Rule2026-03002
Section 3 Project Threshold Updates for Creating Economic Opportunities for Low- and Very Low-Income Persons and Eligible Businesses
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Published
February 13, 2026
Effective
March 16, 2026
Issuing agencies
Housing and Urban Development Department
Abstract
The Section 3 rule "Enhancing and Streamlining the Implementation of Section 3 Requirements for Creating Economic Opportunities for Low- and Very Low-Income Persons and Eligible Businesses" published in the Federal Register on September 29, 2020, includes a requirement that the HUD Secretary update Section 3 project thresholds "not less than once every 5 years based on a national construction cost inflation factor through Federal Register notice not subject to public comment." This notice serves as an update of the 2020 version of the final rule, discusses the establishment of a national construction cost inflation factor for Section 3 projects, and establishes new Section 3 project thresholds.
Full Text
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<title>Federal Register, Volume 91 Issue 30 (Friday, February 13, 2026)</title>
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[Federal Register Volume 91, Number 30 (Friday, February 13, 2026)]
[Rules and Regulations]
[Pages 6752-6756]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-03002]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 75
[Docket No. FR-6085-N-05]
Section 3 Project Threshold Updates for Creating Economic
Opportunities for Low- and Very Low-Income Persons and Eligible
Businesses
AGENCY: Office of the Assistant Deputy Secretary for Field Policy and
Management, HUD.
ACTION: Notification of Section 3 Project Funding Threshold Updates.
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SUMMARY: The Section 3 rule ``Enhancing and Streamlining the
Implementation of Section 3 Requirements for Creating Economic
Opportunities for Low- and Very Low-Income Persons and Eligible
Businesses'' published in the Federal Register on September 29, 2020,
includes a requirement that the HUD Secretary update Section 3 project
thresholds ``not less than once every 5 years based on a national
construction cost inflation factor through Federal Register notice not
subject to public comment.'' This notice serves as an update of the
2020 version of the final rule, discusses the establishment of a
national construction cost inflation factor for Section 3 projects, and
[[Page 6753]]
establishes new Section 3 project thresholds.
DATES: Effective Date: March 16, 2026.
FOR FURTHER INFORMATION CONTACT: Ashley E. Mendoza, Director of
Strategic Initiatives, Office of Field Policy and Management,
Department of Housing and Urban Development, 451 7th Street SW, Room
7118-21, Washington, DC 20410; telephone 202-372-8530 (this is not a
toll-free number). General email inquiries regarding Section 3 may be
sent to: <a href="/cdn-cgi/l/email-protection#58173e3e313b3d373e1e313d343c083734313b2139363c153936393f3d353d362c18302d3c763f372e"><span class="__cf_email__" data-cfemail="87c8e1e1eee4e2e8e1c1eee2ebe3d7e8ebeee4fee6e9e3cae6e9e6e0e2eae2e9f3c7eff2e3a9e0e8f1">[email protected]</span></a>. HUD welcomes and is
prepared to receive calls from individuals who are deaf or hard of
hearing, as well as individuals with speech or communication
disabilities. To learn more about how to make an accessible telephone
call, please visit <a href="http://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs">www.fcc.gov/consumers/guides/telecommunications-relay-service-trs</a>.
SUPPLEMENTARY INFORMATION:
I. Background
Section 3 of the Housing and Urban Development Act of 1968, as
amended by the Housing and Community Development Act of 1992 (Section
3) contributes to the establishment of stronger, more sustainable
communities by ensuring that employment and other economic
opportunities generated by Federal financial assistance for housing and
community development programs are, to the greatest extent feasible,
directed toward low- and very low-income persons, particularly those
who are recipients of government assistance for housing. HUD is
statutorily charged with the authority and responsibility to implement
and enforce Section 3 through regulation, which HUD has done through
the final rule titled ``Enhancing and Streamlining the Implementation
of Section 3 Requirements for Creating Economic Opportunities for Low-
and Very Low-Income Persons and Eligible Businesses,'' published on
September 29, 2020 in the Federal Register at 85 FR 61524 (``Section 3
final rule''), which amended, among others, 24 CFR part 75.
