Construction and engineering groups' campaign to repeal a withholding mandate for government contractors has suffered a setback in the Senate, but industry officials are expecting a positive vote on Oct. 27 in the House.

UPDATE2 (10/25) The House also is to take up a separate bill that would more than offset the revenue lost to the Treasury by repealing the 3% withholding mandate.

It is a different revenue-raiser than the one Senate Republicans proposed as a "pay-for". That offset mechanism was the main reason why many Senate Democrats opposed the repeal bill and blocked it on Oct. 19.

The Congressional Budget Office estimates the House 3% repeal measure's cost to the Treasury at $11.2 billion over 10 years.

The revenue-raising bill that the House plans to consider would produce $13 billion over 10 years, according to CBO. It would change the definition of adjusted gross income that determines whether a person is eligible for a health-insurance credit under last year's health-care law. The change would include counting all of a taxpayer's Social Security benefits in adjusted gross income.

The Office of Management and Budget issued a statement on Oct. 25 saying the Obama administration supports repealing the 3% requirement, but ensuring that companies with outstanding tax debts are barred from getting federal contracts.

OMB issued another statement saying the administration supports the House's offsetting pay-for bill.

The 3% withholding requirement now is slated to take effect in January 2013 and construction officials want to strike it from the books. It mandates that federal, state and local governments withhold payments equal to 3% of a contract's value from contractors.

The pro-repeal side got bad news on Oct. 19, when, on a procedural vote, the Senate blocked a repeal bill offered by Minority Leader Mitch McConnell (R-Ky.). McConnell's proposal fell three votes short of the 60 needed to take up the bill, effectively shelving it.

What opponents--all of whom were Democrats-- objected to was McConnell's pay-for. That was a $30-billion cut in discretionary spending to offset the estimated amount of revenue lost to the Treasury by repealing the withholding requirement. Under the bill, it would be up to the Office of Management and Budget to determine which programs would be trimmed to achieve the $30-billion reduction.

The White House issued a veto warning on the McConnell bill, because of its spending-cut provision.

McConnell's defeat may also have been due partly to a payback factor. The vote on his bill came after the Kentuckian had rounded up enough GOP votes to sink a bill most Democrats backed, to provide $30 billion in aid to states to hire or retain teachers and other employees. The $30 billion would be offset by a new tax on millionaires.

That state aid was part of the American Jobs Act package that President Obama proposed in September.

The vote to sidetrack McConnell's bill was unwelcome news to advocates of 3% repeal. Geoff Burr, Associated Builders and Contractors vice president of federal affairs, said in a statement,  “It is disappointing that Senate Democrats have chosen to once again place politics before efforts to get Americans back to work.”

But a positive development seems on the horizon for Burr and other construction and design industry officials. The GOP-controlled House is scheduled to vote on Oct. 27 a repeal bill and it looks like the votes are there to pass it.

The measure that's on Majority Leader Eric Cantor's schedule for floor action is H.R. 674, introduced by Rep. Wally Herger (R-Calif.), which repeals the 3% mandate without any offsetting revenue-raisers. With 269 co-sponsors, it probably will sail through the House.

The fate of Herger's bill and the revenue-raising pay-for bill is unclear in the Senate.

The Associated General Contractors of America, ABC and other construction groups have been lobbying hard for repealing the 3% requirement. If that mandate takes effect, the impact on the construction industry would be "devastating," AGC CEO Stephen Sandherr told reporters in an Oct. 21 conference call.

AGC released a survey of 1,300 of its member companies spelling out the impact of the 3% requirement.  Of the 1,300 firms responding to the survey,  49% said the withholding mandate would cause them to hire fewer workers, 65% said they would have to cut back on equipment purchases and 17% said they would have difficulty continuing to operate.

Moreover, 63% of the respondents said their profit margin on government projects was less than 3%. Sandherr said, "In other words, contractors will be forced to carry a loss on public works for months at a time," if the 3% mandate goes into effect.

Ellis Hefner, controller of RR Dawson Bridge Co., Lexington, Ky., said, "Our firm is right in the cross-hairs of this," noting that all of the company's business comes from projects that include some federal funding. He said, "We wouldn't have any choice but to defer equipment purchases or maybe even pass up  jobs...."

The 3% mandate was enacted in 2006 and originally was to kick in at the start of 2011. But its effective date has been delayed twice.