Government Contractors

For companies performing service and construction work under federal contracts, employee benefits are both a wage-and-hour compliance obligation and a bidding strategy at the same time. Handled well, your Service Contract Act (SCA) and Davis-Bacon fringe dollars fund a real benefits program, lower your payroll-tax burden, sharpen your bids, and help you keep skilled people. Handled poorly, they invite Department of Labor findings, back-wage liability, and lost margin. This guide explains how to do it right.

Educational only  not legal, tax, or accounting advice. Prevailing-wage rules, wage determinations (WDs), and fringe rates are contract- and date-specific and change over time. Confirm your obligations with the applicable wage determination, the U.S. DOL Wage and Hour Division, and your legal and tax advisors.

Quick answer: the fringe-dollar advantage

Federal service and construction contracts require you to pay covered workers a prevailing wage plus a separate fringe or Health and Welfare (H&W) amount. You can pay that fringe as cash on the paycheck, or contribute it to bona fide benefit plans such as health, dental, vision, life, disability, and retirement. Paying it as cash is fully taxable and adds an employer payroll-tax and insurance burden that commonly runs 20% or more on top of the dollar itself. Directing those same dollars into bona fide benefits avoids that burden, lowers your labor cost and your overtime rate, gives employees more value tax-free, and lets you bid more competitively. For a full-time SCA employee, the H&W obligation alone is about $11,544 a year (2,080 hours at $5.55), so the decision repeats across every worker and every hour.

Who this guide is for

Prime contractors and subcontractors performing SCA-covered service work (janitorial, security, food service, IT services, call centers, facilities, healthcare services, logistics, grounds maintenance) or Davis-Bacon covered construction (building, alteration, or repair on federally funded projects) - especially small and mid-size businesses that need to compete against larger primes without giving up margin. If you see the clauses FAR 52.222-41 (SCA), FAR 52.222-6 (Davis-Bacon), an SF-98 wage determination, or the words prevailing wage in your contract, this page is for you.

The big idea: your fringe dollar is a competitive weapon

On a prevailing-wage contract, every covered hour carries two numbers: a base wage and a fringe or H&W amount. The base wage must be paid in cash. The fringe can be satisfied two ways, and the choice quietly decides your cost structure.

PAY FRINGE AS CASH: fully taxable to the employee; employer owes FICA, FUTA, and SUTA on every fringe dollar; typically raises the workers'-comp and general-liability premium base; raises the FLSA regular rate, so overtime costs more; total extra employer burden commonly runs 20% or more; the employee receives taxed cash; your bid carries a higher fully-burdened labor rate.

FUND BONA FIDE BENEFITS: contributions are generally tax-free to the employee; no employer payroll taxes on the contribution; typically excluded from the comp and GL premium base; excluded from the FLSA regular rate, so overtime stays cheaper; near-zero added burden; the employee receives full-value benefits; your bid carries a lower, more competitive rate.

The takeaway: the same fringe obligation costs you more and delivers less when paid as cash. Moving it into a compliant benefits plan is one of the few levers that improves compliance, cost, competitiveness, and retention at the same time.

The Service Contract Act (SCA), in detail

The McNamara-O'Hara Service Contract Act applies to most federal service contracts over $2,500. Covered service employees must be paid at least the prevailing wage and fringe benefits in the wage determination (WD) attached to the contract, plus the vacation and holidays the WD specifies.

CURRENT HEALTH & WELFARE RATES (effective July 7, 2025): Standard H&W rate: $5.55 per hour (up from $5.36). Contracts subject to Executive Order 13706 paid sick leave: $5.09 per hour (up from $4.93). Hawaii (Prepaid Health Care Act): $2.42 and $1.96 per hour. These fringe amounts are owed on top of the base hourly wage. Always confirm the exact rate on your contract's wage determination - it governs. DOL updates these rates annually, and FAR 52.222-43/44 generally lets you request a contract price adjustment when the WD rate rises at option renewal.

TWO CALCULATION METHODS. Fixed-cost (odd-numbered) WDs: you owe H&W for every hour the employee is PAID - including paid vacation, holiday, and sick time - capped at 40 hours per week and 2,080 hours per year per contract. Overtime beyond 40 hours does not add H&W. This per-employee method is the most common. Average-cost (even-numbered) WDs: total H&W contributions across all service employees must AVERAGE at least the required rate on hours WORKED (including overtime), excluding paid leave. Contributions can vary by employee as long as the average is met. The method changes your funding math and plan design - under a fixed-cost WD a part-timer's paid holiday still generates H&W; under average-cost, paid leave does not.

RULES THAT TRIP CONTRACTORS UP: Part-time employees earn H&W pro-rata (a 20-hour employee earns half of full time). Cash-in-lieu must be paid as a separate, identifiable line on the pay stub - excess base wages cannot substitute for H&W, and employee payroll deductions never count toward the employer's obligation. Vacation and holidays are separate obligations from H&W. A bona fide benefit plan must be legally enforceable, in writing, and communicated to employees. And under SCA Section 4(c), a successor contractor must honor the wages and benefits of a predecessor's collective bargaining agreement.