Applicability is covered in 24 CFR 75.3, where the regulation
establishes that Section 3 requirements apply to ``public housing
financial assistance and Section 3 projects.'' Public housing does not
have a threshold for financial assistance and any dollar amount of
public housing financial assistance provided to grantees will trigger
Section 3 compliance requirements. Therefore, this notice does not
apply to public housing financial assistance, which is subsequently
defined at 24 CFR 75.3(a)(1).
A ``Section 3 project'' on the other hand is a unique term that is
subject to financial assistance thresholds and is defined in 24 CFR
75.3(a)(2)(i) to mean
. . . housing rehabilitation, housing construction, and other public
construction projects assisted under HUD programs that provide housing
and community development financial assistance when the total amount of
assistance to the project exceeds a threshold of $200,000. The
threshold is $100,000 where the assistance is from the Lead Hazard
Control and Healthy Homes programs, as authorized by Sections 501 or
502 of the Housing and Urban Development Act of 1970 (12 U.S.C. 1701z-1
or 1701z-2), the Lead-Based Paint Poisoning Prevention Act (42 U.S.C.
4801 et seq.); and the Residential Lead-Based Paint Hazard Reduction
Act of 1992 (42 U.S.C. 4851 et seq.). The project is the site or sites
together with any building(s) and improvements located on the site(s)
that are under common ownership, management, and financing.
HUD's Section 3 final rule requires at 24 CFR 75.3(a)(2)(ii) that
``[t]he Secretary must update the thresholds provided in paragraph
(a)(2)(i) not less than once every 5 years based on a national
construction cost inflation factor through Federal Register notice not
subject to public comment.''
II. Research and Methodology
The final rule indicates that updates to the established financial
assistance thresholds for Section 3 projects must be based on a
``national construction cost inflation factor.'' The determination of
how to calculate the national construction cost inflation factor is
left to the discretion of HUD as the term is undefined in the final
rule and comments.
The current definition of Section 3 projects requires Section 3
compliance if a housing rehabilitation, housing construction, or other
public construction project receives more than $200,000 of HUD housing
and community development financial assistance or receives more than
$100,000 from Lead Hazard Control and Healthy Homes programs. This
means that the thresholds that need to be adjusted for construction
cost inflation are $200,000 and $100,000 respectively.
The first step in establishing this ``national construction cost
inflation factor'' (hereafter Construction Inflation Factor) is
defining ``construction.'' ``Construction'' is left undefined in the
Section 3 regulations, so analysis requires additional sources. The
original drafters of 24 CFR part 75 considered Bureau of Labor
Statistics (BLS) publications when first determining the threshold
levels for housing and community development projects, so it makes
sense to look to the BLS for additional guidance around this analysis.
The North American Industry Classification System (NAICS),
originally developed by the Office of Management and Budget (OMB), is
the standard used by Federal statistical agencies, including BLS, in
classifying businesses for collecting, analyzing, and publishing
statistical data related to U.S. businesses. The NACIS uses two- to
six-digit codes to classify different sectors and subsectors of the
U.S. business economy, and NAICS 23 broadly covers the construction
sector. The NAICS defines Sector 23--Construction as comprising
``establishments primarily engaged in the construction of buildings or
engineering projects.'' It also establishes that ``Construction work
done may include new work, additions, alterations, or maintenance and
repairs.'' As Section 3 projects are defined as ``housing
rehabilitation, housing construction, and other public construction
projects,'' \1\ NAICS 23 clearly encompasses the type of work that is
performed on Section 3 projects.
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\1\ 24 CFR 75.3(a)(2).
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With ``construction'' defined for purposes of this analysis, the
next step is to evaluate and determine what data elements should be
considered in developing the ``Factor.'' When initially determining the
threshold, HUD looked at BLS data on labor share for construction
projects as part of the calculations. While this analysis does not seek
to recreate the same formula that was used in that initial
determination of the threshold, which also analyzed CDBG, HOME, and
lead hazard grant amounts, it will continue the precedent of using BLS
data to estimate cost shares as part of the formula.\2\
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\2\ When the original threshold calculations were made, HUD used
2017 BLS data as it was most recent available data. Thus, this
analysis will use 2017 data as the baseline for the calculation of
the construction cost increase and new thresholds. At the time of
writing, the most recent available data for cost shares is 2023
data.
