An Inside View of the Davis-Bacon Act

Old law meets new industrial policy

In late 2023, the CHIPS Program Office was deep in negotiations with our leading-edge applicants — the multibillion-dollar deals that would form the core of the portfolio. After an internal meeting, one of our lawyers pulled me aside. A major applicant had flagged an issue we hadn’t been tracking: the Davis-Bacon provisions of the CHIPS Act could require the company to pay “prevailing wage” for construction work that had already been completed. Given the size of the project, this would cost hundreds of millions of dollars and require the company to locate as many as 20,000 construction workers no longer on the job and pay them backpay. After reviewing the Department of Labor’s regulations, our lawyer thought they had a point — not just for this applicant, but also for several others in the pipeline.

We had anticipated some of the other legal and compliance challenges we’d face, NEPA chief among them, and planned and staffed up accordingly. At first, Davis-Bacon didn’t seem to demand the same level of attention. The law had been on the books since 1931, and DOL published the wage schedules that companies had to follow. We knew this could increase costs, and that the cost impact would then flow through to our commercial negotiations with our applicants. But we failed to anticipate that applying a 90-year-old law to a brand new program in a brand new industry would create implementation challenges far beyond what we had prepared for. Getting pulled aside by a lawyer to find out about retroactive application was my first indication of that.

Ultimately, Davis-Bacon implementation became a central issue for projects representing more than half of the program’s funds.¹ This piece describes the range of challenges we encountered and offers recommendations for future implementers and policymakers.

What is Davis-Bacon?

The Davis-Bacon Act requires that workers on federally funded construction projects be paid no less than the “prevailing wage” for their trade in the local area, as determined by the Department of Labor. DOL publishes wage schedules covering four construction categories — building, residential, highway, and heavy — with rates set by locality, usually at the county or multi-county level. Each schedule lists worker classifications (carpenters, electricians, ironworkers, pipefitters, laborers, and many others) with their own required wages and fringe benefits.

As of 2018, DOL published more than 130,000 individual wage rates in total. Rates are determined through voluntary surveys of local wages. Since 2023, DOL has used a three-step process to determine these rates:

1. If a single wage rate is paid to a majority of workers in a classification, that becomes the prevailing wage.

2. If not, the rate paid to at least 30% of workers prevails.

3. If no rate applies to at least 30% workers, a weighted average is used.

Because union wages tend to be uniform and well-documented in survey data, this methodology frequently sets union-scale rates as the prevailing wage.

For each worker, contractors must first identify the applicable wage schedule for their county and construction type, and then match the worker’s actual tasks to the correct classification within that schedule. Pay is based on what the worker does rather than their job title; workers performing multiple types of work in a single week may require multiple classifications, each with its own wage rate and fringe benefit requirements.

Davis-Bacon was not part of the original CHIPS authorization, which passed in the 2020 National Defense Authorization Act without funding. It was added during the Senate markup of the United States Innovation and Competition Act in 2021, on a party-line vote with one Republican addition. When the CHIPS and Science Act was enacted with funding in August 2022, Davis-Bacon remained included.

Davis-Bacon protects construction wages, but adds costs for programs like CHIPS

The rationale for Davis-Bacon is straightforward: it’s a longstanding policy of the federal government to ensure that construction workers get paid a strong wage on federally supported projects. That’s a reasonable objective in its own right, independent of what CHIPS was trying to achieve. And there was some collateral benefit for CHIPS too: prevailing wage can help attract construction workers to the job (though usually by pulling workers away from other projects in the region).

That said, the policy rationale for Davis-Bacon is distinct from that of CHIPS, and compliance came at a cost. Those costs compound: first, some projects become more expensive to build; second, the government absorbs higher costs through its incentives; and third, higher incentives for individual projects means less overall investment gets unlocked.

Project-level costs

I don’t have program-wide data for the costs that Davis-Bacon added to CHIPS projects, and the impact varied significantly by locality and project type. As a ballpark, for some of our leading-edge fabs — which cost $20-25 billion to build — the Davis-Bacon premium was in the hundreds of millions. The premium was generally a smaller share of total capital expenditures for leading-edge fabs, since a larger share of overall investment goes to equipment rather than construction labor. For projects more labor-intensive relative to their total cost, such as smaller supply chain facilities, the share could be higher. But the cost impact depends on locality and project specifics. It also depends on labor market conditions: if construction demand pushes wages up, Davis-Bacon becomes less of a binding constraint.

Program-level costs

The core premise of CHIPS incentives was to close the cost gap between building in the United States and in Asia. To achieve that, we designed our NOFO to provide just enough incentive to make each project’s returns meet the company’s cost of capital. That means an increase in construction costs leaves the government with a choice whether to increase the subsidy to offset the additional cost. Absent a higher subsidy, the firm might limit their investment plans or even decide to pursue its project in another country.

