The Hidden Costs of Accepting Government Money

Numismatics_and_Notaphily_iconThere are often strings attached to taking government money that must be considered before accepting such money. Some of the gotchas include having to comply with prevailing wage rules, environmental reviews and Historical Preservation Act rules.

Let me start with prevailing wages. Any company that works on a government infrastructure project is required to comply with prevailing wages. Prevailing wages are hourly rates that are created by government regulatory agencies to represent what workers and laborers of specific types must be paid in specific geographic areas. The original concept behind the prevailing wage laws was to not let public construction projects destabilize a local construction industry. Basically the government didn’t want laborers shipped into an area who would work for much lower wages than the people who lived in the area.

This sounds good in concept, but in practice, in many states the prevailing wages are set considerably higher than what local laborers are paid. In fact, in many states the prevailing wages are suspiciously close to urban union wages. And so the opposite of what the government was protecting against often happens and contractors working on government projects end up having to pay more for labor than what people in an area will willingly work for, and this can greatly inflate the cost of government projects.

The procedures of complying with prevailing wages for telecom projects is complicated. Typically the prevailing wages are published by job titles and these titles rarely line up well with the actual workers that are hired for a fiber project. And so a construction company must guess how to slot each position into one of the pre-defined wage categories and then hope that they guessed right, since their decision often doesn’t get audited until after the project has been built.

In the telecom industry there are only a few hundred construction companies around the country that build fiber networks. It’s a very specialized field and the workers are highly trained. Nobody is going to hire somebody who’s inexperienced off the street to be a cable splicer or to operate a cable plow. The fiber construction business has developed a good equilibrium between supply and demand. Construction companies can’t hire experienced workers if they don’t pay enough, and so their competitive prices include the kind of wages that cable splicers and others are willing to work for. It’s an equilibrium that the industry seems happy with.

Probably the biggest concern is that even when you take only a small amount of government money, the prevailing wages might apply to the total project. The prevailing wage doesn’t have to be very much higher than the actual wages for it to cost you money to take ‘free’ government money.

Another requirement that often comes with government money is that you have to undertake an environmental study. This means hiring somebody to certify that your project is not going to disturb endangered species, interfere with wetlands or cause pollution of the environment. But laying fiber doesn’t affect any of these items because fiber is almost always built in public right-of-way along existing roads. When the state first built the road they always set aside part of the right-of-way for utilities to build in the future. This means that fiber is placed into soil that was already excavated when the road was built. So an environmental review makes no sense and I’ve never heard of a commercial fiber project that did an environmental review when building in a public right-of-way.

There are similar issues with compliance with the Historic Preservation Act. These rules are designed to prevent construction from disturbing buildings that are designated as historic properties or to protect against disturbing archeological sites. Again, this doesn’t make sense when fiber is constructed in public rights-of-way along existing roads which were previously excavated when the road was first constructed. There are times when commercial companies undertake these reviews, such as when they build fiber across country away from roads or if they are going to build on an Indian reservation. But no commercial contractor would ever consider such a review if they are building along public roadways.

The primary problem with these requirements are that they add both cost and time to a project. The prevailing wage issue can sometimes drastically increase the cost of a project if there is a big difference between actual wages and prevailing wages. And the other reviews can cost hundreds of thousands of unnecessary dollars, but worse can add a big delay at the start of a project, which by definition makes a project more expensive.

So be careful before taking federal or state monies that you first read the fine print. I know of a number of projects that were part of the stimulus grants a few years ago where awardee returned the grant money once they understood the real cost of compliance. Sometimes government money costs more than its worth.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s