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The BLS Office of Productivity and Technology (OPT) defines five
different cost shares that represent a portion of and aggregate to the
total cost of construction:
1. Capital Share
2. Labor share
3. Energy share*
4. Materials share*
5. Services share*
Each of these shares are defined by OPT as ``the proportion of
current-dollar
[[Page 6754]]
output attributed to the use of [the applicable factor].'' \3\ The
final three shares are identified with an asterisk because the BLS also
publishes data on ``intermediate inputs,'' which is an aggregate data
point for all energy, materials, and services that are used in the
production of other goods and services for final consumption. So, the
data related to energy, materials, and services can be combined and
represented in the aggregate as ``intermediate inputs,'' but, for the
purposes of this analysis, these three categories will be discussed
independently to illustrate the methodology more clearly. This also
allows for a more granular investigation of the changes in construction
costs over time. Additionally, OPT publishes their cost shares as
fractional shares represented by a decimal to the thousandth place
(three decimal places). The published shares are displayed as a
percentage to the tenth place (one decimal place) for simplicity, and
calculated percentages will be displayed the same way for the sake of
consistency.\4\
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\3\ BLS Productivity Glossary (<a href="https://www.bls.gov/productivity/glossary.htm">https://www.bls.gov/productivity/glossary.htm</a>).
\4\ All calculated values are displayed to the tenth place to
match BLS data, but the calculated values themselves were not
rounded in the process of the calculations.
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Table 1 below shows the cost shares (as a percentage of the total
construction cost) for each of the components in 2017 and 2023 with the
percentage changes over that time period indicated. The percentage
change for each category is calculated by finding the difference
between the 2023 share and the 2017 share and then dividing that
difference by the baseline 2017 value. A decrease in a category's share
is reflected as a negative percentage change. As illustrated by the
data, these five cost share percentages have either increased or
decreased by different amounts over the identified period of time, so
this analysis will need to consider these changes in calculating the
new threshold levels. If these changes in cost shares are not
considered, the new thresholds may over- or undervalue certain
categories of construction projects and yield a less representative
calculation.
Table 1
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% of % of
construction construction % Change
cost (2017) cost (2023)
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Capital Share................................................... 10.4 12.8 23.1
Labor Share..................................................... 42.8 39.4 -7.9
Energy Share.................................................... 2.4 2.1 -12.5
Materials Share................................................. 35.3 35.2 -0.3
Services Share.................................................. 9.1 10.5 15.4
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Subdividing into those same five categories, BLS also publishes
data on construction cost per component of construction:
1. Capital costs
2. Labor costs
3. Energy costs*
4. Materials costs*
5. Services costs*
Each of these costs is defined by OPT as ``the payments to purchase
[applicable factor] for use in the production of goods and services.''
\5\ Again, like with component shares, BLS aggregates energy,
materials, and services costs into ``intermediate input'' cost, but
this analysis will use each of the individual component costs.
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\5\ BLS Productivity Glossary (<a href="https://www.bls.gov/productivity/glossary.htm">https://www.bls.gov/productivity/glossary.htm</a>).
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Table 2 below shows the BLS data on costs for each component of
construction from both 2017 and 2023 with the percentage changes
included for each. The percentage change for each cost category is
calculated by finding the difference between the 2023 cost and the 2017
cost and then dividing that difference by the baseline 2017 cost.\6\
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\6\ The calculated change is displayed as a percentage to the
tenth place (one decimal) to match the display of published BLS
data. These values were not rounded during the process of the
calculation.
Table 2
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2017 Cost in Cost in
billions billions % Change
(2017) (2023)
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Capital Cost.................................................... $163.653 $298.578 82.4
Labor Cost...................................................... 674.710 919.092 36.2
Energy Cost..................................................... 37.992 49.116 29.3
Materials Cost.................................................. 556.730 821.047 47.5
Services Cost................................................... 142.764 244.623 71.3
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In order to determine how much the overall cost of construction has
increased over the identified time period (2017-2023), calculation is
first required to find how much each category individually has
contributed to the overall cost change. This can be done by multiplying
the category's current cost share percentage by the percentage change
in construction which will result in the fractional (or percentage)
contribution of that category's cost changes to the overall change in
total construction cost.