For programs like CHIPS, where the government funds only a small share of total project costs, the impact of Davis-Bacon on program efficiency can be significant. Imagine a $100 project with a $10 incentive — if project costs rise by 1% to account for Davis-Bacon requirements, you need an $11 incentive to reach the same economic outcome. That’s a 1% increase in project costs but a 10% increase in program costs.

Impact on overall investment

Those per-project costs then limit the overall size of the portfolio. The promise of programs like CHIPS is that by providing a relatively small incentive, the government can catalyze large amounts of total investment. A $100 program averaging a 10% incentive will catalyze $1,000 in total investment: government grants cover 10% of costs, and a mix of private capital, tax credits, and state and local incentives cover the rest.

But the program’s impact is very sensitive to the program-wide funding ratio. If the same program needs to average an 11% incentive rather than 10% to compensate for a Davis-Bacon premium, the government grants are now covering a larger share of the individual projects, so the same $100 only catalyzes around $900. Applied to a multi-billion dollar program like CHIPS, the impact can scale quickly.

Implementation challenges

Notwithstanding the added cost to projects, Davis-Bacon generated relatively little friction in the CHIPS program’s early months — far less than NEPA did. Companies understood it was in the law, incorporated the cost impact into their funding requests, and we accounted for it in our underwriting and negotiations. It was a cost, but appeared to be a manageable one, at least for our major applicants.

What created more friction in our negotiations were the policy and administrative challenges of implementing the prevailing wage requirement. While not every company faced all of these challenges — many negotiations proceeded without trouble around Davis-Bacon — the law’s requirements created significant complications for deals representing more than half the program’s funds. Programs like CHIPS don’t operate on averages. Every project had a national security rationale, and losing any one of them was a bad outcome we worked hard to avoid.

Four challenges proved hardest to navigate: retroactive pay, paying company staff, determining wage levels, and enforcing weekly pay schedules.

1. Retroactive pay

When federal funding arrives on a project already under construction, Davis-Bacon regulations require that recipients apply prevailing wages retroactively. This proved to be our most significant challenge.

Some context helps illustrate the implications. Starting in 2020, as Congress considered legislation to incentivize construction, firms such as TSMC, Intel (in Arizona, Ohio, Oregon, and New Mexico), Samsung, and others began announcing major domestic semiconductor investments. The NDAA authorized CHIPS without funding at the end of that year. The companies began breaking ground in 2021 and accelerated construction investment through and beyond the passage of CHIPS funding in July 2022. By the time we were negotiating term sheets with leading-edge applicants, several fabs had made meaningful construction progress. Because the early stages of construction are more labor-intensive than later stages (which focus on equipment installation), a significant share of spending on construction labor for these fabs had already gone out the door.

The reality of these ongoing construction projects informed how we designed the program in 2023. And, after some internal deliberations, we decided it was necessary to fund projects already under construction. The US government had given no indication that ongoing construction would be ineligible for CHIPS incentives, and both the Trump and Biden administrations had actively encouraged new construction. Moreover, we didn’t want to create perverse incentives, either for CHIPS investments or future programs: if companies learned that breaking ground before federal funding was awarded would disqualify them from receiving it, rational actors would stop building and wait for the check — exactly the opposite of the investment momentum industrial policy should try to generate. Significant optionality also remained even for projects well into construction, as it is common for semiconductor companies to pause after completing a fab’s shell before deciding to spend $10 billion or more on specialized equipment; funding these projects would help ensure their completion.

Most importantly, the companies desperately wanted funding for ongoing construction, and their boards expected it. This gave us leverage in our negotiations, and we settled on a strategy of funding existing projects as part of a broader negotiation to secure the maximum overall investment possible. This strategy served us remarkably well — we received leading-edge commitments that meaningfully exceeded market expectations.²

The requirement for retroactive compliance is an understandable anti-abuse provision — it aims to prevent recipients from purposefully attaching federal funds to the end of a project to avoid coverage on work already completed. That logic may make sense in many federal construction contexts. But for CHIPS, private companies had been making investments measured in the tens of billions, years before federal awards would be awarded, on terms that weren’t yet determined, and through a competitive process with no guaranteed outcome. It was hard to justify imposing retroactive Davis-Bacon compliance costs under those circumstances.

The financial and operational implications of retroactive application were significant. A leading-edge project might have 10,000–12,000 construction workers on site at peak, with a rotating workforce totaling perhaps 30,000 individuals over the project’s life. Working through 300-plus subcontractors across multiple tiers, retroactive application could require identifying wages paid to 20,000 workers who had already cycled off the project, determining what each worker should have been paid under Davis-Bacon, and paying the difference — resulting in hundreds of millions of dollars in additional cost. Apprentices posed their own challenge: under Davis-Bacon, they may be paid less than journeyman rates (usually around 70%), but only if enrolled in apprenticeship programs registered with DOL. If pre-award contractors had used unregistered apprentices, retroactive application would entitle those workers to backpay at full journeyman rates.

