Pricing Wage Compliance Risk in EPC Contracts: The Statutory Cure as the Measure of Exposure
Owners of wind, solar, and storage projects routinely ask the EPC contractor to indemnify them for any tax credit lost because the contractor or a subcontractor failed to meet the prevailing wage and apprenticeship requirements. Because the increased credit rate for compliant projects is five times the base rate, an uncapped indemnity of that kind can expose the contractor to a loss that exceeds its entire contract price. The request rests on an assumption that a compliance failure means a lost credit, and the Internal Revenue Code does not work that way.
How the Cure Works
The Code allows a taxpayer that fails the prevailing wage requirement to keep the increased credit by making correction and penalty payments. The taxpayer pays each affected worker the wage shortfall with interest and pays the IRS a penalty for each such worker, currently $5,000, with both amounts increased substantially where the failure reflects intentional disregard. The apprenticeship requirement carries its own cure, a penalty measured per labor hour of shortfall, and a good faith effort exception that applies when the taxpayer requested apprentices from a registered program and the program denied the request or failed to respond. The cure is available prior to a final determination by IRS with respect to any failure to satisfy the prevailing wage requirements and remains available within a statutory window even after an IRS determination, so the credit can be preserved in most ordinary cases of noncompliance.
Converting the Cure Into a Contract Measure
If the statute prices the failure, the contract can too. A contractor has a principled basis to limit its obligation to funding the correction and penalty payments attributable to workers on its own tier and the tiers below it, together with reasonable cooperation in any examination. The credit itself should fall within the contractor's exposure only where the credit is lost despite a timely cure, which should be rare. Credit loss that follows from the owner's election not to cure, a missed cure deadline, or return positions the owner controls should remain with the owner, because those decisions sit entirely on the owner's side of the line.
Owners will press for the enhanced intentional disregard amounts to fall on the contractor. That request is reasonable when the intentional disregard is the contractor's own, as finally determined, and the contract should say so in those terms rather than shift the enhanced amounts on an allegation. On apprenticeship, the contract should assign responsibility for issuing and documenting requests to registered programs, since the good faith exception turns on paperwork more than performance. Where the owner measures labor hours across several prime contractors, the contractor's share of any penalty should follow its own labor hours.
The Obligation That Outlasts Completion
The prevailing wage requirement does not end at substantial completion. It also applies to alteration and repair work during the credit or recapture period that follows placed-in-service, which means warranty repairs performed by the contractor or its subcontractors may carry the same wage obligations years after the project closes out. Warranty and service provisions should address that obligation expressly, and the warranty pricing should reflect it.
A Practical Allocation
A workable clause makes the contractor responsible for compliance on its tiers, requires it to deliver certified payrolls and apprenticeship documentation on a stated schedule, obligates it to fund correction and penalty payments for its own failures, and caps any residual credit-loss indemnity at a negotiated amount that applies only where a timely cure proves unavailable. That structure gives the owner and its tax equity investors a reliable path to preserving the credit and gives the contractor an exposure it can price and insure.