Working on a HUD-funded project means planning for Section 3 long before the first shovel hits dirt. HUD Section 3 Requirements kick in whenever a housing or community development project uses HUD funding over the threshold ($200,000 for most projects, $100,000 for certain lead-hazard grants). If your project qualifies, everything you do must “to the greatest extent feasible” benefit low-income local residents and businesses. In practice, that means targeting hires, training, and contracts to Section 3 workers and businesses, and keeping thorough records of how you did it.
Complying with Section 3 isn’t just “administrative paperwork” – it directly affects your timeline and bottom line. Missing the mark can lead to stop-work orders, contract changes, or HUD enforcement down the road. By building Section 3 into your plan early, you protect profitability and avoid last-minute scrambles.
Section 3 Basics: Projects and People
A Section 3 project is any HUD-assisted construction or rehab project over $200K (or $100K for HUD lead programs). This includes Community Development Block Grant (CDBG), HOME, public housing rehab, and similar programs. HUD’s goal is to send jobs and business opportunities to “low- and very low-income persons, particularly those who receive government assistance for housing”. In practical terms, Section 3 workers are local people whose household income is below HUD limits or who live in public housing/Section 8, and Targeted Section 3 workers include public housing or Section 8 residents and YouthBuild participants. A Section 3 business is one that is majority owned by low-income persons or hires mostly low-income employees (definitions in 24 CFR 75.5).
Key takeaway: If you’re a contractor on a covered HUD project, you and your subs must make a good-faith effort to hire and train local Section 3 workers and use Section 3 businesses, and document every step. These obligations are usually written into your contract.
Pre-Construction Checklist (Plan Ahead)
Before work begins, assemble your Section 3 compliance plan. Contractors should treat Section 3 as part of bid and mobilization planning – like safety or bonding – not an afterthought. At a minimum:
- Confirm Section 3 applies. Check total HUD funding. If you hit the threshold, Section 3 rules kick in. Remember it applies to the entire project (even portions subcontracted, but not to pure materials/equipment purchases).
- Include the Section 3 clause. Every bid package and subcontract should have the HUD Section 3 contract clause. This legally binds you and your subs to comply. Many recipients require prime and subcontracts to include a flow-down of Section 3 obligations.
- Develop an Outreach Plan. List the steps you will take to reach Section 3 workers and businesses. Good practices include: contacting the local public housing authority or community action agency to announce openings, advertising in neighborhood media or job boards, reaching out to union halls and training centers, and notifying community organizations that serve low-income residents. Document each outreach effort in writing.
- Identify Targeted Positions. Figure out what trades or roles your project will need and which of those are likely to be filled by local hires. Plan apprenticeships or on-the-job training slots for Section 3 candidates. If you’ll use subcontractors, collect a roster of known Section 3-certified businesses in your area and consider how to break out scopes for them.
- Set clear responsibilities. Make sure someone on the team owns Section 3 compliance (project manager or safety/compliance manager, etc.) and that all supervisors and HR staff know what to look for.
By ticking these boxes early, you lay the groundwork for smooth execution. Example: One housing authority notes that to “the greatest extent feasible,” contractors should, at bidding and award, notify the housing authority of job openings, advertise locally, and develop on-the-job training for residents. Even something as simple as providing the PHA with your job posting can create a record of your outreach.
Hiring, Training, and Recordkeeping
Once the project is active, tracking who you hire and train is critical. HUD no longer measures Section 3 by counting new hires; it measures labor hours worked by Section 3-eligible workers. This shift means you should:
- Verify Section 3 status at hire. For any candidate you count as a Section 3 hire, maintain documentation of their eligibility. HUD allows several forms of proof: a worker can self-certify their income is below HUD’s low-income limit (e.g. 80% of AMI), or their participation in public housing/Section 8. Alternatively, a PHA or Section 8 administrator can certify a worker’s status, or the employer can certify either that the person is a current Section 3 business employee or that their pay is below the income threshold. Keep these forms in the personnel file.
- Track labor hours by worker. Update your payroll or timesheets to distinguish Section 3-qualified hours. For example, if a worker spends 30 hours a week on the project, note how many of those hours go to Section 3-eligible tasks or roles. HUD’s rule lets you report a “good faith assessment” of hours if you don’t have detailed time tracking, but the more precise your records, the better you can demonstrate compliance.
