Who Pays When a Subcontractor Underpays?

The short answer

Under the IRS rules, the taxpayer does. To get the increased credit, the taxpayer must ensure every laborer and mechanic employed by the taxpayer or any contractor or subcontractor is paid the prevailing rate (26 CFR 1.45-7(a)). If the credit is transferred, the correction and penalty obligation stays with the eligible taxpayer that transferred it (26 CFR 1.45-7(c)(1)(iv)).

Whether the taxpayer can recover that money from an EPC or subcontractor depends on the contracts. That is why the provisions below matter.

By Alex Jones and Reed Dalton. Adapted from the DSPTCH IRA Field Guide (January 2025). Updated November 2026.

Contract provisions to discuss with counsel

These come from our experience and market observations. They are not a complete list, and they don't replace advice from your own counsel.

Standard obligations for every contractor with PWA exposure: indemnities, attestations, reporting and corrective action responses
Liability tied to each party's own workers, with a clear end date tied to the IRS response period
Notice from the taxpayer when the tax claim is filed
Duties to submit, keep and produce PWA records
A set reporting cadence that is enforced
Who validates wage determinations and classifications, and how disputes reach the Department of Labor
Flow-down language so the same terms reach every lower tier subcontractor
Change order rules for new guidance, and for alteration and repair work
Definitions of key terms, including apprentice, holidays and bona fide fringe
Minimum insurance, especially for subcontractors with PWA exposure

Where risk transfer can break down

Taxpayer and EPC

The owner approved the wage determinations, so the EPC argues it isn't at fault.

EPC and subcontractor

The subcontractor paid the rates in its contract, or cannot pay the penalties. An older master agreement may not mention PWA at all.

Insurance

Claims can be disputed over exclusions or missed process requirements, and may not pay out within the 180-day cure period.

Contract FAQ

Does one EPC contract lock in the wage determination?

Generally, yes. The applicable wage determination is the one in effect when the contract is executed by the taxpayer and a contractor, and it continues for that contractor's subcontracts on the facility (26 CFR 1.45-7(b)). If the taxpayer acts as its own general contractor, each direct contract has its own execution date, so later contracts can pick up newer rates.

Can the owner rely on the EPC's certified payroll?

Payroll alone won't protect the owner if the classification or rate behind it is wrong. Review the wage determinations and spot check payroll yourself or through an independent third party. The regulation names regular payroll review as an example of a record of prevention.

What is the first thing to fix?

Compare your EPC indemnity with each subcontract. If the EPC promises something its subcontractors don't, that gap is yours to close first.

Keep reading

Sources: 26 CFR 1.45-7, 26 CFR 1.45-12. Citations are to the section 45 regulations; other credits with PWA requirements apply similar rules. General information only, not legal or tax advice.

Who Pays When a Subcontractor Underpays Prevailing Wage?