I interviewed several months ago with a CDBG consulting firm, and the panel asked extremely detailed questions about Section 3 and contracting. It's my understanding that hiring contractors that qualify as Section 3 is a goal. Genuine efforts need to be made and documented towards meeting the goal, but it's not a requirement to meet the goal. Davis Bacon on the other hand is absolutely mandatory. It's interesting that Section 3 was pushed down as an contractual requirement rather than a goal since that could be problematic.
In the scenario you described, it's possible that your company would no longer qualify as a Section 3 business concern if Davis-Bacon salaries were paid year long, but at the same time the intent of Section 3 is being met: to provide job opportunities for low income persons. In fact, it would be seen as a major Section 3 success if all the employees would no longer qualify as low-income. I suspect that an argument could be made about the temporary nature of the Davis Bacon job that might allow you to keep Section 3 status with HUD's blessing.
With all that said, I didn't get the job. So maybe I have it all wrong.
I would also be interested if anyone else could provide some insight.