- Report targeted hires. If you hire workers from public housing or Section 8 (targeted Section 3 workers), treat them as double credit. They count toward the 5% targeted-hours benchmark (within the 25% overall benchmark). Examples include current public housing residents or members of HUD-funded training programs. Document their residency or program status (certificates from the housing authority, or self-certification of address within the project area) at hire.
- Document training and apprenticeships. If you create HUD-funded training slots (including union apprenticeships or other workforce development tied to the project), record enrollment and completion. While not strictly mandated in HUD regs, training local Section 3 candidates is a fundamental goal. A completed apprenticeship or job training certification for a Section 3 candidate is good proof of compliance.
- Maintain subcontractor records. Require each subcontractor to follow the same rules. Collect from each sub their Section 3 outreach plan and certifications of any Section 3 hires they report. Many jurisdictions mandate that subcontractors over a certain dollar threshold submit full Section 3 compliance plans (for example, Kansas City requires subs with contracts over $100K to submit Section 3 Plans to the prime). Keep subcontractor payrolls and status docs in your files so everything is in one place if HUD asks.
Throughout construction, build field documentation the same way you would handle a safety audit. For each pay period, track:
- Job postings and outreach logs. Save copies of job adverts (print or digital) and a log of where and when you posted. Keep attendance sheets or sign-in logs for any hiring events.
- Worker certifications and affidavits. File each Section 3/self-certification form with the employee’s payroll record. If a worker’s eligibility relies on external verification (e.g. a housing authority letter), keep that too. Remember HUD requires these documents be kept for the period of performance plus retention period (usually 5 years).
- Timesheets/payroll detail. Your payroll records should connect employees, hours, and classification. If your payroll system doesn’t flag Section 3 status, add a note or code for Section 3 workers in a memo line. Ensure that the certified payroll reports you submit to the HUD funder (often monthly or quarterly) align with these internal records.
- Proof of wages and benefits paid. Keep accurate wage and fringe benefit calculations for Section 3 hours. (Recall, like Davis-Bacon, Section 3 hours must be paid at or above the required rate.) These logs are part of demonstrating Section 3 hires actually worked the hours claimed.
- Subcontractor submissions. Keep copies of each sub’s Section 3 plan, quarterly reports, and their own documentation. If a sub claims they hired Section 3 workers, verify it by inspecting their submitted forms.
- Other outreach evidence. Some jurisdictions require on-site signage (e.g. “This is a HUD Section 3 Project”), or brochures and community notices. If used, keep photos or copies.
In short, document everything. HUD and its grantees will want to see “comprehensive documentation of [your] Section 3 outreach efforts and implementation activities”. That means your files should tell the whole story: we advertised, here are the candidates, here’s who we hired (and their Section 3 status), and here’s the payroll proof.
Reporting and Flow-Down
HUD recipients (PHAs or local agencies) often require regular Section 3 reports to meet federal rules. Contractors should assemble data for these reports. Common elements include total Section 3 labor hours and wages, count of Section 3 hires, and list of Section 3 businesses used. For example, some cities require quarterly Section 3 reports submitted to their compliance office. Even if your HUD funder doesn’t formally collect these numbers monthly, providing them on request protects you and the project.
Critically, all subcontractors must flow down the Section 3 requirements. In practice, prime contractors should:
- Insert HUD’s Section 3 clause into every subcontract, and confirm subs know their obligations.
- Obtain and review each sub’s Section 3 plan (if required by the owner) and reports.
- Audit sub payrolls or interview sub workers if needed to verify their compliance.
Conclusion: Build It In for a Smooth Project
HUD Section 3 compliance doesn’t have to derail your project or threaten profits – if you make it part of the plan. By integrating Section 3 into pre-construction planning, field execution, and payroll reporting, you minimize last-minute changes and protect margins. In fact, a well-run Section 3 process can be a selling point, improving community relations and workforce stability.
Remember: your goal is not “more paperwork,” but a clearer path to meeting HUD’s goals. If all this feels overwhelming, get expert help early. Book a Prevailing Wage Strategy Session with Prevailing Wage Consulting to have specialists review your project plan, uncover any compliance gaps, and build a practical process before mobilization. Protect your profitability and keep the project moving by getting the Section 3 process right from day one.
