Determining Prevailing Wage Rules on P3 Projects

A P3 project, or a "public-private partnership" project, is one in which public and private entities invest together, and both may have some "property rights" or ownership. In this project type, a public entity strikes an agreement with a private entity for some combination of funding, construction, operation, or maintenance on a project.

While P3 Projects are rapidly increasing in popularity, confusion persists with regard to how these projects are actually classified, and which rules apply to contractors. But do prevailing wage laws apply to P3 projects? It's a question without a simple answer.

P3 projects: Advantages & risks

P3 projects are appealing to government officials and private industry players alike for numerous reasons — one of which is the ability for a public body to alleviate public cost (and the associated taxpayer burden) by allocating some of the financial risk and subsequent reward to private companies. This structure not only allows the public entity to reduce the government's costs, but also to bring in greater construction management expertise on the project itself.

There is no specific structure for P3s that is routinely used, however, and the specific nature of the individual project is defined by specific agreement and contract between the parties on the project.

Indeed, in some situations there may be no public involvement at all other than the fact that the project is located on public property (that the public body leased to the developer or operator). Because of this, the underlying structure of the contract can have a significant impact on the nature of the project and the applicable rules, regulations, and remedies.

Prevailing wages required on public projects

Contractors on public projects must follow a unique set of rules that is not generally applicable on other types of construction projects. In addition to meeting bond requirements, contractors are often required to comply with prevailing wage rules. The Davis-Bacon Act requires that contractors and subcontractors working on certain federal projects pay their laborers at least the local prevailing wage.

Because the underlying project type defines the applicable rules, it is extremely important to be able to determine the “actual” project type. There can be numerous factors in determining what kind of project a P3 project actually is. In addition, the relationship between the contracting parties can affect the requirements that control the project.

Property ownership alone does not define project type

Sometimes, property ownership is not enough to define what project type is. Let's take this example from 2016 into consideration: The US Department of Labor brought suit against contractors working on the $850 million CityCenterDC project. The DOL asserted that, because the land was owned by the District of Columbia, prevailing wage rules applied.

However, the project developer had a 99-year lease on the land from DC, and all construction contracts and agreements appeared to be private. So the land itself was public, while the development, construction, and subsequent management of the project was private.

The case went to the US Court of Appeals, which determined that the mere lease of the underlying property did not make D.C. a party to the work. As a result, the project was considered "private" for the purposes of compliance with federal prevailing wage rules.

Applying prevailing wage rules to P3 projects

The court set forth a potentially helpful test for parties trying to determine the underlying nature of a P3 project. In order for a project to be considered a public work for the purpose of determining prevailing wage compliance, the project must:

• Involve public funds
• Be subject to government ownership or operation of the completed facility

In the D.C. case, the court found that neither condition of the test was met: The sole connection of the government to the project was a lease, and there was no involvement on the project at all by the public entity.

Although helpful to some extent, it seems that this test provides a relatively low bar to a project being classified as “public.” While the project in this case didn’t meet the requirements to be considered a public project, it appears from this case that any minimal involvement of the public entity in terms of construction funds would be enough.

This is an interesting result for parties attempting to determine the security rights applicable to the project, and for contractors working on such projects. If the addition of any amount of public funds means that the rules related to public projects apply, that means that any such project would necessarily incur the bonding requirements of the Miller Act or the various states’ Little Miller Acts.

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