Variables:
If:
<bullet> S<INF>x</INF> = the share of total construction cost at a
given time for a single category of construction with the subscript X
serving as a placeholder (expressed as a decimal)
<bullet> [Delta]C<INF>x</INF> = the percentage change in cost for a
single category of construction with the subscript X serving as a
placeholder (expressed as a decimal)
[[Page 6755]]
Then the calculation can be written as,
<bullet> S<INF>x</INF> x [Delta]C<INF>x</INF>
The result of this formula tells us how much the total construction
cost has changed due to the change in a single category's cost, as a
percentage of the overall cost (expressed as a decimal). Stated
differently, it is the fractional (or percentage) impact on total
construction cost due to a single category's cost change. The final
equation for impact (represented by I<INF>X</INF>) of the construction
category can therefore be written as:
[GRAPHIC] [TIFF OMITTED] TR13FE26.002
Single Category Example
To more clearly illustrate this concept, one can plug values into
the formula. This example will use the category of labor simply because
it is the largest cost share of the five. Calculations for the other
categories will follow later in this analysis.
For this example, the subscript X will be replaced with subscript L
to represent labor, and thus the equation can be rewritten as . . .
<bullet> I<INF>L</INF> = S<INF>L</INF> x [Delta]C<INF>L</INF>
Where:
<bullet> S<INF>L</INF> = Labor Share
<bullet> [Delta]C<INF>L</INF> = the percentage change in Labor Cost
over time
<bullet> I<INF>L</INF> = Impact of labor costs on the overall
construction cost change
This calculation will give us the fractional (or percentage) impact
on total construction cost due to labor cost changes over the given
time frame (in this case 2017-2023).
Using the percentages (expressed as decimals) provided in Tables 1
and 2 respectively, the formula becomes:
<bullet> 0.394 x 0.362 = 0.143
This means that the overall cost of a construction project went up
by 14.3% from 2017 to 2023 as a result of the increase in labor costs
over the same period.
Total Cost Increase Formula
As noted, the formula derived above only gives the percentage
contribution of a single category to the overall change in total
construction cost. To determine the overall percentage increase in
total construction cost over time, the contribution of each category's
cost increase must be calculated and then combined. This formula will
follow the same logic and naming convention as demonstrated in the
single category example with labor share.
<bullet> S<INF>C</INF> = Capital Share
<bullet> S<INF>L</INF> = Labor Share
<bullet> S<INF>E</INF> = Energy Share
<bullet> S<INF>M</INF> = Materials Share
<bullet> S<INF>S</INF> = Services Share
<bullet> [Delta]C<INF>C</INF> = the percentage change in Capital Cost
over time
<bullet> [Delta]C<INF>L</INF> = the percentage change in Labor Cost
over time
<bullet> [Delta]C<INF>E</INF> = the percentage change in Energy Cost
over time
<bullet> [Delta]C<INF>M</INF> = the percentage change in Materials Cost
over time
<bullet> [Delta]C<INF>S</INF> = the percentage change in Services Cost
over time
<bullet> I<INF>C</INF> = Impact of capital costs on the overall
construction cost change
<bullet> I<INF>L</INF> = Impact of labor costs on the overall
construction cost change
<bullet> I<INF>E</INF> = Impact of energy costs on the overall
construction cost change
<bullet> I<INF>M</INF> = Impact of materials costs on the overall
construction cost change
<bullet> I<INF>S</INF> = Impact of services on the overall construction
cost change
This calculation can be expressed as five individual formulas (one
for the impact of each category), as demonstrated in the labor example
above, added together. Thus, the construction inflation factor (CIF)
referenced in 24 CFR 75.3(a)(2)(ii) is defined as the total percentage
increase in construction cost over a given time period, which can be
expressed as:
[GRAPHIC] [TIFF OMITTED] TR13FE26.003
Or, if the respective equations for impact on overall construction
cost are inserted, the equation can be rewritten:
[GRAPHIC] [TIFF OMITTED] TR13FE26.004
Substituting percentages given in Tables 1 and 2 (expressed as
decimals) results in the following calculation:
<bullet> (0.128 x 0.824) + (0.394 x 0.362) + (0.021 x 0.293) + (0.352 x
0.475) + (0.105 x 0.713)
After solving for each category's contribution to the overall
change in construction cost, the formula can be simplified and then
solved:
<bullet> 0.106 + 0.143 + 0.006 + 0.167 + 0.075 = 0.496
