A payroll administrator preparing certified payroll on a Davis-Bacon job has to show that each worker received the full prevailing wage. That wage is the basic hourly rate on the wage determination plus the fringe benefit rate listed beside it. A contractor can pay the fringe portion in cash, through contributions to bona fide benefit plans, or through a mix of the two.
The plan contributions count only at their hourly equivalent, and the federal rule sets how to compute it. A contractor whose crews split time between public and private work can overstate that credit when it divides by the wrong hours, and its certified payroll then shows less than the prevailing wage.
The rule
Annualization is the Department of Labor’s name for the method. Under 29 CFR 5.25(c), a contractor divides the total cost of a fringe benefit by the total hours the worker put in during the period the cost covers. Those hours include work covered by the Davis-Bacon Act and its related acts, and private work. The rule was written into the regulation in an amendment published August 23, 2023, and the eCFR text was current as of October 15, 2026.
The Wage and Hour Division explains the purpose in Fact Sheet #66E. Averaging over all hours keeps Davis-Bacon work from being the sole or a disproportionate source of funding for a benefit that covers the worker on every job.
The divisor follows the contribution. These rules come from section 15f12 of the Field Operations Handbook unless noted:
- Weekly contributions are divided by the week’s hours, monthly contributions by the month’s hours, and quarterly contributions by the quarter’s.
- Overtime hours go in the divisor, according to DOL’s infrastructure law FAQ.
- When a contractor pays a year in advance, it can divide by the hours the participating workers put in during the prior calendar or plan year. The Resource Book’s example puts a $3,000 annual pension cost over 1,850 hours from the prior year, for $1.62 an hour.
- When the contribution differs from worker to worker, such as single and family health coverage, the credit is computed for each worker. An average across the crew is not allowed.
A worked example
The figures below are an example with round numbers. An electrician’s wage determination lists a basic hourly rate of $40.00 and fringe benefits of $20.00, for a prevailing wage of $60.00. In October the electrician works 160 hours, 100 on a Davis-Bacon project and 60 on private work. The contractor pays a $1,200 monthly health premium for this worker and contributes $3.00 to a pension plan for every hour worked.
| Fringe item | Cost for the month ($) | Hours worked on all jobs | Credit per hour ($) |
|---|---|---|---|
| Health insurance premium | $1,200 | 160 | 7.50 |
| Pension contribution at $3.00 per hour | $480 | 160 | 3.00 |
| Total creditable fringe | $1,680 | 160 | 10.50 |
The creditable fringe comes to $10.50 an hour. On each Davis-Bacon hour, the contractor owes the $40.00 rate plus $9.50 in cash in lieu of fringe, so the worker receives $49.50 in cash and $10.50 in benefits.
Dividing the same costs by only the 100 Davis-Bacon hours gives a credit of $16.80. That leaves $3.20 an hour in cash.
| Line | All 160 hours as divisor ($) | 100 Davis-Bacon hours as divisor ($) |
|---|---|---|
| Fringe rate on the wage determination | 20.00 | 20.00 |
| Health insurance credit per hour | 7.50 | 12.00 |
| Pension credit per hour | 3.00 | 4.80 |
| Total credit per hour | 10.50 | 16.80 |
| Cash in lieu of fringe per Davis-Bacon hour | 9.50 | 3.20 |
| Cash in lieu for the month's 100 Davis-Bacon hours | 950.00 | 320.00 |
The gap is $630 for the month, which is $6.30 on each of the 100 Davis-Bacon hours. If the worker splits time the same way all year, the gap reaches $7,560 for this one electrician. Fact Sheet #66E lists leaving private hours out of the annualization among the common violations.
Overtime and cash in lieu
Fringe is owed on every hour worked, overtime included. The half-time premium is computed on the basic hourly rate, and cash paid in lieu of fringe stays out of it. DOL’s Resource Book example has an electrician working 44 hours at $27.00 plus $18.00 in fringe. Straight time is 44 hours at $45.00, or $1,980.00, and the premium is 4 hours at half of $27.00, or $54.00, for $2,034.00.
Fact Sheet #66E adds a limit. When a worker is consistently paid above the basic hourly rate, including on work with no fringe requirement, the extra pay is part of the regular rate and goes into the overtime premium.
What cannot be credited
Fact Sheet #66E lists costs that do not count toward the fringe rate. These include workers’ compensation insurance and any other benefit that federal, state or local law already requires. They also include the contractor’s own administrative cost of running its benefit plans, along with travel, per diem, lodging, and company vehicles or phones.
That list matters when the estimating database stores one labor burden figure. Workers’ compensation sits inside burden, as the labor burden post shows, and it cannot be credited toward the fringe rate on a wage determination.
How to use this number
On a public bid, price Davis-Bacon labor at the basic hourly rate plus the cash in lieu each worker will be owed after credit. The credit per hour depends on each worker’s total hours in the period, private work included, so it falls as hours rise. In a 200-hour month, the same $1,200 premium is worth $6.00 an hour.
On the job cost report, the cash in lieu is a labor cost of the Davis-Bacon job. Track it as its own cost code so the project manager can compare it with the estimate each month.
Caveats
The regulation excepts contributions to defined contribution pension plans from annualization. The plan has to provide immediate participation and vesting within the first 500 hours worked, and it has to meet the two conditions in 5.25(c)(3). Contractors and plans can ask the Wage and Hour Division for an exception for other benefits.
Many construction vacation and sick leave plans are unfunded, which means they are paid from the contractor’s general assets. A contractor must get DOL’s approval before it takes credit for an unfunded plan. For vacation, the Handbook divides the year’s vacation pay by the year’s total hours, so $1,500 over 1,500 hours is $1.00 an hour.
When a plan’s cost includes employees who are not laborers or mechanics, such as office staff, their hours go into the divisor or their contributions come out of the cost. This post covers the federal rule. State prevailing wage laws are outside it.
How to start on your jobs
Pick one worker who had both public and private hours last month. Pull the month’s hours by job from payroll, flag the Davis-Bacon hours, and pull each benefit cost paid for that worker with the period it covers. Compute the credit per hour with all hours as the divisor and compare it with the fringe credit on that month’s certified payroll. If the two differ, run the same check for every worker on the job before the next payroll.
Multiply the cash in lieu per hour by the labor hours per unit from the labor productivity post to see what cash in lieu of fringe adds to the cost of each unit installed.