Public-Private Partnerships, often referred to as P3s or PPPs, are experiencing a growing popularity in construction. One reason for this is quite straightforward: as public entities, whether they be city, states or public agencies, continue to experience tightening budgets, creative means of financing necessary projects leads them to explore using some form of P3. P3s allow public owners to obtain financing for projects that do not have adequate traditional funding sources. While P3s may provide additional opportunities and work for many contractors, P3s raise as many questions as they answer. Notably, given the “public” element of a P3, contractors at all tiers should ask whether the P3 requires payment of prevailing wages to workers on a project. Two recent decisions have shed some light on when prevailing wages may be required by law on a P3 project.
In District of Columbia v. Department of Labor, 34 F.Supp.3d 172 (D.D.C. 2014), the district court weighed in on whether prevailing wages are required in a P3. The CityCenterDC project in Washington, DC involved a series of agreements to develop a piece of property owned by the city into condominiums, apartments, office buildings, a hotel, retail space and some public open spaces. The project, though on a city-owned parcel, has been and will be “entirely privately funded, occupied, and maintained for the duration” of the ninety-nine year leases with the city. A dispute arose over whether the workers on the project were to be paid prevailing wages pursuant to the Davis Bacon Act. The court ruled that the CityCenterDC project was not a “public work” as defined by the Davis Bacon Act and thus workers on the project were not entitled to be paid prevailing wages. The court based its ruling primarily on the lack of public funding for the project. As noted above, the project was financed through private developers and investors and did not receive any public funds. Additionally, the court ruled that since private parties, and not the government, would be the tenants and users of the project, there was no other basis on which to require payment of prevailing wages.
In San Antonio Building and Construction Trades Council v. City of San Antonio, 224 S.W.3d 738 (Ct. App. Tx. 2007), the city of San Antonio entered into a lease agreement with a private developer to maintain and expand a convention center. Financing for the project came from a combination of private capital and bonds issued under authority granted to a nonprofit corporation. A trade union brought suit seeking a judgment that the construction workers on the project would be paid prevailing wage under applicable state law. The trial court ruled that prevailing wages were not required on the project because the project was not a public work and no public funds were used. The trade union appealed and the appellate court agreed with the trial court that prevailing wages were not required. The appeals court denied the appeal solely on the issue that no public funds were used as the bonds were not guaranteed by the state.
The CityCenterDC and the San Antonio Building cases, being unique projects with unique circumstances, may not have a significant impact on other cases. Contractors should note that for P3 projects, whether prevailing wages will be required on the project, is a highly fact intensive analysis. A slight change in the specifics of a project could significantly change the outcome of a lawsuit. For instance, in the CityCenterDC project if the city had required that part of the office space would be reserved and leased back to the city for use as municipal offices, it is possible, but by no means certain that prevailing wages would have been required. As mentioned above, the court in the CityCenterDC case considered the lack of tenancy by the city to be at least one important fact that led to the conclusion that the project was not a public work. Whether tenancy by a public owner would be sufficient to make a P3 a public work is not clear but should be considered by contractors being engaged to work on a P3.
P3 projects will likely continue to be a vehicle through which large scale projects are developed and constructed in the future. Of the many potential risks on P3s, whether prevailing wages will be required on a P3 is a significant issue that contractors should consider before beginning performance. Though no contractor is likely to raise the issue of prevailing wages prior to beginning performance, much less volunteer to pay prevailing wages, contractors should at least consider whether prevailing wages may be required on the project. Prime contractors, if prevailing wages are later found to be required, under the Davis-Bacon Act or analogous state laws, are liable for payment of prevailing wages to all workers on the project. On a P3 of significant size, the labor costs will be substantial. If prevailing wages are imposed during or after performance, the contractor could be exposed to considerable retroactive liability.
The CityCenterDC and San Antonio illustrate that each P3 project is unique and whether prevailing wages might be required from the beginning or imposed after the fact is a highly fact intensive analysis. Contractors, especially prime contractors on such projects, should carefully assess their potential exposure if prevailing wages are required.