For some of our applicants, the challenge of retroactive application was so significant that they would not sign an award until we were able to eliminate or mitigate the administrative and financial burden. But addressing these issues required working through DOL — which brought its own set of challenges, as I’ll describe below.

2. Applying Davis-Bacon to company employees

Davis-Bacon applies to “construction activities” regardless of whether they are performed by external contractors or a company’s own employees. This is, again, an understandable anti-evasion measure, but it created serious problems for at least one applicant in our pipeline. This smaller company makes chips critical to our automotive industry and defense industrial base, and was proposing a project to expand domestic production rather than rely on foundries in Taiwan. Unlike our greenfield mega-projects, this project would expand and modernize existing facilities. And rather than rely exclusively on outside contractors, the company planned to use a mix of contractors and its own workforce, an approach enabled by the fact that it had trained its fab technicians to both service equipment in operating fabs and perform various construction tasks — electrical work one day, plumbing the next, and specialized cleanroom installation the day after.

But applying Davis-Bacon to company employees rather than contractors proved to be a big hurdle. Davis-Bacon required tracking every hour each employee spent on covered construction activities — by trade classification, with a different prevailing wage applying to each — and paying a wage differential for that portion of their work as distinct from fab operations work or non-Davis-Bacon construction work. The company also relied heavily on profit-sharing (where a portion of employees’ pay was tied to the firm’s profits) and Davis-Bacon’s guaranteed wage floor was difficult to reconcile with a pay structure that was inherently variable. Moreover, Davis-Bacon has a statutory requirement to pay wages weekly, meaning the company would need to change its payroll systems for a portion of the pay for a portion of its workforce.

These hurdles were daunting, but the challenge wasn’t just operational; it was also cultural. Differential wages would create inequities within the workforce, with similarly situated employees getting paid different amounts, risking internal grievance. This problem was compounded by the retroactivity issue described above — raising the prospect of a “Davis-Bacon Christmas” where some employees received checks and others didn’t for reasons the company’s management couldn’t defend.

After several months working through these issues, the company ultimately decided it couldn’t proceed with the award as originally scoped. We then spent another few months restructuring the project around work that would be performed entirely by outside contractors in an effort to salvage the key national security benefits of the deal. By the time we had a workable path, market conditions had shifted, management had changed, and the deal was lost. The Davis-Bacon implementation challenges had probably cost us half a year, and, as our CIO Todd Fisher used to say, time kills all deals.

3. Determining applicable wage rates

A more mundane but still significant challenge was determining which wage rates applied to which work. The construction tasks involved in building and modernizing semiconductor fabs don’t always map cleanly onto DOL’s Davis-Bacon classifications, so applicants must go through a construction plan line-by-line to determine which rate applies to which activity. In traditional Davis-Bacon contexts this is less burdensome because contractors know the system and have processes in place. But semiconductor construction was a novel application, and all of our applicants — and most of their contractors — were navigating Davis-Bacon for the first time.

For large recipients, the administrative cost of this work was real but manageable relative to project scale: they could hire consultants, procure software systems, and build internal compliance capacity. For smaller companies, it was a more meaningful burden. To help, the CHIPS team ran dedicated Davis-Bacon workshops with applicants. These workshops typically entailed a few hours on a Zoom call with the company’s construction team, our investment team, and our internal Davis-Bacon team, working through large spreadsheets detailing planned construction activity to categorize that activity by Davis-Bacon classification.

Once awards were issued and construction was underway, a few specific issues made rate determination challenging. The county-by-county variation in DOL’s wage schedules is driven by the uneven survey data underlying them, which are based on voluntary surveys and can be sparse. As a result, the number of published classifications varies widely: some localities have detailed schedules covering dozens of trades; others have only a handful. When semiconductor construction involves work that doesn’t match any existing classification in a locality (which is commonly the case), the company must submit a “conformance” request. This process often results in required wage rates that seem disconnected from the local labor market. Moreover, because wage determination takes time (say, six to nine months), it can result in retroactive payment obligations and create uncertainty about the overall price tag for construction for projects already underway.

4. Weekly pay

The requirement for weekly pay can be a challenge too. Today, most employers pay on a biweekly basis, so weekly pay is an operational requirement that most companies outside the traditional federal construction ecosystem had never encountered. For our applicants, adapting payroll systems was a real but generally manageable compliance task. It created bigger challenges elsewhere: at DOE’s Loan Programs Office, several applicants negotiating large energy loans found the administrative challenge of weekly pay to be much more troublesome. More significantly, they had biweekly pay schedules written into existing union agreements that couldn’t be easily reopened. By my understanding, resolving this consumed months of senior-level attention, and in some cases the issues were never fully resolved.

