Q&A: Supporting PWA compliance and managing risk in clean energy projects

The Prevailing Wage and Apprenticeship (PWA) provisions introduced by the Inflation Reduction Act (IRA)  (Opens a new window)offer increased tax credits for qualified projects and facilities. As part of the IRA’s goal to invest in clean energy solutions, these PWA provisions  aim to improve the quality of jobs in clean energy fields and encourage those industries to expand workforce training opportunities. 

If fully compliant with PWA requirements, taxpayers can see a fivefold increase in their tax credits i.e., from 6% to 30%. These PWA requirements are therefore especially relevant, and also key to the construction industry, but there is still some uncertainty regarding compliance and recordkeeping requirements. In this Q&A, we address some common questions about PWA compliance. 

Why is PWA compliance important in clean energy construction projects? 

A: PWA compliance is a crucial step in claiming the increased credit amount for many tax credits. Additionally, failure to pay workers “wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character” will result in being required to pay those workers the difference (plus interest), as well as a potential penalty for each underpaid worker in order to retain the fivefold credit increase. Projects or facilities that are not in compliance with the PWA requirements, but claim to be, risk the Internal Revenue Service (IRS) disallowing or recapturing the increased credit amount. 

With so much at stake, it is essential to understand the PWA requirements and put an efficient compliance system in place at the beginning of your project. 

What proactive measures should be taken to confirm compliance? 

A: It's important to include PWA requirement language that includes access to records, use of third-party wage collection tools, and specific tax credit considerations such as IRC Section 48E qualified facilities in the construction contracts. It is also valuable to educate your contractors, including second and third tier subcontractors on the PWA requirements and record keeping responsibilities. Providing basic PWA training helps them understand what to look out for and how to avoid prevailing wage and apprenticeship compliance issues. Additionally, for investment credits, having a cost segregation study will help identify PWA applicable scopes of work on the project. Having well-educated contractors that are contractually obligated to comply with these requirements greatly increases the likelihood of project success from a PWA compliance standpoint. 

How should the compliance process be organized? 

A: Compliance needs can be broadly categorized in terms of what must be done for yesterday, today, and tomorrow. 

1. Yesterday: Review past actions for compliance and address any backlog or non-compliance issues. 
2. Today: Implement current compliance measures to keep the project moving forward efficiently. Consider bringing in a compliance consultant at the earliest possible stage – if not yesterday, then today. 
3. Tomorrow: Plan for future contracts and change orders, and be sure to account for administrative fees for compliance support. Continue refining your compliance system to make it more efficient and scalable for future projects. 

How can contractors satisfy the project’s apprenticeship requirements? 

A: The best way to comply with the apprenticeship requirements is by communicating with them early in the project and by employing apprentices in accordance with the tax code and with the applicable registered apprentice program rules. However, this is not always practical nor necessary; contractors who employ three or fewer workers throughout the duration of the project are not required to also employ apprentices. For contractors who employ four or more workers on the project, they are required to employ at least one apprentice to satisfy the apprentice participation requirements.  

The best way to find and hire an apprentice is by sending a written request to a registered DOL apprentice program dated at least 45days prior to the apprentices’ requested start dates. This requests must include several key data points to satisfy the valid request requirements of the regulations. Then, if the requests are granted, the contractor must employ the requested apprentices or, if the requests are denied or not responded to within five business days, the contractor may be considered to have made a good faith effort and an exception from the apprenticeship requirements could be awarded.  

Overall, the project still needs to achieve a certain percentage of its total labor hours being attributed to apprentices through either employment or the good faith effort exception awards. These requirements should be continually monitored throughout the construction duration.    

How can technology help in managing PWA compliance? 

A: Technology is an important tool when it comes to compliance. Using purpose-built software (such as a wage compliance program) to collect and analyze your data reduces both human workload and human error. Consolidating your compliance information can streamline the compliance process, simplify your reporting, and give you real-time updates for ongoing compliance management. However, technology can’t do everything for you, and it is best used as a tool to support the overall compliance process and team. Technology is only as good as the people behind it.  

When should a consultant be brought in for PWA compliance? 

A: An experienced PWA consultant can be brought in any time prior to the tax return filing, but ideally, a consultant should be brought in as early as possible. Whether during pre-planning, contract execution, or mobilization. Waiting too long can introduce inefficiencies or errors that will need correction, which can cause delays and put the project at risk. Involving a PWA consultant from the earliest possible stage helps reduce your risk and keep the project on track. It can also help increase lender, insurance, and investor confidence in your project’s compliance. 

Can you provide an example of a common compliance misunderstanding? 

A: One common misconception is the idea that PWA requirements must be applied to all scopes of the project. In some cases, only certain parts of a project, for example energy property require PWA compliance, while others, such as fencing or parking lots, may not.  

Another common misunderstanding is that a contractor needs to have a minimum of 15% (or the applicable labor hours percentage) of their labor hours worked by apprentices. Although this is a good goal to have, it is not entirely accurate. The 15% labor hours requirement is a project level requirement, meaning that 15% of all labor hours worked across all contractors needs to be performed by apprentices. It’s also important to understand that only contractors with four or more laborers or mechanics working on site are required to also employ an apprentice, per the participation requirement. 

What hot topics are currently facing the industry? 

A: The topic we see the most right now is how to best assess PWA compliance for the Section 48E or 45Y tax credits as it relates to tracking PWA at the qualified facility (QF) level. The QF level compliance concept is supported by the code and regulations but the intent of tracking PWA compliance at the QF level is not entirely clear because the preamble to the final Section 48E regulations states that a project-level compliance approach, similar to Section 48, is the best and most accurate way to assess PWA compliance. However, it is clear that, for tax return reporting purposes, assigning the project-level compliance data to the qualified facility level is still needed. Despite requests to Congress from leading industry groups, there is currently no guidance around what the best PWA compliance path is for these credits, nor a recommended allocation methodology.  Lastly, the project-level compliance approach may conflict with the views of other parties involved such as tax equity or credit buyers so it is important that all parties sponsoring the project are agreed on how PWA tracking and reporting processes for Section 48E or 45Y credits are implemented from the beginning of construction or as early as possible. 

Being aware of these differentiations can help avoid unnecessary compliance-related delays and costs. 

Final takeaways 

The key to PWA compliance is to be proactive: understanding what’s required and putting the necessary people and processes in place before work begins can save significant time and money. Make sure to leverage both the necessary compliance technology and tax compliance consultants as early as possible. Proper planning, continuous education for all parties, and timely consultant involvement are essential factors in successful PWA compliance.