Date:  August 21, 1996                      Letter No. LR-96-02
 
   Subject:    Application of Federal labor standards to HOME projects
          I.   Statutory and regulatory provisions.
          II.  Determining applicability.
          III. Scope of coverage.
          IV.  Homeownership projects.
          V.   Case studies.
 
     The National Affordable Housing Act of 1990 (NAHA) created the
   HOME Investment Partnerships Program (HOME), a housing development
   program with new language in the provision concerning Federal
   (Davis-Bacon) labor standards applicability.  Guidance for HUD field
   staff and clients on the application of Davis-Bacon requirements to
   HOME projects was provided on a case-by-case basis until general
   policy decisions could be made and those policies could be tested
   against actual project proposals.  We believe that sufficient
   experience has been gained to enable us to compile general guidance
   in this area for HUD staff and client use.
 
     The following is provided with the cooperation and advice of
   the Community Planning and Development's Office of Affordable
   Housing and the Office of General Counsel.
 
   I.     Statutory and regulatory provisions.
 
     Federal (Davis-Bacon) wage requirements are made applicable to
   the HOME program by Section 286 of the NAHA which provides, in part,
   as follows:
 
     "Any contract for the construction of affordable housing with
        12 or more units assisted with funds made available under this
        subtitle shall contain a provision requiring that not less
        than the wages prevailing in the locality, as predetermined by
        the Secretary of Labor pursuant to the Davis-Bacon Act...,
        shall be paid to all laborers and mechanics employed in the
        development of affordable housing involved,...."
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     HUD regulations (24 CFR 92.354) paraphrase the statutory
   provision and clarify that the contract for construction must
   contain these wage provisions if HOME funds are used for any project
   costs, including construction or nonconstruction costs, for housing
   with 12 or more HOME-assisted units.
 
     The regulations further explain that a construction contract
   that includes a total of 12 or more HOME-assisted units is covered
   by Davis-Bacon requirements even if the contract covers more than
   one HOME "project" and prohibits arranging multiple construction
   contracts within a single project for the purpose of avoiding Davis-
   Bacon coverage.  Once triggered, the wage provisions apply to the
   construction of the entire project - HOME-assisted and non-assisted
   portions, alike.
 
     The NAHA and program regulations also provide for the exclusion
   of certain sweat equity labor from Davis-Bacon coverage.  Members
   of an eligible family who provide labor in exchange for acquisition
   of a property for homeownership or toward rental payments are not
   subject to Davis-Bacon wage requirements.  Additionally, volunteers
   may be employed in accordance with 24 CFR Part 70.
 
     The HOME labor standards provision is unlike labor standards
   clauses in other HUD programs.  For example, the labor standards for
   Community Development Block Grants (CDBG) apply to construction work
   financed in whole or in part with the assistance received through
   CDBG and cover residential property only if the property contains
   not less than 8 units.  For HOME, we are directed to "construction
   contracts" (not construction work or properties) where the standard
   is whether 12 or more of "units" covered by the contract are
   "assisted" (not whether construction work is directly financed).
   These differences serve both to focus the unit threshold window on
   the "contract" and to broaden the scope of coverage to construction
   and non-construction costs and assisted and non-assisted portions.
 
   II.    Unit Threshold.
 
     The Davis-Bacon "trigger" relates to the number of HOME-assisted
   units contained in a construction contract.  It is
   important to recognize that the two (2) factors are:  1) the number
   of HOME units - there may be units which are not HOME-assisted in
   the contract; and 2) the scope of the construction contract - not
   the "project."
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     The number of HOME-assisted units is determined in accordance
   with guidance provided by the program office in Notice CPD 94-12
   (April 26, 1994).  This determination is made by the participating
   jurisdiction (PJ), insular area or Indian tribe (referred to
   collectively as recipients) primarily for purposes other than labor
   standards applicability.  The Offices of Labor Relations, General
   Counsel and CPD have agreed that the number of HOME-assisted units
   identified pursuant to this Notice is acceptable for Davis-Bacon
   unit threshold purposes.  The number of assisted units within a
   specific project should be available from the recipient and is also
   reflected on HUD Form 40094, Homeownership Assistance/Rental Housing
   Project Set-Up Report.  (Note that the recipient determines the
   number of assisted units in a project, not a construction contract.)
 
