The Prevailing Wage and Apprenticeship (PWA) requirements are essential for anyone looking to maximize benefits offered under the Inflation Reduction Act. While the PWA requirements act like the gateway to clean energy tax credits, they have broader objectives, like fair labor compensation and adequate skill development in the construction industry.
Understanding and ensuring PWA compliance is essential. Navigating through these requirements can be a demanding process. Here’s a comprehensive checklist of what energy developers must follow to meet PWA requirements and avoid costly errors.
1. Determine If PWA Requirements Apply
The first step is to ensure the project is subject to PWA compliance.
- PWA compliance applies to clean energy projects, like solar, wind, energy storage, and EV charging, given the project:
- is over 1 megawatt (MW)
- began construction on January 29, 2023, or after.
- PWA compliance doesn’t apply to projects that:
- Are under 1 MW
- Began construction before January 29, 2023.
2. Understand the Clean Energy Tax Credit Framework
Under the IRA:
- Meeting PWA requirements increases the base tax credit by five times.
- Applies to both Investment Tax Credits (ITC) and Production Tax Credits (PTC) under Sections 45, 45Y, 48, and 48E.
3. Prevailing Wage Standards
What’s required:
- All laborers and mechanics shall be paid at least prevailing wage rates during construction, alteration, or repair.
- Rates include basic hourly wages and fringe benefits.
- Wage rates are locked in at project commencement and must be referenced from the Department of Labor’s wage determinations at sam.gov.
Applicability:
- Applies throughout the construction period.
- Maintenance work performed after a project is placed in service is not subject to prevailing wage rules.
4. Apprenticeship Requirements
Developers must satisfy all three of the following:
- Labor Hour Requirement: A set percentage of total construction labor hours must be performed by registered apprentices.
- 12.5% – projects starting in 2023
- 15% – projects starting in 2024 or later
- Ratio Requirement: Must comply with apprentice-to-journeyworker ratios as defined by the DOL or state apprenticeship agency.
- Participation Requirement: Employers with four or more workers on a project must employ at least one registered apprentice.
Note: These apply only during construction. Once a project is in service, apprenticeship rules no longer apply.
5. Registered Apprentices Defined
Only apprentices who are registered in a Registered Apprenticeship Program, as authorized by the DOL or a State Apprenticeship Agency, are included in the computation. Keep proof of registration on hand for each apprentice.
6. Construction Start and Continuity Rules
- Construction is considered to have started via:
- Physical Work Test (significant physical work on site), or
- 5% Safe Harbor (5% of total project cost incurred).
- A continuity requirement mandates that construction progress continues without excessive delays.
7. Recordkeeping Standards
Compliance requires meticulous documentation:
- Unredacted records must be provided to the IRS upon request.
- Reporting should be conducted at least quarterly to identify errors early and avoid penalties.
- Certified payroll records are not required, but may be used if agreed upon.
8. Penalty and Cure Provisions
Mistakes happen, but there’s room for correction:
Prevailing Wage Penalties:
- $5,000 per underpaid worker plus back pay and interest.
- $10,000 per worker for intentional disregard, plus triple damages.
Apprenticeship Penalties:
- $50 per non-compliant labor hour.
- $500 per hour for intentional disregard.
Cure Provisions:
- If discrepancies are corrected before filing the tax return, penalties may be reduced or waived.
- Corrections include back pay to workers and penalty payments to the IRS.
9. Intentional Disregard Factors
The IRS may assess intentional disregard based on:
- Repeated or systemic noncompliance.
- Lack of quarterly reviews.
- Failure to correct shortfalls promptly.
- Absence of internal procedures for error reporting.
Note: If a taxpayer fixes shortfalls before filing, it’s presumed that there was no intentional disregard.
10. Third-Party Monitoring and Audits
Lenders, insurers, and tax credit purchasers increasingly demand:
- Third-party audit reports on labor hours and penalties.
- Third-party monitors during construction.
- Assurance that the project owner bears the compliance risk, not the financing party.
11. Project Labor Agreements (PLA)
Projects under a qualified PLA are eligible for a penalty safe harbor:
- Penalties for apprenticeships and underpaid wages may be waived if corrections are made before filing.
- Not all union agreements qualify; ensure the PLA meets IRS criteria.
12. Contract and Bid Document Best Practices
When negotiating EPC, O&M, or LTSA agreements:
- Clearly define who is responsible for PWA compliance and tax credit claims.
- Set expectations for:
- Record retention and access
- Audit cooperation
- Fee caps for penalties or corrections
- In build-to-transfer agreements, ensure the purchaser receives all compliance records before the project is in service.
13. Scalable Compliance Systems and Data Privacy
Due to privacy rules, PWA filings cannot include personal identifiable information (PII), but IRS audits require unredacted PII. To manage this:
- Collect work papers separately for filings and audits.
- Utilize a secure, centralized platform to hold records from numerous contractors and safeguard PII.
- Assign responsibility for keeping accurate, complete, and accessible records of compliance.
Conclusion
Achieving compliance with PWA requirements is crucial to attaining increased clean energy tax credits. Although compliance is time-consuming, it can be achieved through proper planning, documentation, and systems. Complying with this checklist will assist developers in addressing the complexity, reducing risk, and ensuring they continue to qualify for the full IRA tax credit.