Section 3 in HUD Programs

If you represent a HUD organization that regularly receives Federal funds, you are probably familiar with requirements relating to Federal labor standards. Section 3 requirements—often discussed in the same context as labor standards—you may be less familiar with, however.

While Federal labor requirements are governed by the Davis-Bacon Act and other Federal laws and are triggered for most construction projects, Section 3 requirements are not “crosscutting” in that Section 3 applies only to HUD-funded housing rehabilitation, housing construction, and other public construction projects once a certain monetary threshold of HUD funding is met.

Most basically, Section 3 is a provision of the Housing and Community Development Act (HCDA) of 1968 that serves to guarantee that employment and economic benefits resulting from specific HUD financial aid are prioritized for individuals with low and very low incomes, especially those receiving government housing assistance—as well as for businesses that offer economic opportunities to this demographic.

Prior to enactment of a new Section 3 rule in November 2020, compliance under the Section 3 “old rule”, compliance was determined by whether Section 3 covered contractors met hiring and contracting targets, which were 30 percent of all new hires met criteria for Section 3 residents, and 10 percent of the recipient’s construction contract amount was being awarded to a Section 3 business(es).

Section 3 Terminology

Under the 2020 Section 3 “final rule”, a worker may meet Section 3 criteria by having (i) an annual income (for the previous calendar year) below the income limit established by HUD, (ii) through employment by a Section 3 business concern, or (iii) through participation in the Federal Department of Labor’s YouthBuild program.

The 2020 “final rule” establishes distinct benchmarks for Targeted Section 3 workers that are  similar to the criteria for Section 3 workers, but which vary  somewhat based on the type of HUD financial assistance (e.g., public housing, housing and community development) being used for the project.

Under the “final rule,” a Section 3 “business concern” refers to a business that is either (i) at least 51 percent owned and controlled by low- or very low-income persons; (ii) one where over 75 percent of the labor hours performed for the business over the prior three-month period were performed by Section 3 workers; or (iii) a business at least 51 percent owned and controlled by current public housing residents or residents who currently live in Section 8-assisted housing.

Final Rule

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The “final rule” adopted by HUD in November 2020 was largely in response to the ineffectiveness of the requirements under the “old rule. The 2020 “final rule is now incorporated into HUD regulations at 24 CFR Part 75. The “final rule” seeks to improve alignment with current business practices by requiring the reporting of labor hours, rather than new hires. The rule also streamlines the reporting process for funding recipients and establishes oversight by individual HUD program offices that administer the HUD funds subject to the rule, in order to reduce administrative burden and enhance the rule’s effectiveness.

As of October 2023, current Section 3 benchmarks for HUD recipients and subrecipients dictate that 25 percent of all labor hours on a Section 3 covered project should be worked by Section 3 workers, and five percent should be worked by Targeted Section 3 workers. Every three years, HUD will review the Section 3 reporting it receives from recipients, evaluate the data against the existing benchmarks and potentially adjust the benchmarks (upward or downward) to ensure effectiveness of the “final rule.”

During the first three-year review toward the end of 2023, HUD did not alter the existing 25 percent and five percent hour ratios, concluding that the agency did not yet have a sufficiently large sample of data to support alteration of the current benchmarks. The 25 percent and five percent hour ratios will therefore remain in effect until the next three-year review toward the end of 2026.

HUD Video Series

HUD has launched a video series to equip recipients with a foundational understanding of the “final rule” and to allow for effective implementation of Section 3 requirements among funding recipients.

To date, this five-part video series includes two parts focused on the rules pertaining to Housing and Community Development Financial Assistance (e.g., CDBG funds) and Public Housing Financial Assistance, while a third segment explores the use of apprenticeship programs. The fourth part focuses on considerations for Section 3 compliance at the program and project levels, and the recently released fifth part shares best practices and strategies for empowering workers and businesses through employment, training, and contracting opportunities.

How Does HORNE Assist Clients with Section 3 Compliance?

HORNE provides a variety of services to aid its clients in Section 3 compliance, including:

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Policies and Procedures

We assist our clients with the development of Section 3 policies and procedures that encompass all requirements at 24 CFR Part 75, including contracting, reporting, and recordkeeping. Policies will facilitate compliance among our clients’ Section 3 construction contractors as well.

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Training and Awareness

HORNE provides training to clients to enhance understanding in all areas of Section 3, and technical assistance to contractors to enable them to understand and bid on contracts.

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Outreach

A crucial part of any successful Section 3 program is intentional outreach; HORNE will work with its clients’ construction contractors to generate job applicants who meet Section 3 and Targeted Section 3 worker eligibility criteria. HORNE will use various media, including print, social media, public libraries, and community centers, to conduct outreach activities.

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Monitoring

HORNE will assist clients with the development of a monitoring plan to track and verify all Section 3 hires under the HUD program and review recipient and subrecipient Section 3 reports for completeness and accuracy. This includes utilizing Section 3 resources available on the HUD Exchange webpage.

HORNE Successes

HORNE has achieved notable successes in Section 3 compliance, including having developed a comprehensive Section 3 program for the Mississippi Development Authority under the state’s CDBG-DR grant post-Hurricane Katrina. HUD’s Office of Fair Housing and Equal Opportunity (FHEO) lauded the program as one of the most successful in the country.

In two separate housing programs, HORNE has helped its In two other separate HUD-funded housing programs, HORNE has also helped its clients meet Section 3 hiring goals under the “old rule” requirements. Notably, these clients far surpassed the 30 percent hiring target, achieving an impressive rate of 80 percent Section 3 hires in one of the programs.

If you have a specific question or request relating to Section 3, or for additional information relating to how HORNE may be able to assist your organization with Section 3 compliance and implementation, please contact us here to submit your inquiry.

About the author

About the author

James Dunphy has conducted training and technical assistance sessions with firm team members and clients on the basic requirements of the Section 3 Final Rule,  including most recently during a training session in March 2024 in Bay Minette, Alabama, with subrecipients of Government Services client the Alabama Department of Community and Economic Affairs (ADECA).

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