     Once the number of HOME-assisted units is determined, the
   construction contract(s) must be identified.  Each contract must
   then be considered for coverage based upon the number of HOME units
   contained in the contract:  contracts with 12 or more HOME units are
   covered; contracts with 11 or less HOME units are not.  Two
   important factors must be weighed in this determination:
 
     1)   A HOME project can not be divided into multiple contracts
             to avoid Davis-Bacon coverage.  There may be other,
             legitimate reasons that a single project would be
             constructed with separate contracts that would each
             contain 11 or less HOME units and the contracts would not
             be covered.  But it is not permissible to arrange
             multiple contracts solely to circumvent labor standards
             requirements.
 
     2)   A construction contract with 12 or more HOME-assisted
             units is covered even if the contract involves more than
             one HOME project.  For example, if, for whatever reason,
             four projects each containing 4 HOME-assisted units are
             "pooled" into one construction contract, the contract
             would be covered.
 
   Special note on Group Home and Single Room Occupancy (SRO) projects:
 
     Notice CPD 94-01 (January 4, 1994) defines group homes and SROs
   for HOME assistance purposes.  A group home is usually a large
   single family residence consisting of common space such as kitchens,
   dining areas, living
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   rooms and bathrooms, along with separate private or semi-private
   space (i.e., bedroom) for each occupant.  An SRO consists of single
   room dwelling units that are the primary residences of its
   occupants, and may have shared common dining, sanitary and/or
   recreation facilities.  Depending upon certain parameters
   established by the program office (See Notice CPD 94-01), PJs may
   choose to consider group homes as a single unit for HOME assistance
   purposes or may classify them as single room occupancy units.  In
   the latter case, if the number of HOME-assisted SRO dwelling units
   covered by a contract for construction equals 12 or more, Davis-Bacon
   labor standards are applicable.
 
   III.   Scope of coverage.
 
     It has been determined that applicability of Federal wage
   requirements is not affected by the specific use of HOME funding.
   That is, it does not matter whether HOME funds are used for
   construction or non-construction project costs; if the threshold is
   met then the labor standards provision is triggered.  (See also CPD
   Notice 92-19, dated June 9, 1992.)  This determination hinges in
   part on the difference between "assisted" and "financed" -
   "assisted" is a much broader term.  In addition, under the statute
   Federal wage rates apply whenever a construction contract contains
   12 or more units that are assisted, whether the contract is assisted
   or not.  Housing units in a HOME project that are constructed with
   private funds may still be "assisted" by HOME even though the
   construction of the units is not directly "financed" by HOME.
 
     It has also been determined that once triggered, the labor
   standards apply to the construction of the entire project.  For
   example, if it were practical to funnel all of the HOME funds to the
   construction costs for a portion of a project it would not limit
   labor standards applicability to that HOME-funded portion.  (See
   also CPD Notice 94-12.)
 
   IV.    Homeownership projects.
 
     Some HOME projects are designed to provide homeownership
   opportunities to low-income families.  These projects may not
   involve the use of HOME funds for the construction of the housing
   in any way but, for example, involve only down payment or mortgage
   assistance to the homebuyers.
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   Construction work for projects in which HOME funds are used only to
   assist homebuyers to acquire single family housing is not covered
   UNLESS there is an agreement with the owner or developer of the
   housing in advance of the construction work that HOME funds will be
   used to assist homebuyers to buy the housing and the construction
   contract covers 12 or more HOME-assisted units.
 
