When PWA Compliance Gets Put to the Test

A certified payroll report (CPR) is prepared by the contractor. It records worker classifications, hours, wage rates and pay, and the contractor attests that the information is accurate.

A certified payroll report can only show what the contractor reported. A worker omitted from the report cannot appear in a certified-payroll-only review. A reported classification may look correct until it is compared with the duties the worker actually performed. A reported wage may appear compliant until it is checked against proof of what the worker was actually paid.

Source-document verification tests the certified payroll report against the records behind it, including timesheets, proof of payment, worker classifications, and registered-apprenticeship records. That additional evidence can reveal issues a payroll-only review cannot establish.

For project owners, that distinction matters because an issue that is never identified cannot be resolved. And the later an issue is discovered, the fewer corrective options may remain.

CPR review is an important first step. The problem is when the review stops there.

Together, these six checks show whether the conclusion in a final report is supported by the underlying compliance work.

If you want one place to start, start with Verify: ask for one redacted week showing the certified payroll report, timesheet, and proof-of-payment reconciliation. The standard is not whether a provider has a dashboard. It is whether the compliance conclusions can be traced back to the evidence supporting them.

The final PWA regulations require the taxpayer claiming an increased credit amount to maintain records sufficient to establish compliance for each laborer and mechanic employed by the taxpayer, its contractors and subcontractors in the construction, alteration or repair of the facility.

The taxpayer may arrange for a third-party vendor to maintain those records, but the taxpayer remains responsible for substantiating the PWA compliance position and must be able to make the required records available to the IRS on request.

For a source-document review, that can include certified payroll, timesheets, proof of payment, wage determinations, classification support, registered apprenticeship records, and documentation showing how exceptions were corrected.

Ask the provider to show the evidence behind its conclusions. That should include the source-document reconciliation, proof that every contractor and pay period was covered, records showing how exceptions were resolved, and the documentation a buyer or counsel would receive in diligence.

The point is simple: you should not have to take the provider's word for how the compliance work was done. The record should show it.

How thoroughly payroll and source records are reviewed affects when problems are found.

For certain limited Prevailing Wage failures that are not due to intentional disregard, the $5,000-per-worker penalty payment is waived if the required correction payment is made by the last day of the first month following the end of the calendar quarter in which the failure occurred and either (1) the worker was underpaid in not more than 10% of the pay periods in which the worker was employed on the project during the calendar year, or (2) the total underpayment for that worker was not greater than 5% of the amount the worker was required to be paid. The wage difference and required interest are still owed.

Apprenticeship creates a different timing problem. If the apprentice-to-journeyworker ratio is exceeded on a day, the excess apprentice hours still count toward total labor hours but do not count as qualified apprentice hours for the labor-hours requirement. An apprentice working in excess of the permitted ratio also must be paid not less than the applicable prevailing wage rate for the work actually performed.

Finding an apprenticeship shortfall while work is underway may allow the project to adjust staffing or make additional qualified-apprentice requests. If the labor-hours or participation requirements remain unsatisfied after the work is complete, the taxpayer may need to make the applicable apprenticeship correction payment unless the Good Faith Effort Exception or another applicable rule is satisfied.

That is why high-quality compliance does more than flag exceptions. It drives issues to resolution while corrective options remain available.

For Section 48 and Section 48E investment tax credit projects covered by this article, the compliance obligations and recordkeeping can continue beyond close. Prevailing Wage requirements can apply to qualifying alteration and repair work during the five-year period beginning on the placed-in-service date. Apprenticeship requirements do not apply to alteration or repair performed after the facility is placed in service.

Routine maintenance is treated differently from alteration and repair, so the project needs a process to classify post-placed-in-service work, apply the appropriate wage requirements when they attach, and maintain the supporting record. The determination depends on the facts and circumstances of the work.

That means recordkeeping is not complete at close. The project may need the record to support post-placed-in-service work and to answer diligence or IRS examination questions years later.

Two providers can both say they manage PWA compliance. Both can collect certified payroll reports. Both can generate a final report. The difference becomes clear when a buyer, counsel, underwriter, or examiner asks what was tested and requests the evidence supporting the conclusions.

A high-quality record shows the chain from requirement to evidence to resolution.

It makes missing workers and missing pay periods visible. It ties exceptions to source documentation. It documents the issue, the correction, and the evidence that closed it. And it gives an independent reviewer enough information to understand how the conclusion was reached without reconstructing the file from scratch.

The goal is not simply to ask whether a provider offers PWA compliance. Ask what evidence supports the provider's compliance conclusions.

• Can they show the source records behind their conclusions?
• Can they demonstrate complete population coverage?
• Can they show how issues were corrected?
• Can another reviewer independently validate the record later?
• Will the provider stand behind the work?

Those questions tell you far more about the quality of the compliance program than the existence of a final report.