Recurring pitfalls in PWA compliance

1.Apprenticeship requirements shortfalls

The apprenticeship requirements are complex and cause the most issues in tax credit transactions. Contractors often struggle to source enough qualified apprentices to meet the labor hours and participation requirements. Then they still need to ensure the right ratios are maintained daily and document it all rigorously.

Penalty payments exist as a remediation path for each of the apprenticeship requirements, but they can stack up. For example, if enough contractors on a project do not hire apprentices, then they may trigger penalties for the participation requirement and labor hours requirement. Additionally, if the ratio requirement is not met on a given day, then the labor hours of the apprentice who was under-supervised will not be included in the labor hours requirement calculation, which could lead to issues with the labor hours requirement if enough violations occur. It is recommended that the apprentice-to-journeyworker ratio be tracked in an automated platform so that daily violations are caught quickly and flagged to contractors before the violations lead to large penalties.

2.Worker misclassification

Worker misclassification also ranks among the most frequent compliance failures — especially once work has begun and the wrong classification has already been selected. It is important to review the Department of Labor wage determinations classifications before starting work and assess which are the most appropriate for the job at hand. Unfortunately, internal job titles like "installer" or "pile driver" may not map neatly onto Department of Labor wage determination classifications. When contractors make assumptions based on title rather than actual duties performed, they can end up underpaying workers for the entirety of a project.

A few specific scenarios come up repeatedly:

When misclassification is discovered late in construction, at the transaction stage, or beyond, the financial exposure compounds quickly as interest accrues and penalties stack. Remediation can require reviewing records from the very beginning of a project and involve contractors and subcontractors who have not been on-site for months.

3.The payroll data gap

Compliance is only as strong as the data behind it. Getting complete, timely payroll data from every contractor and subcontractor on a project is a persistent operational challenge, especially if there are issues with the relationship between the contractors and the developer.

The path forward in situations like this requires pulling certified payroll reports, working with the general contractor to validate data, and, in some cases, invoking state "unclaimed property" laws to make correction payments to workers who could not be located. The best way to prepare for this scenario is to appropriately structure the risks and responsibilities in the contracts between the taxpayer and the contractors. EPC agreements, O&M agreements, and supply agreements should all include provisions that enforce cooperation for PWA.

Additionally, contracts generally include indemnity provisions that are structured to allow parties to act on a PWA advisor's reasonable findings in real time — rather than waiting for a final IRS determination, at which point a transaction is often already under strain.

4.The good faith effort exception: A safety net with fine print

When apprentices are genuinely unavailable, the final Treasury regulations provide a good-faith effort exception. A taxpayer or contractor who has made a documented request to a registered apprenticeship program is exempt from compliance requirements for a given work period if one of the following conditions is true: they received either no response from the apprenticeship program within five business days, or the program confirmed that the program cannot fulfill the request, or fewer apprentices were provided than requested.

In practice, the exception is frequently mishandled.

A compliant request must include, among other items, the number of apprentices being requested, the number of labor hours, the relevant trade, and the start and end dates of the work period. There is also a requirement to state that the request is made with an intent to employ apprentices in the occupation in which they are trained, in accordance with the requirements of the registered apprentice program, and consistent with the hours and dates included in the request. Requests that omit any of these elements do not qualify.

Timing is equally critical. Requests must be submitted no later than 45 days before apprentices are needed, and the exception itself expires after 365 days. For example, a good-faith effort exception covering a 16-month project period only protects the first 12 months — a new request must be submitted in order to include the requested labor hours of the last four months in the labor hours requirement calculation.

Additional pitfalls include directing requests to programs outside the geographic area of the project, declining a partial fulfillment and attempting to claim the full exception, and failing to confirm that a non-response is genuinely a non-response.

The operational standard here is straightforward: use a reliable template, track every request and response, set renewal reminders, and maintain all correspondence in a centralized location.

5.Navigating transactions with an imperfect PWA report

On larger projects, a fully clean PWA report is the exception rather than the rule. A clear-eyed remediation plan, established early, is what allows transactions to move forward.

For prevailing wage shortfalls, correction payments flow to affected workers, plus interest at the federal short-term rate plus six percentage points. Penalty payments for both prevailing wage and apprenticeship requirement failures should be filed with the taxpayer's tax return. The IRS this year released Form 7220, which requires taxpayers claiming increased credit amounts to calculate and report PWA penalties at the facility level, with a tax return preparer signing off on the filing.

Under the statute, taxpayers have 180 days following a final IRS determination to make correction and penalty payments. This window exists as a post-audit remedy, but should not be relied on as a mechanism for managing known compliance gaps during a transaction. Tax credit buyers and tax equity investors will require documented evidence that all correction and penalty payments have been made before a transaction can proceed.