Talking E: The Effects of Government Mandates on Engineering Projects

If you’re in the engineering business, you know first-hand about the tremendous impact that state and federal laws and regulations have on your day-to-day operations. You also know that those laws and regulations can often be prohibitive.

Two professional associations, the Associated General Contractors of America (AGC) and the American Council of Engineering Companies (ACEC), are working toward change.

The AGC, for example, opposes all efforts to use government-mandated project labor agreements (PLAs) on Federal construction projects. The AGC is committed to full and open competition for all public projects, and they believe that:

• the choice of whether to adopt a collective bargaining agreement should be left to the contractor-employers and their employees, and that such a choice should not be imposed as a condition to competing for, or performing on, a publicly funded project.
• government mandates and preferences for PLAs can restrain competition, drive up costs, cause delays, lead to job site disputes, and disrupt local collective bargaining.
• government-mandated PLAs can limit the number of competitors on a project, because government mandates for PLAs typically require contractors to make fundamental, often costly changes in the way they do business.

The AGC has found no evidence proving the claim that PLAs will improve the economy or efficiency of a project. The Government Accounting Office also reported that it could not document the alleged benefits of past mandates for PLAs on federal projects.

The ACEC is currently concerned with repealing the 3% Withholding Mandate, a requirement that was buried in the Tax Increase Prevention and Reconciliation Act of 2005. The law, which is due to take effect in 2012, will require federal and state government entities and any local jurisdiction with annual expenditures exceeding $100 million to withhold 3% from all payments for goods and services.

The withholding mandate will apply to the total cost of the contract, not to the net revenue generated or the size of the company. Because many companies realize a profit margin of less than three percent on a contract, withholding 3% up front for tax purposes will force them to divert funds needed to complete the contract, creating cash flow problems. As a consequence, government agencies may see the cost for goods and services increase as firms seek to offset the impact of the 3% percent withholding mandate.

Smaller firms will be hit hard, both in terms of creating cash flow problems as well as affecting the important role they often play as subcontractors on large government contracts. Prime contractors may be compelled to pass the costs associated with the 3% withholding requirement to their subcontractors, or possibly shift from subcontracting work out to performing it internally.

The ACEC is deeply concerned about the impact and unintended consequences of this new requirement on all companies that receive contracts or other forms of government payments. The provision was designed to deter tax evasion, but it will primarily penalize honest taxpayers. In addition, implementing the provision will cost federal agencies and state and local governments billions of dollars. A Department of Defense study estimates that it will cost DOD alone $17 billion in the first five years to comply with this mandate.

The ACEC is urging Congress to repeal the 3% withholding mandate, and has worked closely with the Ways and Means Committee on the legislation and built substantial coalition support. The full House is scheduled to vote on the bill during the last week of October.