate includes both the basic hourly wage and the required fringe benefits. For example, if the basic hourly wage is $40 per hour and includes $10 per hour in fringe benefits, the total compensation requirement is $50 per hour.

Step 2: Decide How to Pay Fringe Benefits

Contractors can either pay the fringe benefits directly to the worker as additional wages or contribute to a bona fide fringe plan or program. Examples of fringe benefits include health insurance, a pension, or vacation pay.

If benefits are paid directly as wages, they must be taxed just like regular earnings. If provided through a plan, they are generally tax-exempt.

Step 3: Allocate Fringe Benefit Costs

To calculate fringe benefits, break down the total benefits provided per employee. For example:

  • Health Insurance: $3.00 per hour

  • Pension Plan: $2.50 per hour

  • Vacation Pay: $1.50 per hour

  • Total Fringe Benefits: $7.00 per hour

If the project's required fringe benefits are $10 per hour, but you only provide $7 per hour in actual benefits, you must pay the remaining $3 per hour in additional cash wages to meet compliance.

How to Calculate Fringe Benefits

For contractors managing how to calculate fringe benefits, a detailed breakdown of wages and benefits is required. Each employee's payroll should specify:

  1. Basic hourly rate

  2. Fringe benefit amount paid in cash or benefits

  3. Total compensation (wages + fringe benefits)

If the total compensation meets or exceeds the total required rate of pay (basic rate + fringe benefits), the contractor remains compliant. If it falls short, adjustments must be made in the form of increased wages or additional benefits.

Examples of Fringe Benefits

To illustrate how to calculate fringe benefits on a Davis-Bacon project, let's look at a real-world scenario.

Example 1: Paying Fringe Benefits in Cash

A contractor is working on a federal highway project where the basic hourly rate for laborers is $45 per hour, including a $12 per hour fringe benefit requirement. If the contractor does not provide any benefits, they must pay:

  • Base wage: $33.00/hour

  • Fringe benefit paid as cash wages: $12.00/hour

  • Total hourly rate paid to worker: $45.00/hour

Example 2: Providing Fringe Benefits Through a Plan

Another contractor offers benefits instead of paying them in cash. The company provides:

  • Health Insurance: $5.00/hour

  • Pension Plan: $4.00/hour

  • Vacation Pay: $3.00/hour

  • Total Benefits Provided: $12.00/hour

Since the total benefits match the required fringe amount, no additional cash payment is necessary.

Understanding these examples of fringe benefits helps contractors make informed payroll decisions that balance compliance with cost efficiency.

Common Mistakes When Calculating Fringe Benefits

Even experienced contractors make errors when determining how to calculate fringe benefits . A frequent error is underreporting fringe benefits, as all benefit contributions must be properly accounted for to meet compliance requirements. Not submitting certified payroll reports correctly can result in compliance violations, includingerrors that occur when calculating fringe benefits.

By avoiding these mistakes, businesses can ensure accurate certified payroll reporting and avoid costly penalties.

Why Fringe Benefits Matter

Understanding how to calculate fringe benefits is crucial for contractors working on federally funded projects. Whether paying benefits in cash or providing them through a benefits plan, businesses must ensure they meet federal wage requirements.

Properly calculating and reporting fringe benefits protects contractors from compliance issues, helps workers receive fair compensation, and keeps projects running smoothly.

If you're managing government contracts and need a streamlined solution for handling certified payroll compliance, consider using eMars' payroll compliance software or consulting a compliance specialist. Ensuring accurate fringe benefits reporting is essential for maintaining a strong reputation and avoiding penalties in the construction industry.

Contact eMars today to schedule a free demo!

Contact Us