This means that, accounting for the contribution of each of the
five categories, total construction cost increased by 49.6% from 2017
to 2023.\7\
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\7\ Individual category contributions: Capital = 10.6%; Labor =
14.3%; Energy = 0.6%; Materials = 16.7%; Services = 7.5%
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Application to Section 3 Thresholds
With the national construction cost inflation factor defined, the
formula can be applied to the existing Section 3 project funding
thresholds. To determine the change (in dollars) to the threshold,
first multiply the construction inflation factor times the current
project threshold. In the formula, the construction inflation factor
will be represented by CIF and the current threshold will be
represented by T<INF>C</INF>:
<bullet> CIF x T<INF>C</INF>
However, this result only shows the change in the threshold. In
order to find the new threshold, the current threshold total must be
added to the above formula, resulting in the equation for the new
threshold (represented as T<INF>N</INF>):
[GRAPHIC] [TIFF OMITTED] TR13FE26.005
This equation can also be combined with the above CIF equation to
give a single equation to determine the new Section 3 thresholds:
[GRAPHIC] [TIFF OMITTED] TR13FE26.006
[[Page 6756]]
Or, if each of the individual equations is substituted for impact
on total construction cost, the equation can be rewritten:
[GRAPHIC] [TIFF OMITTED] TR13FE26.007
III. Threshold Update
The final step is to plug in the numbers and find the new Section 3
funding thresholds. As was determined in the previous section, the CIF
equation showed that the cost of construction increased by 49.6% \8\
from 2017-2023. Using the current thresholds, one can then solve for
T<INF>N</INF>. There are currently different thresholds for general
Housing and Community Development projects and Lead Hazard Control and
Healthy Homes projects; therefore, we will solve for both. Housing and
Community Development Threshold: \9\
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\8\ This number is expressed as a percentage rounded to the
tenth place for simplicity in the narrative, but it is not
recommended to be rounded during the calculation. Rounding should
only take place at the end of the entire calculation process to
maintain accuracy.
\9\ The total of $299,200 is found if the result of the equation
for the CIF is rounded to three decimal places, 0.496 in this case.
If the results are left unrounded throughout the equation, which is
recommended, the total comes to a more accurate $299,284.11 (rounded
to two decimals).
<bullet> T<INF>N</INF> = 200,000 + (0.496 x 200,000)
<bullet> T<INF>N</INF> = $299,200
Lead Hazard Control and Healthy Homes Threshold \10\
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\10\ The total of $149,600 is found if the result of the
equation for the CIF is rounded to three decimal places, 0.496 in
this case. If the results are left unrounded throughout the
equation, which is recommended, the total comes to a more accurate
$149,642.05 (rounded to two decimals).
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<bullet> T<INF>N</INF> = 100,000 + (0.496 x 100,000)
<bullet> T<INF>N</INF> = $149,600
New Section 3 Thresholds
This analysis determines that the Section 3 project thresholds for
Housing and Community Development projects and Lead Hazard Control and
Healthy Homes projects should be about $299,200 and $149,600
respectively. These numbers were computed using the original threshold
amounts of $200,000 and $100,000 and then using the newly defined
national construction cost inflation factor to account for the
nationwide increases in construction cost from 2017-2023.
However, it is not practical for compliance efforts to use such
exact numbers. Therefore, HUD has decided to round these numbers to
$300,000 for Section 3 Projects that receive Housing and Community
Development financial assistance and $150,000 where the assistance is
from Lead Hazard Control and Healthy Homes programs for ease of both
external compliance and internal administration and monitoring. The
proximity of the raw calculation results to these rounded numbers makes
the decision to round very sensible, but it should not serve as a
precedent for future calculations as HUD cannot anticipate the
adjustments that may later be needed to best administer Section 3.
Joseph DeFelice,
Assistant Deputy Secretary for Field Policy and Management.
[FR Doc. 2026-03002 Filed 2-12-26; 8:45 am]
BILLING CODE 4210-67-P
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