How to Annualize Fringe Benefit Costs Under Davis-Bacon

To annualize fringe benefits under Davis-Bacon, take the total annual cost of a fringe benefit contribution for one employee and divide it by every hour that employee worked during the same period on all projects, government and private combined. The result, set by 29 CFR § 5.25, is the hourly credit you can claim toward the prevailing wage fringe requirement.¹ The rule exists so contractors can’t charge a full year’s insurance premium against a short stretch of federal work; getting the math wrong can produce back-wage liability and, in serious cases, a three-year debarment from federal contracts.

The Formula

The calculation is straight division:

Annual cost of the benefit ÷ Total hours worked in the same period = Hourly fringe credit

Say you pay $4,800 a year in health insurance premiums for a carpenter who logs 2,000 total hours across all jobs. The annualized credit is $4,800 ÷ 2,000 = $2.40 per hour. Add a $200 life insurance policy for the same carpenter and you get another $200 ÷ 2,000 = $0.10, for a combined fringe credit of $2.50 per hour.²

If the wage determination on your job calls for $10.00 per hour in fringe, that $2.50 covers part of the obligation. The remaining $7.50 has to come from additional qualifying contributions or be paid to the worker as cash wages on each paycheck.³

Run the Numbers Per Worker

The regulation requires the calculation for each employee individually.¹ If contribution amounts vary by worker or employees pick different insurance tiers, the credit has to be worked out separately for each person. A laborer on family-tier coverage will have a different numerator than one on a single-employee plan, even at identical hours. Averaging across a crew is where contractors get caught during audits.

The Time Period and What Counts as Hours

The regulation lets you annualize over the year or a shorter time period the cost is attributable to.¹ That matters when a plan doesn’t run a full twelve months, or when a worker was hired mid-year. Whatever window you use, the numerator (the contribution) and the denominator (the hours) must cover the same period.

The denominator is “total number of hours worked” on both DBRA-covered and private jobs during that period, meaning actual hours on the job. The regulation does not explicitly address whether paid leave hours count. If you provide significant vacation, holiday, or sick pay, confirm the treatment with the Wage and Hour Division or counsel before locking in your calculation.

What You Can Put in the Numerator

Only “bona fide” fringe benefits earn credit. Qualifying categories include:⁴

Medical, hospital, dental, and vision coverage
Pensions and defined contribution plans such as 401(k) accounts
Life, disability, sickness, and accident insurance
Vacation and holiday pay
Costs of registered apprenticeship programs, including tuition, books, and materials
Unemployment benefits and similar benefits not already required by other law

That last condition catches people. If a benefit is already mandated by federal, state, or local law, you can’t also count it as a Davis-Bacon fringe credit. Workers’ compensation, required by state law nearly everywhere, doesn’t qualify.

Funded plans, where contributions go irrevocably to an independent trustee unaffiliated with the contractor, are the cleanest path.⁵ Unfunded self-insured plans require prior approval from the Secretary of Labor and must be legally enforceable, financially responsible, communicated in writing to workers, and reasonably expected to deliver the promised benefits.⁶ Approval requests go to the Division of Government Contracts Enforcement at unfunded@dol.gov.

A benefit also has to be continuously available to the employee, not just switched on during federal work. Benefits provided only during government projects fail the bona fide test and can’t be annualized.

Benefits That Skip Annualization

Two categories of benefits are excepted from the annualization requirement.

Qualifying Defined Contribution Pension Plans

Contributions to a defined contribution pension plan are automatically excepted, with no request needed, if the plan provides immediate participation and vesting within the first 500 hours worked.⁷ This is the most commonly used exception. If you contribute $3.00 per hour to a 401(k) plan meeting those vesting rules, you can claim the full $3.00 as a fringe credit without spreading it across annual hours.

Non-Continuous Benefits

Other benefits can be excepted if they meet two conditions: the benefit isn’t continuous in nature (not available without penalty throughout the year), and it doesn’t compensate for both private and DBRA-covered work. The second prong is satisfied if any benefits attributable to private work periods are wholly paid for by compensation from private work.¹ Unlike the pension exception, this one requires a written request to the WHD Administrator, sent to DBAannualization@dol.gov or mailed to the Director, Division of Government Contracts Enforcement.

Administrative Costs: Creditable and Not

Third-party administrative costs directly related to delivering benefits, such as an insurance carrier’s claims-processing fees, are creditable. The contractor’s own internal costs for managing benefits are not.⁸

Non-creditable internal costs include filling out claim forms, paying and tracking carrier invoices, updating personnel records when workers come or go, sending enrollment lists, distributing tax documents, and any recordkeeping for Davis-Bacon fringe compliance itself. Hiring a third party to handle those tasks doesn’t convert them into creditable costs; they remain ordinary business expenses.

Reporting the Credit on Certified Payroll

Contractors report prevailing wage compliance on the WH-347 Certified Payroll form, which the Department of Labor provides for the purpose.⁹ The form is technically optional, but it captures information contractors are required to keep, and most contracting agencies expect it. You specify whether fringe was paid as cash or contributed to third-party plans, and enter the hourly fringe credit for each worker.

Payrolls are submitted weekly with a signed statement of compliance. Overstated fringe credits are among the most common audit findings, so the number on the form has to match the annualization math in your files.

Records to Keep

Keep all payroll and basic employment records for at least three years after all work on the prime contract is completed.¹⁰ That includes payroll registers, time records, benefit plan documents, insurance invoices, and the annualization calculations themselves. Keep the supporting math, not just the final hourly figure. If an investigator asks how you arrived at $2.50, you need both the annual contribution and the total hours you divided by. Federal Acquisition Regulation provisions may impose longer retention periods for specific records, such as four years for payroll registers, but the three-year floor in 29 CFR 5.5 applies to Davis-Bacon records directly.

What Happens If the Math Is Wrong

Underpayments caught during an audit have real consequences. The contracting agency can withhold contract payments to cover unpaid wages.¹¹ Beyond back wages, violations can bring:

Contract termination, with the contractor liable for the government’s cost to finish the work
Debarment from all federal contracts for three years, for contractors who disregard their obligations to employees¹²
Debarment for retaliation against a worker who raises a prevailing wage complaint, on its own grounds

WHD findings can be challenged before an Administrative Law Judge, with further appeal available. The debarment list is public, and the appeal process is long. Most contractors would rather get the annualization right the first time.

1
eCFR. 29 CFR 5.25 – Rate of Contribution or Cost for Fringe Benefits
2
U.S. Department of Labor. Davis-Bacon Compliance Principles
3
U.S. Department of Labor. Fact Sheet 66E – Compliance with Fringe Benefit Requirements
4
U.S. Department of Labor. 29 CFR 5.29 – Bona Fide Fringe Benefits
5
eCFR. 29 CFR Part 5 Subpart B – Interpretation of the Fringe Benefits Provisions of the Davis-Bacon Act
6
eCFR. 29 CFR 5.28 – Unfunded Plans
7
eCFR. 29 CFR 5.25 – Rate of Contribution or Cost for Fringe Benefits
8
eCFR. 29 CFR 5.33 – Administrative Expenses of a Contractor or Subcontractor
9
U.S. Department of Labor. Instructions for Completing Davis-Bacon and Related Acts Weekly Certified Payroll Form WH-347
10
eCFR. 29 CFR 5.5 – Contract Provisions and Related Matters
11
U.S. Department of Labor. Wage and Hour Division Fact Sheet 66 – The Davis-Bacon and Related Acts
12
Office of the Law Revision Counsel. 40 USC 3144 – Authority of Comptroller General