Published date: 02/19/2025
Construction is a highly regulated industry, with strict labor laws and compliance requirements—especially for government-funded projects. Even though meeting these regulations can feel like a burden, the cost of non-compliance is much worse. Contractors who fail to adhere to prevailing wage laws, certified payroll reporting, and workforce requirements can face serious financial and reputational consequences.
Here, we’ll break down the hidden costs of non-compliance (with some real-world examples) and how contractors can protect their businesses.
Costly Fines & Penalties
One of the most immediate consequences of non-compliance are financial penalties. Federal, state, and local agencies enforce prevailing wage laws and labor regulations, often imposing hefty fines on contractors who violate them.
- Prevailing Wage Violations: Under the Davis-Bacon Act and related state laws, underpaying workers or failing to file certified payroll reports can result in fines ranging from thousands to millions of dollars.
- Misclassification of Workers: If employees are improperly classified as independent contractors, employers may owe back wages, overtime, and unpaid payroll taxes.
- Failure to Meet Apprenticeship & Workforce Requirements: Some contracts require contractors to employ apprentices or meet hiring goals for specific demographics. Non-compliance can lead to fines or contact termination.
Real-World Example: This year, a New Orleans landscaping company was ordered to pay $319,000 in back wages and penalties for misclassifying workers as independent contractors.
Payment Withholding & Contract Losses
Non-compliance doesn’t just result in fines—it can also affect cash flow and future revenue opportunities. What seems like a quick and easy way to save money now, can eventually result in a business that’s ruined forever.
- Withheld Progress Payments: Agencies may refuse to release funds until compliance issues are resolved. Even prime contractors have been known to sometimes withhold payment to a subcontractor when it is non-compliant because a prime carries the liability of the project’s entire contract being carried out.
- Contract Termination: Persistent non-compliance can lead to losing an awarded contract mid-project.
- Lost Future Opportunities: A record of non-compliance can make it difficult to secure new bids, as public agencies may check past compliance history before awarding contracts.
Real-World Example: In 2015, an Illinois contractor working on a state-funded highway project lost its contract due to Disadvantaged Business Enterprise fraud; they had claimed to subcontract work to a certified minority owned business when they were actually performing the contracted work themselves.
Debarment: The Ultimate Consequence
For extremely severe or repeated violations, contractors may face debarment, which means they are prohibited from bidding on public projects for a period—sometimes permanently.
Federal Debarment: For DBA and DBRA projects, not only can the company be debarred, but its responsible officers can also face personal debarment. Contractors who willingly violate the Davis-Bacon Act or other federal laws risk being barred from bidding on government contracts for up to three years or more.
- State & Local Debarment: Many states have their own debarment lists (e.g. California’s DLSE Debarments), restricting contractors from bidding on state-funded projects.
- Reputational Damage: Once a company is debarred, it can be difficult to regain trust and credibility in the industry.
Real-World Example: In 2019, a Florida contractor was debarred after an investigation revealed that they failed to inform subcontractors about their contracts’ prevailing wage payment obligations.
Legal Fees & Lawsuits
Non-compliance can also lead to legal disputes, costing contractors time and money in court battles and settlements.
- Employee Lawsuits: Workers who are underpaid or misclassified may take legal action, leading to backpay claims and legal expenses.
- Whistleblower Cases: Employees or subcontractors may report labor law violations, triggering federal or state investigations.
- Litigation Costs: Fighting non-compliance allegations in court can be far more expensive than investing in proper compliance from the start.
Real-World Example: In 2016, a prime contractor in Wisconsin was sued by the city of Waukesha after they misappropriated labor and materials funds meant for public improvements.
Reputational & Business Impact
Beyond financial penalties, non-compliance can harm a contractor’s reputation, making it difficult to win future projects and retain skilled workers.
- Negative Publicity: Wage violations, debarment, or lawsuits can make headlines, deterring potential clients and partners.
- Loss of Skilled Workforce: Workers prefer to be employed by reputable companies with strong compliance records.
- Strained Relationships with Agencies: Government entities and project owners may hesitate to work with contractors who have a history of non-compliance, regardless of whether the offending party has remediated their business practices.
See: The Department of Labor has a library of past news items illustrating the consequences of non-compliance.
How Contractors Can Avoid These Risks
The good news? Non-compliance is avoidable. Here are some best practices to protect your business:
Invest in Compliance Software: Using an electronic certified payroll reporting system can help assist in keeping compliant.
Train Your Team: Educate payroll administrators, HR personnel, and project teams on the latest labor compliance requirements.
Conduct Internal Audits: Regularly review payroll records, classifications, and workforce data to catch and correct errors before they become costly.
Stay Up to Date: Compliance regulations change frequently—stay informed about new laws at the federal, state, and local levels.
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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.
