Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why the Government Pays 50 Percent More for Construction Than Private Firms
Transcript
- Lucas: The federal government is about to spend roughly six billion dollars renovating the FBI headquarters. That's the latest estimate, anyway. It's been kicked around since 2013, and the price tag has already doubled. Luna: Six billion for one building. And it's not even new construction — it's a renovation. What does a private company spend to build a comparable office tower? Lucas: The Government Accountability Office looked at exactly that question. In a 2025 report, they compared federal construction costs to private-sector benchmarks. Their finding: on average, government projects cost about 50 percent more per square foot. Sometimes it's double. Luna: Fifty percent more. That's billions in extra spending across all federal construction. And nobody seems to fix it. Lucas: There's one law that explains a huge chunk of that premium: the Davis-Bacon Act. It was passed in 1931, in the middle of the Great Depression. The idea was simple — if the federal government is going to hire contractors to build roads or post offices, those contractors should pay their workers a 'prevailing wage' so they don't undercut local labor markets. Lucas: On its face, that sounds fair. The problem is how 'prevailing wage' is calculated. The Department of Labor runs surveys, but they're heavily weighted toward union wages. In many cases, the 'prevailing' rate is actually the union rate, even if only a small fraction of local workers belong to a union. Luna: So you end up paying a premium that might not reflect the actual market. Do we have numbers on how much that adds to the FBI project specifically? Lucas: The GAO hasn't broken it down project by project, but economists have estimated the Davis-Bacon premium nationally. A 2020 study from the Cato Institute put it at roughly 10 to 15 percent of total project costs. On a six-billion-dollar project, that's six hundred to nine hundred million dollars in extra labor costs alone. Luna: And that's before you factor in the delays and the bureaucracy. The FBI headquarters has been in planning for over a decade. The original 2013 estimate was around three point five billion. Lucas: That's a doubling in just over ten years. Some of that is inflation and scope changes, but a lot of it is the way the government procures construction. You have to follow the Davis-Bacon wage schedule. You have to file certified payroll reports. You have to deal with a thicket of regulations that private developers simply don't face. Luna: And those regulations also limit the pool of contractors willing to bid. If you're a small or mid-sized construction firm, the paperwork alone can be a dealbreaker. Lucas: Exactly. Fewer bidders means less competition, which means higher prices. The GAO report noted that on some federal projects, only two or three contractors even submit a bid. In the private sector, you might see ten or fifteen. Lucas: Look, I think it's worth pausing here because this actually connects to something bigger. If you're the kind of person who finds it frustrating that the government routinely overpays for things like construction — and you want to understand why — then these conversations we have every week are built for you. This show is completely listener-supported, no ads, no sponsors, and that only works because people who care chip in at buy me a coffee dot com slash fexingo. It's a small gesture, but it directly funds deeper dives into stuff like this. Luna: Yeah, it's a good reminder that understanding how your tax dollars actually get spent takes work. And we do that work because listeners make it possible. So if you value that, consider tossing a few bucks in the virtual jar. Lucas: Alright, back to the FBI headquarters. So we've got this 1931 law that inflates costs by requiring union-level wages on federal construction. But why hasn't it been reformed? It's been attacked for decades. Luna: Because labor unions are a powerful political constituency. The Davis-Bacon Act is one of their sacred cows. Any attempt to repeal or even modify it gets met with fierce lobbying. And it's not just Democrats — many Republicans from union-heavy districts also defend it. Lucas: There have been attempts. In 2017, the Trump administration proposed a rule change that would have made the prevailing wage calculation more market-based. It was challenged in court and ultimately blocked. The unions argued that gutting Davis-Bacon would lead to a race to the bottom on wages. Luna: But is that actually true? I mean, private construction wages are already competitive in most markets. Do we see a race to the bottom in the private sector? Lucas: We don't. Private developers pay market rates, and those rates are usually pretty good, especially in skilled trades. The difference is that Davis-Bacon wages are often set above market. In a 2022 study, economists at the University of Utah found that the prevailing wage for electricians in some counties was thirty to forty percent above the median private-sector wage. Lucas: So the law is effectively a premium for union labor on federal projects. And since the federal government spends roughly two hundred billion dollars a year on construction and infrastructure, that premium adds up fast. Luna: And it's not just direct costs. The complex rules also slow down projects. The FBI headquarters is a perfect example — they spent years just on environmental reviews and site selection. But even after that, the procurement process is a nightmare. Lucas: The General Services Administration, which manages federal buildings, has to follow the Federal Acquisition Regulation, which incorporates Davis-Bacon and a host of other rules. The result is that a typical federal construction project takes about three years longer than a comparable private one, according to a 2018 study by the Mercatus Center. Luna: Three years longer — that's time during which costs accumulate. And meanwhile, the building's value may be deteriorating before it's even finished. Lucas: Exactly. And there's another layer: the 'prevailing wage' surveys themselves are notoriously flawed. The Department of Labor collects wage data from contractors, but the response rate is low. In many counties, they rely on union-submitted data almost exclusively. So the 'prevailing' wage becomes whatever the union says it is. Lucas: The GAO has flagged this multiple times. A 2020 report found that the wage determinations for some occupations were based on data from just a handful of workers — sometimes as few as two or three. Statistically meaningless. Luna: So you've got a system that's both expensive and not particularly well-designed. Yet it persists. Are there any signs of reform on the horizon? Lucas: There are some small-bore efforts. In 2024, a bipartisan group in Congress introduced a bill to exempt small projects — under five million dollars — from Davis-Bacon requirements. It didn't pass, but it got some traction. There's also been talk of using market-based wage surveys, like the Bureau of Labor Statistics' Occupational Employment and Wage Statistics, instead of the DOL's bespoke surveys. Luna: That would be a sensible fix. But I suspect the political calculus is still against major reform. Unions are a core Democratic constituency, and many Republicans don't want to be seen as anti-worker. Lucas: Right. So we're stuck with a system that adds billions to the deficit, delays critical infrastructure, and doesn't actually protect workers in any meaningful way — because the private sector already pays competitive wages. It's a classic case of a well-intentioned law that has outlived its usefulness. Luna: And it's one of those things that, once you know about it, you start seeing it everywhere. Every time you hear about a cost overrun on a federal construction project, you can bet Davis-Bacon is part of the story. Lucas: I think that's the right note to end on. The FBI headquarters will eventually get built, and it will cost a fortune. And most people will blame bureaucratic incompetence or inflation. But a big piece of the puzzle is a Depression-era wage law that nobody has the political will to fix. Luna: And that's the kind of story we like to dig into here. Thanks for listening.