Tag Archives: prevailing wages

Impact of Prevailing Wages

ISPs have been complaining that the BEAD grant rules are adding a lot of cost to building broadband networks. There are requirements like needing letters of credit and environmental studies that will add cost compared to projects funded with other grant projects.

One of the issues that is adding the most cost to BEAD-funded networks is the requirement that all construction must be done using prevailing wages. That means wages that are paid at Davis-Bacon wage levels – to include benefits. The Davis-Bacon Act was passed in 1931 and requires that workers used for federal public work projects must be paid a prevailing wage rate. Some states also require Davis-Bacon labor rates for projects constructed using State grant funding.

Davis-Bacon wages are calculated by the U.S. Department of Labor. The DOL surveys existing wages regionally for a long list of job titles and publishes the results. Since the calculations are done regionally, and since most federal projects are done in or near cities, the prevailing wages tend to reflect the wages and benefits paid in urban areas.

Davis-Bacon prevailing wages are almost always higher than the labor rates paid by the contractors that construct rural fiber networks. The contractors that build fiber in rural areas typically specialize in rural work. Since the cost of living is lower in most rural areas, the wages tend to be lower than the Davis-Bacon prevailing wages.

This is somewhat of a regional issue. I’ve worked with projects in a few parts of the country where contractors are already paying prevailing wages or higher. But I’ve also seen cases where fiber construction contractors were paying at rates as much as 30% below the prevailing wage.

Following is an example of an actual fiber construction project priced at market rates (what contractors are paying today) and Davis-Bacon wages. The two network components most affected by the prevailing wage issue are fiber and fiber drops.

Market Prevailing
Labor Rates Labor Rates Difference
Fiber

$19,900,000

$22,000,000

$  2,100,000
Drops

$  1,500,000

 $  1,700,000

$     200,000
Total

$21,400,000

 $23,700,000

$  2,300,000
At 75% Grant
  BEAD Grant $16,050,000 $17,775,000 $  1,725,000
  Matching $  5,350,000 $  5,925,000 $     575,000
Total $21,400,000 $23,700,000 $  2,300.000

If this project was funded by a BEAD grant, the cost of the network would be 11% higher than funding with a grant that doesn’t require prevailing wages. This not only increases the amount of BEAD grant that will be requested, but it also adds to the matching funding that must be provided by the ISP. In this case, if this project was funded by a BEAD grant, the prevailing wage would add $1,725,000 to the size of the requested grant – if the request was for 75% grant funding. This also adds $575,000 to the matching funds that must be provided by the ISP.

One of the problems with driving up the cost of the project is that it might make the project unfeasible. There is not much margin in rural grant projects even if paying market wage rates, and the extra matching funds might be enough to make an ISP decide not to pursue the grant or the project.

ISPs are clearly unhappy about this requirement because they feel like they are paying more for a project than what they could contract for without this rule. They have willing contractors willing to build the project at market labor rates. Having to come up with an additional $575,000 out of pocket feels like a penalty.

Another issue that might compound problems is that some rural contractors aren’t interested in projects at the prevailing wages. They are uncomfortable having some crews being prevailing wages and others making market wages. That is an uncomfortable position for an employer.

To make matters more confusing, a lot of ISPs build the fiber drops using existing staff. They are leery about paying more for the staff building grant-funded drops than for other drops. This is both an accounting nightmare and an HR problem with staff.

It’s easy to understand why the Davis-Bacon wage rules are in place. The IIJA project that funded the BEAD program is basically a jobs bill, and the whole point of the program is to get more money into the pocket of workers. But the real-life consequence of the policy is higher costs and the possibility that grant projects will be too expensive to pursue.

Federal Funding for Broadband Infrastructure

There is a lot of speculation that we might be seeing some money aimed at broadband due to the budget passed by Congress on February 9. That bill contains $20 billion for infrastructure spending spread evenly in fiscal years 2018 and 2019. On a floor speech as part of the vote, Senate Majority Leader Charles Schumer says the money will go towards “existing projects for water and energy infrastructure as well as expanding broadband to rural regions and improving surface transportation”.

Any broadband money that comes out of this funding will have to be spent quickly by the government. The fiscal year 2018 is already almost half over and ends on September 30 of this year. It’s likely that any grants coming out of such money would have to awarded before that September date to count as spending in this fiscal year. In order to move that fast I’m guessing the government is going to have to take shortcuts and use processes already in place. That probably means using the BTOP grant forms and processes again.

The short time frame for any of this funding also likely means that only ‘shovel-ready’ projects will be considered. But that aligns with statements made by the administration last year when talking about infrastructure projects. Anybody hoping to go after such grants better already have an engineered project in mind.