On the whole, for our largest projects, none of these challenges stopped, or even meaningfully delayed, construction. Projects advanced, companies adapted, and compliance systems were built. The cost was measured in management bandwidth, negotiating friction, and program funds — not in abandoned megafabs. The one deal we lost was a smaller project, and Davis-Bacon was one of several contributing factors. My argument here is not that the law made CHIPS fail, but that it made CHIPS harder and more expensive than it needed to be. For smaller, more marginal projects, those costs can be decisive.

The challenge of split jurisdiction

Davis-Bacon’s requirements fall into a few categories: some are fixed in statute, some in DOL regulation, and some allow for more flexibility through waivers or other administrative action. That administrative flexibility was ultimately in the hands of DOL, which has final enforcement authority over Davis-Bacon. This meant substantial interaction between Commerce and DOL over the course of the program.

On some issues we got resolutions and on others we didn’t, in which case the company had to decide between accepting the additional burden or declining the award and investing elsewhere. In the case of retroactivity, we sought a programmatic waiver, but at the time DOL did not believe that a programmatic waiver was justified under their regulations and precedents. We looked for a path through on a case-by-case basis, with mixed results. Overall, we muddled through.

This was frustrating to me and my team, but I lay no blame at the feet of the public servants at DOL. It’s their job to administer Davis-Bacon broadly, which applies to thousands of programs and hundreds of billions of dollars in construction, and granting flexibility for one new program creates precedent. The tension is structural: denying flexibility had implications we’d have to live with at CHIPS; granting it had implications DOL would have to live with for Davis-Bacon for years to come. When two agencies with different mandates are both responsible for a program’s execution, the result is unlikely to be optimal for either’s policy objective.

Recommendations

Based on CHIPS’s experience with Davis-Bacon, I offer four recommendations.

First, policymakers in Congress should carefully underwrite the fiscal costs of Davis-Bacon when weighing whether to apply it to new programs. For discretionary, partial-funding programs like CHIPS, the cost impact scales in ways that don’t arise in typical government programs: if federal funds cover only 10% of project costs, a 1% increase in total construction costs requires a 10% increase in the grant to maintain the same economic outcome for the project. That impact will vary depending on local labor markets, the makeup of construction costs, and macroeconomic conditions — but policymakers should go in with eyes open.

Second, in determining whether to include Davis-Bacon in a new program, Congress should recognize that implementation friction is cumulative. We weren’t just dealing with the challenge of Davis-Bacon — we were navigating NEPA, national security guardrails, federal interest requirements, the Paperwork Reduction Act, byzantine procurement rules, and a slew of other statutory dictates, all alongside the core commercial challenge of negotiating some of the largest industrial investments in American history. No single requirement broke the program. But the accumulation of legal and compliance requirements was a problem, and Davis-Bacon was among the heaviest weights in that stack. When designing industrial policy programs, Congress should consider the sum of compliance burdens, rather than assess each requirement in isolation.

Third, wherever Davis-Bacon applies to novel programs, implementing agencies need significantly more administrative flexibility than the current framework provides. Most urgent is the retroactivity requirement: Congress should either specify that Davis-Bacon compliance is prospective from the date of award, or create a clear statutory pathway for project-level or programmatic waivers. More broadly, the current split-jurisdiction model — in which DOL sets and enforces compliance standards for programs it isn’t responsible for delivering — creates structural misalignment that no amount of goodwill can fully overcome. Implementing agencies need a meaningful institutional role in adapting Davis-Bacon requirements to the programs they are accountable for executing.

Fourth, implementation teams cannot treat Davis-Bacon as an afterthought. It is a central implementation challenge that requires investment in staffing, internal capacity building, and applicant education from the very start of a program. We were underprepared — that cost us time and credibility with applicants, and it may have lost us at least one deal. Reducing reliance on Asia for chipmaking is a complicated undertaking; so is regulating construction wages. Putting the two together proved very challenging, and future implementers should plan accordingly.

I’ve spent most of my career in government — I’ve never had a private sector job aside from one summer in law school. At CHIPS I spent hundreds of hours negotiating with industry, and got used to hearing a litany of complaints from companies as part of those negotiations. But over time you learn what is posturing and what is real. The Davis-Bacon challenges described in this piece were legitimate, and both policymakers and implementers should take them seriously.

1. Davis-Bacon came up so often that one of our leading negotiators began joking that he had named his dog…Davis Bacon.

2. For more detail on the success of CHIPS incentives in catalyzing new leading-edge investment, see “The CHIPS Program Office Vision for Success: Two Years Later.”