   V.     Case Studies
 
     Many of the following examples are based on actual projects
   that were presented for labor standards coverage determinations.
   A description of the project is followed by the coverage decision
   and rationale.  Remember that in most cases the key to applicability
   is not the use or targeting of the HOME funds but the number of
   HOME-assisted units that are in a contract for construction.
 
   1)     a.  Proposal  The project involves the construction of a 59-unit
             single family residence subdivision.  HOME funds will
             provide project construction financing and secondary permanent
             financing to prospective low-income homebuyers.  The PJ, as
             the lender and with concern about the overall viability of the
             project, is willing to commit to the development of the
             subdivision only in phases of 10 or 11 units at a time.
             Funding for subsequent phases will be contingent on the
             successful completion and marketing of the preceding phase(s).
             Separate construction contracts will be awarded for each
             phase.
 
     b.  Decision  The proposed construction work will not be
        covered.  None of the contracts for construction will contain
        12 or more HOME-assisted units and it appears that the
        division of the project into multiple contracts is a
        precautionary measure to protect the lender and is not for the
        purpose of avoiding Davis-Bacon coverage.
 
   2.     a.  Proposal  The project involves the construction of a 60-unit
             multifamily property (all 60 units will be HOME-assisted)
             and a 100-unit single family development (of the 100 single
             family units, 33 units will be HOME-assisted).  The
             construction work will be accomplished in four separate
             contracts:  one for the 60-unit multifamily property; and 3
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     contracts for the single family homes each contract containing
        no more than 11 HOME-assisted units.  HOME funds will be used
        for land acquisition and site development for the construction
        of all of the housing units.  The developer and PJ have
        entered into an agreement in advance of construction that HOME
        assistance will be provided for homebuyers to purchase 33 of
        the single family units.  The PJ and developer assume that the
        multifamily building will be covered but ask for confirmation
        that structuring the single family portion in the manner
        described will avoid Davis-Bacon coverage.
 
     b.  Decision  The construction of the entire development is
        covered.  The assumption that the multifamily building is
        covered is correct.  As to the single family units, there is
        no reasoning presented that explains why this portion has been
        divided into 3 separate contracts other than to avoid
        prevailing wage requirements.  In fact, the inquiry so much as
        states that avoiding Davis-Bacon is the reason for the
        multiple contract strategy.
 
   Special notes on this Case Study:  This scenario, modified only
   slightly, could result in a very different coverage decision
   relative to the single family units:  What if the PJ established the
   single family units as three separate projects each containing 11
   HOME-assisted units and the developer awarded a separate
   construction contract for each project?
 
   While the regulations prohibit creating multiple contracts within
   a single project to avoid Davis-Bacon coverage, there is no
   prohibition against arranging multiple projects within a development
   proposal.  In other words, the regulations would not prohibit a PJ -
   which considers a developer's proposal to build a 100-unit single
   family HOME project - from establishing multiple "projects" (each
   with 11 or less HOME-assisted units) and the developer awarding a
   separate construction contract for each project.  This arrangement
   would result in no Davis-Bacon coverage.  However, if the developer
   grouped these "projects" under one construction contract so that the
   total number of HOME-assisted units contained in the contract is 12
   or more, the work would be covered.  The key is the number of HOME-
   assisted units contained in a contract for construction.
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   3.     a.  Proposal  A developer, with a commitment from the PJ for
             HOME assistance, proposes to develop 40 single family units
             for homeownership.  HOME funds combined with private funds
             will be used for site acquisition and to finance the
             construction of the units, which will be performed under one
             contract.  Prospective homebuyers will execute real property
             sales contracts, presumably conveying ownership of the land,
             prior to the construction of the single family units.  Each
             unit will be entered as a single project in the HUD cash
             management system (CM/I).  The PJ asks for confirmation that
             executing sales contracts prior to construction and entering
             the units as separate "projects" in the CM/I database would
             not trigger Davis-Bacon requirements.
 
     b.  Decision    The construction work will be covered.  The
        two factors presented, ownership of the land and separate
        entry into the CM/I database, have no significant bearing on
        labor standards applicability.  Davis-Bacon coverage will be
        triggered because the construction contract will contain 12 or
        more (40) HOME-assisted units.
 
