What You Need to Know About the Inflation Reduction Act

Though it may not seem to contain construction-specific items with its 700+ pages, the Inflation Reduction Act (IRA) of 2022, a wide-ranging, 10-year, U.S. federal funding plan, does include several provisions that can directly benefit construction companies and their future capital projects.

The section of the IRA with the most relevance to our industry? Energy security. Specifically, it encourages turning to clean energy through incentives such as tax credits and grants. And some of these generous incentives will hinge on construction companies demonstrating that their workers are paid the prevailing wage on qualifying projects.

Clean energy incentives

First, here’s a quick distinction among clean, green and renewable energy. Often used interchangeably, these terms do have key differences. Clean energy isn’t always “renewable,” yet may be an electricity source that doesn’t produce pollutants and the greenhouse gasses that trap heat within our atmosphere. Green energy, which falls within this broader renewable category, yields low-impact, carbonless energy — think solar, wind, water and heat. Renewable energy is unlimited and naturally replenishable — think wind and solar power that are transformed into energy.

As it pertains to the IRA, the emphasis is on clean energy, putting more focus on efforts that lower emissions. And when talking in energy terms as it applies to construction, it isn’t just about the final structure and how effectively it functions. It’s also about what went into building it. 

As a major contributor to carbon emissions, the construction industry has been taking baby steps toward incorporating more environmentally friendly building methods, materials and equipment. Now, the IRA helps encourage this effort by offering tax credits to promote not only producing energy-efficient structures but using clean fuels and vehicles during their construction.[1]

As a way of encouraging the purchase and use of electric vehicles (EV), the Act, which expands on an existing law outlining Clean Vehicle Credit provisions, states that EV batteries must contain certain critical minerals sourced or manufactured in the U.S. or a free trade partner country. Minimum battery capacity is 15 kilowatt hours and must be rechargeable. The IRA also stipulates that the percentage of battery parts produced in North America must be equal to or higher than what is prescribed for each of the next few tax years, starting with 50% in 2023 and increasing by 10% annually until 2029, when the requirement is 100%. Each of these provisions delivers a $3,750 tax credit, for a maximum allowable credit of $7,500 per EV.

For construction companies looking to reduce and control their capital project costs, these tax incentives can really add up. Couple that with increasing regulatory compliance and owner expectations for more sustainable buildings using green materials and building practices, and it’s clear there is impetus from multiple directions toward actively pursuing a greener path to construction.

The connection to the prevailing wage

Companies that work on clean energy projects can maximize the above tax benefits by meeting requirements for prevailing wages and apprenticeships. This applies to qualified projects that began on or after January 29, 2023.

The prevailing wage definition is straightforward: it’s the hourly rate plus fringe benefits specific to each worker’s classification as an employee or contractor and is local to where the work on a qualifying clean energy project is performed. That work can be actual construction, modification or repair. A visit to SAM.gov can show the prevailing wage rates.

In tandem with the prevailing wage stipulation is the requirement for apprentices to make up a certain percentage of the workforce on the project. They’re to be sourced from registered apprenticeship programs which simultaneously serve as a talent channel and prepare the future construction workforce.

These requirements have the added benefit of potentially softening the impact of the labor shortage, an enormous concern within the construction industry. Not only could they help attract workers with a guaranteed prevailing wage, but they create a job pipeline for specially trained apprentices. It’s a win-win for them and for contractors who need their talent.

Know that supporting documentation is necessary to show these prevailing wage and apprenticeship requirements are being met.

Being an essential part of the solution

While there currently aren’t any direct incentives in the IRA for transitioning to construction software as another means of reducing the building sector’s impact on climate change, incorporating these types of technology is a proactive way to demonstrate value in building with the environment in mind. And of course, there’s the originally intended benefit of doing away with impracticalities and wastefulness and improving project outcomes.

• Cut back on mountains of paper. Storage, original drawings and their updates, checklists, reports; they all pile up over the course of lengthy capital projects. Switching to cloud-based construction documentation software allows you to store all that paperwork virtually in the cloud, fill in and e-sign forms, and send reports and timesheets electronically — all of which can help save acres of trees for just one project.
• Reduce incidence of rework and the material waste that goes with it. Among the many benefits of the building information modeling (BIM) process and technology is its ability to create highly accurate 3D models that enable virtual experimentation of structural changes and material swaps before they’re built into the project. It’s an effective way to avoid potential mistakes that would have to later be deconstructed and redone.
• Improve verification of building systems energy efficiency. Despite it not being a required process in the industry, building commissioning is the most direct way to ensure all the complex structural systems and equipment are operating efficiently — on their own and within the entire building ecosystem. Heavier emphasis on commissioning requirements is key to earning the increasingly coveted green certification status such as LEED (Leadership in Energy and Environmental Design).

InEight has been working with environmentally conscious companies for years, helping them adopt more sustainable project management processes and software technologies. Curious what solutions could work best for you? We’re happy to share some insights in a one-on-one consultation.

[1] Note: As with all things tax-related, please consult your company’s tax advisor for specific guidance and applicability of the above IRA provisions.

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