3 Reasons Why Cash in Lieu of Benefits is a Bad Idea for Government Contractors
Posted in: Employee Benefits
Government contractors providing service work are required by government regulations to either provide fringe benefits in an amount specified in the contract, or pay the designated fringe amounts in cash to their employees, otherwise known as “cash in lieu of benefits”. Service contractors who try to utilize a traditional benefit plan instead of approved SCA health plans to meet specific fringe requirements quickly realize that they have to spend an inordinate amount of time administering the benefits for this segment of their employee population in order to stay compliant with federal regulations.
After more than 10 years working with government contractors, I have found there are three main reasons why cash in lieu of benefits puts you as a government contractor at a competitive disadvantage.
- Competitive disadvantage on labor costs: Contractors who opt to pay cash in lieu of benefits are at a competitive disadvantage on their labor costs because they incur additional expenses in the form of payroll burden. The additional cash workers get in their pay drives up costs for employers in the form of applicable payroll taxes and payroll related expenses such as FICA, FUTA, SUI and workers’ compensation premiums. Contractors actually end up losing money this way. Below is an example of a cost saving analysis that illustrates the savings as a result of providing benefits versus paying the fringe in cash:
| Fringe Rate Paid in Cash | Fringe Rate Paid Into Benefit Plan | |
| Cash Wages | $21.60 | $17.00 |
| Health & Welfare Benefits | $0.00 | $4.60 |
| Total Required Compensation | ||
| Estimated Bill Rate | $3.24 | $2.55 |
| (FICA, workers’ compensation premiums, unemployment taxes, public liability programs) | ||
| Estimated Contract Bid | $24.84 | $24.15 |
| Contract Savings per Year | $0.00 | $71,760.00 |
| Five-Year Contract Savings | $0.00 | $358,800.00 |
| Note: Calculations are based on a 15% indirect/overhead rate and 50 employees | ||
- Competitive disadvantage to win contracts: If contractors increase bid pricing to offset more expensive labor costs, contracts become less competitive, which can result in lost opportunities.
- Competitive disadvantage on time management: The contractor will spend an inordinate amount of time accounting for every hour and administering cash in lieu of benefits for the government contract employee population in order to ensure compliance with the Department of Labor regulations.
What is the solution?
A good way to become more competitive quickly for government service contracts is to contribute the designated fringe rate to a bona fide benefit plan, rather than pay cash in lieu of benefits to your government contract employees.
One way to ease the administrative burden and cost associated with tracking and documenting compliance for these laws and regulations is to consider an employee benefit plan that is specifically designed for employees who are subject to the Davis Bacon Act (DBA), Service Contract Act (SCA), State Prevailing Wage Laws or Living Wage Ordinances and outsourcing the fringe benefits administration to a knowledgeable third party. These plans give you the ability to offer your employees competitive benefits that fit within the designated hourly rate.