   4.     a.  Proposal  A PJ requests guidance in relation to six (6)
             HOME projects totalling 22 units which will be owned and
             operated by one community based non-profit organization.  All
             6 projects, ranging from 2 to 4 units each, are in varying
             stages of processing and are being handled independent of each
             other with separate applications, loans and construction
             contracts.  However, due to an approaching financing
             commitment deadline, all six projects were entered into the
             CM/I system on the same date.
 
     b.  Decision  Davis-Bacon wage requirements would not apply to
        these projects.  None of the contracts for construction will
        contain 12 or more HOME units.  The date of entry into the
        CM/I system has no bearing on Davis-Bacon applicability.
 
   5.     a.  Proposal  The project involves the construction of 15
             units in two buildings (9 units in one building; 6 in the
             other) on contiguous lots.  A combination of HOME funds, low-
             income tax credits and developer equity are financing the
             project.  Construction of both buildings was begun under one
             contract using Davis-Bacon wage rates.  Disputes
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     between the owner/developer and the contractor led to work
        stoppage and ultimately the contractor was dismissed.  With
        both buildings only partially completed, the tax credit
        contributions were in jeopardy unless completed and occupied
        units were delivered quickly.  In order to secure the tax
        credits, the PJ and developer propose to contract for
        completion of one building and then contract for the
        completion of the second building.  The same contractor would
        be used for both buildings but the contract for the second
        building would be executed only after successful completion of
        the first.
 
     b.  Decision  Davis-Bacon wage requirements would not apply to
        the construction of these buildings.  Neither of the contracts
        for construction will contain 12 or more HOME-assisted units
        and it appears that the division of the project into multiple
        contracts is intended to expedite progress for tax credit
        benefits and not to avoid Davis-Bacon coverage.
 
   6.     a.  Proposal  A developer proposes to construct a multifamily
             project with 2 buildings of 8 HOME-assisted units each.  HOME
             funds will be used for site acquisition and certain "soft
             costs" such as site surveys and architectural drawings.  The
             construction work will be performed under one contract.  No
             HOME funds will be used for the construction of the units.
 
     b.  Decision  The construction of the project is covered.
        Unlike the CDBG program, the HOME labor standards provision is
        triggered whether HOME funds are used for construction or non-
        construction project costs.  Since the construction contract
        will contain 12 or more HOME-assisted units, Davis-Bacon rates
        will apply.
 
   7.     a.  Proposal  The project involves the new construction of a
             14-unit HOME (single family homeowner) subdivision.  CDBG and
             HOME funds will finance site improvements for the subdivision.
             The improvements will be performed under one contract and
             constructed only within the boundaries of the subdivision
             site.  The improved site/housing lots will be turned over to
             three (3) community housing development organizations
             (CHODOs).  The CHODOs will contract for the construction of
             the
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     individual housing units separately and will have no more than
        two lots in their control at any time.  The remaining lots
        will be made available to the CHODOs as construction of the
        units is completed.
 
     b.  Decision  The site improvements contract will be covered
        and the contracts for the housing construction will not.  The
        question here is not so much coverage but what kind of wage
        decision is applicable.  For Davis-Bacon purposes we can view
        the site improvements and housing construction as a single
        development since the purpose of the site improvements is
        solely to support the construction of single family
        residences.  In this case the site improvements are
        "incidental" to the housing construction and therefore would
        be subject to a residential wage schedule.
 
     Any questions concerning this Letter may be directed to the
   Office of Labor Relations at (202)708-0370 or, in the case of HUD
   program participants, to the HUD Field Labor Relations Staff with
   jurisdiction for your area.
 
                                   Assistant to the Secretary for
                                        Labor Relations
                                        Richard_S_Allan@HUD.gov
 
   Visit the Office of Labor Relations on the World Wide Web HUD Home
   Page at http://www.hud.gov/