Published date: 02/22/2024

Got a housing project?

No, we’re not talking about that dripping faucet in your downstairs bathroom or your kitchen cabinets that are in desperate need of a facelift.

We’re talking about the other kind of housing project. You know, the kind that comes with a bunch of strings attached (and maybe a groan or two from novice contractors) because it has been funded by the US. Department of Housing and Urban Development (HUD). A project that carries with it a host of other labor requirements and stipulations, namely, those attributed to Davis-Bacon Act and HUD’s Section 3.

And since we’ve discussed DBA to great length in previous posts, we’ll instead focus today on the Section 3 workforce-related requirements that many contractors and project owners must abide by when their project uses HUD funds. Yes – this includes the latest updates that occurred from HUD’s Final Rule, which became effective in November of 2020 and fully transitioned by July 1, 2021.

What Is Section 3, and What Triggers It?

Since 1968, the Section 3 provision within the HUD Act has worked to help alleviate poverty by helping low and very-low-income individuals access work opportunities and other economic resources. Over the years, Section 3 public works, community development, and housing construction and rehabilitation projects have lifted up generations of people while transforming our country’s urban landscape.

While the scope and price tag of broader HUD-funded projects can vary tremendously, whenever more than $200,000 in either full or partial HUD funding is accepted, Section 3 workforce requirements are triggered.

Under Section 3, there are generally two types of project funding: Public Housing financial assistance (PHA) and Housing and Community Development financial assistance (HCD). Each might have their own criteria when it comes to identifying individuals to help, but they both share a common overarching goal: to increase the amount of workers hired on projects that qualify for either ‘Section 3’ or ‘Targeted Section 3’ status.

Section 3 and Targeted Section 3: What’s the Difference?

Let’s break it down.

To be considered a Section 3 worker, an individual must either 1) have an annual income below the established HUD threshold, 2) be employed by an established Section 3 business, or 3) participate in YouthBuild, a community-based pre-apprentice program for 16- to 24-year-olds who do not have a high school degree.

Targeted Section 3 worker status factors in additional criteria that can qualify an individual. Like mentioned previously, these requirements can differ slightly depending on whether your project is PHA or HCD-funded.

For PHA funding, Targeted Section 3 status can be designated for workers who reside in either public or Section 8-assisted housing. For HCD funding, Targeted Section 3 worker status can be assigned to individuals living within the service area or neighborhood of the project at hand, as defined by 24 CFR§ 75.5 within the Code of Federal Regulations.

It’s important to note that these designations come with their exceptions and caveats. To learn more, visit the Section 3 Guidebook posted on the HUD Exchange website.

What Exactly Has Changed With the Final Rule?

When the Final Rule was placed into effect in November 2020, the requirements for hiring Section 3 and Targeted Section 3 workers were loosened a bit, a move designed to make it easier for projects to qualify for funding. However, the Final Rule brought in fundamental changes to the law impacting the way contractors and project owners account for these workers.

First, instead of funding projects based on the number of Section 3 and Targeted Section 3 workers hired, funding is now contingent on the number of labor hours worked by these types of workers.

According to the Final Rule, at least 25% of a project’s total labor hours must be completed by Section 3 workers today, and 5% of the total labor hours must be worked by Targeted Section 3 workers. Because Targeted Section 3 workers also qualify for Section 3, their labor hours can count toward both of these requirements.

Second, the types of metrics you are now required to track on workers have changed as well. To meet Final Rule requirements, additional demographic data on workers must also be collected and reported.

These revised standards apply only to projects awarded after the Final Rule became law. This means that Section 3 projects that were underway before the Final Rule was enacted remain governed by the previous standards. Details on how the new rules compare to the old standards can be viewed on HUD’s Section 3 Final Rule webpage.

Remember, though, regardless of the timeframe of a HUD-funded project, it is important to become well versed in all facets of the law. (The HUD Section 3 Guidebook is an excellent resource that can help.) And whenever HUD funding over $200,000 is accepted for a project, all Davis-Bacon requirements must be met. Yes, that means prevailing wage laws.

Where Technology Comes into Play

Given the complexity of Section 3 and all the updates ushered in by the Final Rule, it is more important than ever to invest in the right labor compliance and certified payroll solution.

For public agencies, this means selecting a tool that simplifies and standardizes tracking and reporting processes while making it easy to customize the workflow for all your contractors. For contractors, this means choosing a highly secure, scalable, web-based solution with the right system checks in place to ensure compliance and protect you from potential violations and the headaches that go with them.

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These materials are being issued with the understanding that LCPtracker is not engaged in rendering legal or other professional services and is providing these for informational purposes only. If legal, accounting, or tax expert assistance is required, the services of a competent legal, accounting or tax professional should be sought.