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Construction costs soar $200K to $500K

Spike in federal prevailing wages leads to cuts in housing projects.

Residential construction worker pay tied to federal prevailing wages has soared in Ohio — with 200 to 400 percent increases for certain jobs — leading some local housing projects to be scaled back.

Seven developers awarded tax credits by the state last year have discovered that costs jumped between $200,000 to $500,000 for those projects after the U.S. Department of Labor published new prevailing wage rates in Ohio last fall.

The increases affected two Southwest Ohio developments, including Springfield’s RLH Partners that’s building the 34-unit Mulberry Terraceand Hamilton County’s Model Group that’s developing the 100-unit Losantiville Apartments.

RLH Partners eliminated a planned duplex from its $5.5 million Mulberry Terrace to cover the increased costs.

The federal prevailing wage law, also known as the Davis-Bacon Act, was created in 1931. It requires prevailing wages to be used on federally funded projects to ensure a decent standard of living for workers, ensure quality construction and keep tax dollars local.

Federal prevailing wages are set through surveys by the Department of Labor, while state prevailing wages are set through a local collective bargaining agreement.

Multiple attempts to get comments and an explanation of the increase from the Department of Labor weren’t returned. Local developers speculated that the rates increased so much because surveys in Ohio hadn’t been completed at the federal level for several years and due to a low number of survey responses.

State and local construction trade leaders say prevailing wages are needed to keep local tax dollars flowing into the local economy.

“It’s needed now more than ever,” said Chuck Morton of the Dayton Building and Construction Trades Council, a group which represents unionized construction workers.

“We’ve got a prevailing wage to protect community tax monies given out to do these improvements and make sure the people working on these jobs are local,” Morton said. “Whether they’re union or non-union, it helps both groups.”

The recent federal increases sparked the Ohio Housing Council to send letters to state Congressional leaders about the increased wages.

According to the letter obtained by the Springfield News-Sun, the council says it doesn’t object to paying prevailing wages, but believes the data collection method used by the Department of Labor to determine the rates was flawed. The letter cites a 2011 Government Accountability Office study which says the surveys don’t accurately reflect prevailing wages.

“It’s really not something where anybody is trying to undo the prevailing wage,” said Steve Gladman, a consultant for the Ohio Housing Council. “The argument is that we don’t think it’s the correct prevailing wage, to see those types of increases and inconsistencies in increases. What we’re asking for is the U.S. Department of Labor validates that survey and comes up with a new look at it.”

The letter states the increases “adversely impact the financial feasibility of affordable housing projects.” While the letter states there is an appeal process to contest the validity of the rates, it also says that process doesn’t work well with the two-year window in which tax credit projects like Mulberry Terrace must be used. The organization would like the older rates to be used until a new survey is completed.

According to the letter, one project in Licking County saw costs increase by more than $529,000, while another project in Franklin County increased by more than $340,000.

The letter also shows some examples of rate increases from 2010 to 2012, including 200 to nearly 400 percent increases for certain jobs in certain counties on federal residential construction projects.

In Clark County, a Bobcat operator working on the project would’ve been paid $20.45 per hour, but with the recent increase, they will now make $40.65. General laborers wages increased from $9.87 to $26.73. Painters saw wages climb from $12.46 to $34.08 with benefits.

The prevailing wage for a painter in Franklin County increased 370 percent – from $7.25 per hour without benefits to $34.08 including benefits. In Richland County, a bricklayer’s prevailing wage increased from $8.04 per hour without benefits to $40.18 with benefits – a nearly 400 percent increase.

A developer typically doesn’t sign a construction contract until it lines up all of its financing, so the project is subject to the wage rates the month the contract is signed — which is what happened to the Mulberry Terrace project in Springfield.

“They hadn’t signed a contract, so they were subject to those higher rates,” said Sean Thomas, Ohio Housing Finance Agency’s director of planning, preservation and development.

After the wage increases, Thomas said, projects linked to federal dollars saw costs increase about $200,000 to $500,000.

“When you get that close to the end of the process, it gets tough to find additional funds to make up that gap,” Thomas said.

Five of the seven tax credit projects received a $1 million loan from the housing finance agency to pay the higher costs.

The loans came from OHFA’s state unclaimed funds allocation, which is roughly between $30 million to $40 million.

The rate increases caused a nearly $188,000 project shortfall for the Mulberry Terrace project, according to Interfaith Hospitality Network Executive Director Elaina Bradley. The Springfield Metropolitan Housing Authority will apply rent vouchers to the development, requiring the project to pay Davis-Bacon Act wage rates.

After meeting with the development team, which includes RLH Partners and the city of Springfield, the decision was made to construct one less property.

Bradley was surprised to see cost increases after four years of planning.

“Of course, it was a little challenging to think about … We had to start back at ground zero.”

The project was delayed several months. The best solution, Bradley said, was to move forward with the 26-unit structure on Mulberry Street and four duplexes, instead of the originally planned five.

The team also had to re-bid construction estimates.

Construction will begin this month on Mulberry Terrace, and a formal groundbreaking will be in April for the first permanent supportive housing development in Springfield.

It will reduce the waiting list for people needing housing in Springfield, Bradley said, as well as decrease the number of shelter stays.

“There are homeless individuals and families who are in need of this type of housing,” Bradley said. “Not only safe, affordable housing, but housing that will provide that supportive service to them that will help them change their lives so they can sustain housing and ends their recurrent homeless episodes.”

Shannon Meadows, the city’s community development director, said the prevailing wage is typically set to reflect the rates of the private sector. She also said it’s hard to speculate what effect the increased prevailing wage could have on future projects.

“There’s typically been the presumption prevailing wage is more expensive, when in reality, it is typically more paperwork,” Meadows said.

The wage increases, Gladman said, could harm future developments because of increased costs across the board, including materials. The increased costs also could raise the price per unit, making it more difficult to get financing.

“The underlying economics just don’t work when there’s that much debt,” he said. “It’s not a matter of just borrowing more money. It’s just like buying a house. You can’t go to the bank and borrow money if you don’t have more income to pay it back. That’s the problem when it adds to the cost. They have to rethink what they’re doing, whether it be smaller projects or ask local government for more assistance.”

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