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.

PSA Pro Tip

Leverage Your Commercial Insurance Program

Do your due diligence and make sure you’re getting the most out of your commercial insurance program. We’ve put together the key things you need to consider when it comes to the management of your insurance.

Some of the advantages of this option are:

  • As a government contractor you can easily obtain a SCA health plan with a cost that meets the designated fringe rate (currently $4.54 per hour).
  • Fringe accounting reports are prepared by a third-party who can provide information directly to the Department of Labor (DOL) in the event of a DOL inquiry.
  • Benefit plan is made readily available in the event you opt to form a joint venture company.
  • You gain flexibility to offer employee benefit plans that meet the specific needs of employees in different geographic locations.
  • You do not have to alter your corporate benefit plan to meet the requirements of a Collective Bargaining Agreement (CBA).
  • Benefits administration systems do not have to be modified to accommodate the tracking that is required on individual cost contracts.

For more information on a benefit plan that is offered at the health and welfare benefit that is also compliant with the Davis Bacon Act (DBA), Service Contract Act (SCA) and Patient Protection and Affordable Care Act (PPACA), please click here or contact me directly at tlehman@psafinancial.com.

Related Posts

  1. IRS Updates Electronic Filing Requirements (Benefit Minute)
  2. PSA In Good Health 2023 Volume 6