Worcester’s CitySquare, depicted above in a rendering, will replace the failed Worcester Commons Mall with a mixed-use development. The project will feature office buildings and new entertainment and retail destinations, and is located near the commuter rail.

A project that intends to revitalize Worcester’s flagging downtown area is closer than ever to a final agreement, but obstacles to projects with public funding continue to plague other development in the city.

Projects with at least partial public funding are common in the city where the state college is the biggest employer, but prevailing wage laws put construction in this mid-sized city at big-city levels, according to Roberta Schaefer, president and chief executive officer of the Worcester Regional Research Bureau.

“The cost of construction in Worcester is the same as it is in Boston because of prevailing wage, but Worcester cannot demand Boston rent. There’s a gap,” Schaefer said. “If I’m correct that you have to pay Boston prices for construction here, but you can’t get that rate, then you’ve got to change that dynamic. You can’t continue the prevailing wage and expect that places outside of Boston are going to be able to revitalize themselves.”

Massachusetts is one of many states that has a “mini-Davis Bacon Act.” The Davis Bacon Act is a federal law passed in 1931 that requires all construction projects with federal funding to pay workers the prevailing wage in the region. Massachusetts passed its own version of the law after President Bush said he no longer wanted to see the law enforced federally, Schaefer said.

So anytime construction is funded with state money – as Worcester’s CitySquare partially is – the law applies. A local law requiring contractors to participate in a state-certified apprenticeship program also restricts bidders on projects.

“Since a project like that requires some kind of subsidy, you’re into these labor costs,” Schaefer said.

CitySquare’s developers, Boston-based Berkeley Investments, recently entered into a deal with the city that will help move the project along. Barbara Smith-Bacon, the firm’s vice president and project manager, did not want to divulge the details of the agreement, but said that it would help move the project along by dividing the construction into more manageable bites.

CitySquare is to be a mixed-use development on the site of the failed Worcester Commons Mall, which has stood vacant for several years and takes up a large chunk of downtown, Schaefer said. There is little retail and there are not enough restaurants in the area, and CitySquare hopes to change that.

The development’s brokers have been getting tenants, and the hope is that demolition of the old mall will begin this year. Berkeley has also been getting calls from people interested in the residential part of the project, Smith-Bacon said.

“The good news is that people are starting to understand what the opportunity is there,” she said.

Berkeley bought the property three-and-a-half years ago. The company signed a development agreement in 2006, and has been using 2007 and 2008 to get marketing done.

“We think it’s moving along pretty quickly,” Smith-Bacon said.

CitySquare’s plans call for demolishing most of the mall, keeping some well-occupied office buildings there and building a street grid to give the area more of a traditional downtown feel. There will be new entertainment and retail destinations, and the project site is near the commuter rail.

“There is no destination for all those people who have moved to central Massachusetts,” Smith-Bacon said.

The project will add to other renovations that have upped the amount of entertainment in the city. Hanover Theater in Worcester was recently renovated, and is attracting Broadway-type shows.

Other projects with some public funding – which have to follow the prevailing wage law – include the Worcester Blackstone Visitor Center, which will be a “hub for heritage tourism and educational activities,” according to the Worcester Office of Economic and Neighborhood Development. The visitor center will cost $18 million. Nearing completion is the Union Station parking garage, a 500-car structure expected to open in July. The $22 million garage is intended to support development inside and around Union Station. The city is also building a new $72.8 million high school.

‘Open for Business’

With such a large higher education presence in the city, there are many ongoing projects that have some public funding. The University of Massachusetts Medical School is expanding in Worcester with a new $100 million research laboratory.

Several of the private colleges and universities in the city are also building, and some partnerships hope to attract small businesses that could employ some of the graduates.

The Worcester Polytechnic Institute has formed a partnership with the Worcester Business Development Corp. to create Gateway Park, a mixed-use project that includes condominiums and office and laboratory space for life sciences. Developers hope the project will attract start-up companies and keep some graduates in the city.

Worcester has been fairly successful attracting research companies, but there is still an industry missing from the city.

“What we haven’t captured here is a lot of the manufacturing,” Schaefer said. That is essential for serious employment growth in the city. And attracting new businesses should start with the city.

“The city government needs to be as business-friendly as possible,” she said. “Outsiders need to hear that this is a place open for business.”

The process for developing a new project in Worcester should be more transparent and organized so that potential developers can see how the process works.

“I’m not saying just accept anything, but the rules need to be reasonable and fair,” Schaefer said. “The city needs to develop a reputation for being business-friendly and open to business.”

The city manager has tried his best to create a business-friendly environment in the city, but has been met with obstacles, Schaefer said. In a February presentation to the City Council, she urged councilors to re-think the law requiring contractors on publicly funded projects to participate in apprenticeship programs.