The fine print in the Inflation Reduction Act’s (IRA) provision for enhanced federal tax credits for clean energy projects is coming into focus, giving construction contractors a better roadmap for getting a piece of that action.
The U.S. Department of the Treasury and the Internal Revenue Service have issued proposed regulations on prevailing wage and apprenticeship requirements projects must meet to qualify for tax breaks that can reach five times the base amount.
Although project owners seeking the credit are technically responsible for documenting compliance, it falls to construction contractors to structure the work to align with the employment rules. In general, to participate they must pay workers on the jobs wages not less than prevailing rates determined by the Labor Department and reserve a set share of work for qualified apprentices. The rules, out for public comment ahead of November finalization, detail the requirements project owners and contractors will need to understand.
Those mandates are integral to supercharged investment tax credits worth up to 30% of the project cost. Construction contractors, then, are set to play a central role in maximizing the impact of the IRA’s clean-energy infrastructure component and helping clients get the most bang for the buck. That impact could be substantial; one estimate has the tax credits, ranging from a base 6% up to the enhanced 30%, accounting for three-quarters of the $370 billion expected to be spent IRA-qualified projects, which span energy storage and solar panels to waste energy recovery and combined heat and power (see Figure).
The enhanced credits, included to hand labor a fair share of federal spending on clean energy through both wage guarantees and training and skill-building opportunities in that arena, could be pivotal. But they’re only attainable with the active participation of contractors that will execute the projects, from the planning stages through completion and, potentially, any ongoing post-construction role.
As prospective IRA projects take shape, contractors will need a thorough understanding of the labor rules, qualifying criteria, and their role in the process, says Laura Cataldo, a director in the construction and real estate practice of Baker Tilly, a Chicago-based consulting firm. Interested companies, she says, should be poring over the rules, readying their workforces, and positioning themselves as knowledge leaders with prospective project partners.
“Contractors that proactively market themselves to owners as understanding the credits and being ready to comply with the requirements are seeing huge opportunities being presented to them,” Cataldo says.
A useful way to look at their role, she adds, is as advocates for what amounts to reverse value engineering: expanding the scope and up-front cost of projects through addition of renewable energy components with the assurance of recouping those costs through tax breaks. Given the nature of qualifying projects, electrical contractors that are not only technically capable but knowledgeable about the program and ready to meet labor requirements required for maximum favorable tax treatment could be well positioned.
“With electrical contractors being the specialty trade that is closely aligned with these energy systems they have a great opportunity to talk with project owners, general contractors and design teams about opportunities to enhance the scope of projects,” she says.
The key for contractors willing and able to meet IRA guidelines and interested in project opportunities is to be proactive, Cataldo says. In a primer issued earlier this year, Baker Tilly runs down a contractor’s checklist. It includes evaluating prior, current and future projects that could be eligible (see interactive graphic for more information); prequalifying the company as meeting labor requirements; and expanding communications channels with project owners that might be a good fit.
“This is a sizeable energy credit program and these projects are a trend we see coming in the public and private sectors,” Cataldo says. “It may be important for interested contractors to strike while the iron is hot.”
Tom Zind is an independent analyst and freelance writer based in Lees Summit, Mo. He can be reached at [email protected].