The FAR Council recently published a proposed rule mandating the use of project labor agreements (“PLAs”) on federal construction projects where the total estimated cost to the government is $35 million or more. See FAR Case 2022-003, 87 FR 51044 (Aug. 19, 2022). The proposed rule codifies President Biden’s February 4, 2022, Executive Order No. 14063. 87 FR 7363 (Feb. 9, 2022). Certain exceptions apply, and for projects below $35 million whether to mandate PLAs is left to the discretion of each federal agency. A PLA is a pre-hire collective bargaining agreement with one or more labor organizations that establishes the terms and conditions of employment for a specific construction project.

Why it’s significant: The proposal rule, and the underlying Executive Order, further enhance an Obama-era Executive Order that encouraged PLAs on federal construction projects over $25 million, but did not require it. 74 FR 6985 (Feb. 11, 2009). The new Executive Order puts forth the new rule to seek increased “economy and efficiency,” arguing that large-scale construction projects can create “special challenges” for efficient and timely procurement, and contractor labor disputes can cause significant project delays. During the Obama and Trump Administrations, construction industry trade groups sought revocation of the Obama Executive Order, arguing it increases taxpayer costs and filing pre-award bid protests against agencies implementing a PLA requirement, in order to have it removed. During the time that rule was in effect, between 2009 and 2021, the FAR Council estimated that a PLA was used only 12 times despite there being roughly 2,000 eligible contracts. The new Biden Executive Order and proposed rule firmly moves the industry requirements on federal projects in the opposite direction and establishes a clear federal prerogative for PLAs on large construction projects.

Effects on the industry: Once in effect, the proposed rule will cause a significant shift in the federal construction industry. Recent Bureau of Labor Statistics estimates show that only 12.6 percent of the construction work force belong to unions. This means a contractor may face staffing challenges arising from a restricted pool of potential candidates. The FAR Council notes in the proposed rule that the average number of construction awards valued at $35 million or more, from Fiscal Year 2019 through Fiscal Year 2021, was approximately 119 annually, with an average cost of $114 million per award.

Exceptions: While the new rule is generally mandatory, there are some significant exceptions listed in the revised FAR 22.504(d), which allow the PLA requirement to be circumvented: (i) when the requirement for a PLA would not advance the Federal Government’s interests, due to the project being of short duration with little complexity, the project only involving one craft or trade, the project being specialized with a limited market, or the agency’s need for the project is of such an unusual and compelling urgency that a PLA would be impracticable; (ii) where market research indicates a substantial reduction in competition to such a degree that adequate competition at a fair and reasonable price could not be achieved; or (iii) where the requirement would be inconsistent with other statutes, regulations, executive orders, or Presidential memoranda. The FAR Council estimates that 10 percent to 50 percent of the large-scale $35 million or greater construction contracts will receive exceptions to the new rule during in the early period. This is likely based on expectations that some construction companies who do not already employ a unionized labor force will have compliance difficulties, which would prevent them from submitting bids. As a result, the FAR Council expects that only 60 to 107 construction contract awards will require PLAs during the first few years. The Government likely hopes to avoid steep drops in competition from contractors, especially small businesses, potentially leaving the federal market.

Bottom line: Despite this “warm up” period and specific exceptions, the number of projects the FAR counsel expects to require PLAs will be a substantial change from the prior 12 years under the prior executive order. Federal construction contractors should not bank on securing exempt projects and should instead plan now for potential and substantial shifts in procedure and cost based on the increase in mandated union labor on federal construction projects.

Next steps: Comments on the proposed rule close on October 18, 2022. Substantial industry commentary is expected. Watch this space for further updates.