Organizations that regularly receive federal funds from the U.S. Department of Housing and Urban Development (HUD) are generally familiar with federal labor standards, such as the Davis-Bacon Act. While Section 3 requirements are often discussed in the same context as labor standards, they differ in both scope and application.
Unlike federal labor standards, which are broadly applied across construction projects, Section 3 requirements are not crosscutting. They apply specifically to HUD-funded housing rehabilitation, housing construction, and certain public construction projects once funding thresholds are met.
Section 3 was established under the Housing and Community Development Act (HCDA) of 1968 and was designed to ensure that employment and economic opportunities created from HUD financial assistance 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 these individuals.
Section 3 Old Rule
Prior to the new Section 3 rule in November 2020, compliance was based on hiring and contracting numbers. Covered recipients and contractors were expected to have:
- 30% of all new hires meet the criteria for Section 3 residents
- 10% of the recipient’s construction contract amount awarded to a Section 3 business(es).
Section 3 Final Rule
The final rule adopted by HUD in November 2020 was largely in response to the ineffectiveness of the requirements under the old rule. The final rule, issued under 24 CFR Part 75, changed how Section 3 compliance is measured. Instead of focusing on hiring outcomes, the rule requires recipients to track and report labor hours worked by Section 3 workers.
The rule also streamlines the reporting process for funding recipients and establishes oversight by individual HUD program offices, in order to reduce administrative burden and enhance the rule’s effectiveness.
Key Definitions Under the Final Rule
Under the final rule, a Section 3 worker is an individual who meets one of the following:
- Has an annual income (for the previous calendar year) below the income limit established by HUD,
- Is employed by a Section 3 business concern, or
- Participates in the Federal Department of Labor’s YouthBuild program.
A Section 3 business concern is defined as a business that:
- Is at least 51 percent owned and controlled by low- or very low-income individuals,
- Has at least 75 percent of the labor hours performed by Section 3 workers over the prior three-month period, or
- Is at least 51 percent owned and controlled by current public housing or Section 8-assisted housing residents.
A Targeted Section 3 worker is similar to the criteria for a Section 3 worker but is based on the type of HUD financial assistance (e.g., public housing, housing and community development) being used for the project.
Current Benchmarks
As of October 2023, current Section 3 benchmarks for HUD recipients and subrecipients state that:
- At least 25% of all labor hours on a Section 3 project should be performed by Section 3 workers, and
- At least 5% of labor hours must be performed 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 at the end of 2023, HUD did not alter the existing benchmarks, citing a lack of data to make a change. The 25 percent and five percent hour ratios will therefore remain in effect until the next three-year review toward the end of 2026.
Updated Section 3 Project Thresholds
In February 2026, HUD updated the project funding thresholds that trigger Section 3 applicability. The update reflects nationwide increases in construction costs and applies a newly defined national construction cost inflation factor to the original threshold amounts.
For Community Development Block Grant, Disaster Recovery (CDBG-DR) projects, Section 3 requirements now apply to projects receiving more than $300,000 in HUD funding, effective March 16, 2026.
HUD Resources
HUD developed a multi-part video series to equip recipients with a foundational understanding of the “final rule” and to allow for effective implementation of Section 3 requirements. The series addresses:
- Housing and Community Development Financial Assistance programs, including CDBG
- Public Housing Financial Assistance
- Apprenticeship program integration
- Program- and project-level compliance considerations
How BDO Can Help
BDO’s Government Services professionals assists clients with navigating Section 3 compliance, including:
- Development of Section 3 policies and procedures that encompass all requirements at 24 CFR Part 75, including contracting, reporting, and documentation.
- Training to enhance understanding in all areas of Section 3, and technical assistance to contractors to enable them to understand and bid on contracts.
- Targeted outreach for construction contractors to generate job applicants who meet Section 3 and Targeted Section 3 worker eligibility criteria.
- Monitoring and reporting support, including validation of reported labor hours and review of recipient and subrecipient submissions for completeness and accuracy.
If you have a specific question or request relating to Section 3, or for additional information relating to how BDO may be able to assist your organization with Section 3 compliance and implementation, please contact our Government Services team.