Assuming that funding follows the BTOP funding program, there were a few issues in those grants that ought to be kept in mind:

  • The grants favored areas that had little or no broadband. This is going to be more muddled now since a lot of rural America is seeing, or soon will be seeing broadband upgrades from the CAF II and A-CAM programs funded by the FCC. It’s doubtful that the big telcos are updating the national databases for these upgrades on a timely basis, so expect mismatches and challenges from them if somebody tries to get funding for an area that’s just been upgraded.
  • The BTOP grants required that anybody that wanted funding had to already have the matching funds in place. There were some notable BTOP failures from winners who didn’t actually have the funding ready, and I speculate tighter restrictions this time.
  • There were several requirements that added a lot of cost to BTOP programs – requirement to pay prevailing wages along with environmental and historic preservation reviews. There has been talk in Congress about eliminating some of these requirements, and hopefully that would happen before any funding. But that will take Congressional action soon.
  • The BTOP process surprisingly awarded a number of projects to start-up companies. Some of these start-ups have struggled and a few failed and it will be interesting to see if they make it harder for start-ups. The BTOP process also made it difficult, but not impossible for local governments to get the funding.

If there is going to be any money allocated for broadband, it’s going to have to be announced soon and one would think that deadline to ask for this funding is going to have to come soon – in very early summer at the latest.

The alternative to a federal grant program would be to award the $20 billion as block grants to states. If that happens it might be bad news for rural broadband. There are only a handful of states that have created state broadband grant programs. Any state with an existing program could easily shuttle some of this funding into broadband.

States without existing broadband programs will have a harder time. Most states will need legislative approval to create a broadband grant program and would also have to create the mechanisms for reviewing and approving these grants – a process that we’ve seen take a year in the few states that are already doing this.

It’s almost been two weeks since the budget was passed and I’ve read nothing about how the $20 billion will be used. Regardless of the path chosen, if any of this money is going to go to rural broadband we need to know how it will work soon, or else the opportunity for using the money this year will likely be lost.

 

Big Government and Broadband

Capitol_domeOne of the platforms of Hillary Clinton’s campaign is to create a 5-year $275 billion infrastructure plan that would, among other things, foster faster broadband for rural America. The plan would also pay for crumbling roads and bridges and other infrastructure. I’ve seen estimates that as a country we have a several trillion dollar infrastructure deficit, and so this plan would be the proverbial drop in the bucket towards bringing our infrastructure back to where it needs to be. But it’s a start and is better than doing nothing.

This plan leads me to speculate on the role that big government might be able to play in solving our broadband needs. What might the US government do with billions of dollars aimed at improving broadband?

We’ve seen two previous big federal broadband programs and the results have not been very good. First was the billions that were part of the broadband stimulus package. This money was used mostly to create middle mile fiber – that is fiber that stretches between communities. Some of that fiber has been used to get better broadband to the last mile, but the vast majority of that investment has not benefitted a whole lot of people other than the cellular companies who use that fiber to get cheaper access to cell towers.

The stimulus money also put a lot of emphasis on getting fiber to ‘anchor institutions’ which it defined as schools, libraries, city halls, and other government institutions. So we ended up with rural fiber networks that serve only a handful of these anchor institutions, but not to the neighborhoods surrounding these locations. As I’ve written many times, bringing fiber only to anchor institutions is actually a disincentive to get fiber everywhere because it removes these large bandwidth customers from being potential customers of locally built fiber networks.

To give the federal government a little credit, the stimulus money popped onto the scene with no notice and there was no plan in place or even people in place to review the various grant proposals. There were some last mile networks financed from the stimulus money and I’m sure those communities are thrilled to have been the lucky few that benefitted from the many billions in spending.

More recently we have seen the FCC throw billions of dollars at the large telcos with the CAF II funding. They have given Frontier, AT&T, and CenturyLink billions of dollars to improve rural DSL broadband to 10 Mbps. And gave them six years to get it done. This is such a bad idea on so many levels that you’ll have to go and read my other rants on this. But this is mostly the equivalent of pouring money onto the ground and it going to bring no real broadband to anybody. This is a classic case of a government boondoggle that spends a lot of money and accomplishes almost nothing useful.

So what might the feds do if they were to give out more billions? One thing they will probably do is to overspend on broadband like was done with the stimulus money. Those grants included rules that inflated the cost of building fiber. The companies taking the money had to do expensive environmental and historical studies, something that makes no sense for fiber that is placed into pre-existing road rights-of-ways. And they required the contractors building the networks to use prevailing wages, which mostly meant paying large city wages for projects that could have normally been done in rural areas for a lot less. Altogether these extra requirements probably added 15% – 20% to the cost of the projects.

What is scary is that in order to shovel the money out the door quickly the federal government might either give the money to the incumbents as corporate welfare or else end up backing projects like more middle mile that largely build fiber to nowhere.

The most cost effective way to use federal money would be to give it to local groups in some sort of matching arrangement. This would stretch the federal money the farthest and would also enable communities to find the best local broadband solution. Some communities might tackle this directly using bond money for the match, while many others would seek out public/private partnerships with local carriers. And the small telcos and coops around the country could use this money to extend their fiber networks – many of them have already showed us how to bring fiber to remote places.

I have no idea if there will even be another big pile of federal money aimed at broadband – it’s a long way from a campaign platform to reality. But if this does happen I hope that this time they have a better plan that would use the money to build last mile fiber to rural communities – the only permanent solution to closing the rural broadband gap. I hope they take the time to listen to the industry and this time that they do it right – or at least better.