Faced with resistance from the Department of Housing and Urban Development, Congress is considering legislation intended to settle a dispute over whether federal law requires payment of prevailing wages to all workers on federally financed construction projects.

The wage law, the 55-year-old Davis-Bacon Act, applies to many projects financed by HUD's Community Development Block Grants and Urban Development Action Grants. The act requires contractors to pay prevailing wages, but HUD has insisted that Davis-Bacon is triggered only when government funds are actually passed on to workers.

In most metropolitan areas, the prevailing wage is the union rate.

A bill introduced in the House last week by Rep. Bruce F. Vento (D-Minn.) would amend the Housing and Community Development Act of 1974 to specify that the Davis-Bacon law must be applied to a project if "any activity integrally and proximately related" to construction is paid for by federal funds. The amendment also says HUD may not prohibit use of a higher prevailing wage rate mandated by local or state laws.

Until recently, the Davis-Bacon law had been widely interpreted as covering construction workers paid by private funds if other aspects of a project, such as land purchases, were financed by government money. The Labor Department establishes the prevailing rate for all areas based on its surveys, or on the union wage rate if more than half the workers in the area are paid the union rate.

Opponents, including builders, contractors, and city and state governments, argue that the Davis- Bacon requirements add as much as 25 percent or more to the cost of a project, a figure disputed by labor unions and other supporters of the act.

In 1985, the Labor Department, which interprets Davis-Bacon, told HUD that when grant money is used for "activities which are integrally and proximately related" to construction, workers must be paid Davis-Bacon wages.

But HUD Secretary Samuel R. Pierce Jr. appealed to the Justice Department, arguing that the Labor Department's interpretation was too broad. In response, Assistant Attorney General Charles J. Cooper issued an opinion last August saying that federal law does not require payment of prevailing wages on government-funded projects unless the federal money is actually used to pay workers.

Vento said the administration interpretation of the law "is a transparent attempt to gut Davis-Bacon" and that HUD is "violating the law" by refusing to apply the act's standards.

"What I fear is that we will lose political support for housing and development programs," Vento said. "We are trying to provide housing for poor people, and we don't need to get into a fight" with powerful labor unions.

"Socioeconomic statutes" like the Davis-Bacon Act were enacted to prevent the government from using "its massive procurement strength to drive down wages in a given locality," according to Donald Elisburg, assistant secretary of labor for employment standards from 1977 through 1981. He said studies "used to show how much money can be saved by eliminating Davis- Bacon protection are simply incomplete, inaccurate and not credible."

Local governments and associations representing builders and contractors, however, insist that Davis-Bacon requirements increase costs and limit the usefulness of federal grants.

HUD General Counsel J. Michael Dorsey said the proposed amendment's restrictions could "seriously hamper many localities' efforts to attract new industry, new business, new housing or office construction." Local governments often use federal grants to buy land, equipment or services to lure private developers into public projects.

"Uncertainty" over how Davis-Bacon requirements will be interpreted "has delayed many {federal grant} projects," according to Sandy City, Utah, Mayor J. Steven Newton, who testified for the National League of Cities. The league believes "Davis-Bacon is an outdated law which has been superseded by other federal legislation protecting workers and should be repealed or substantially altered," he said.

Davis-Bacon must be applied to all federally assisted projects costing $2,000 or more, a level established when the act was implemented in 1931. A proposed amendment to the act would lift the threshold from $2,000 to $50,000.