Part four in a 2023 series from Deltek
By John Meibers, Deltek ComputerEase
Construction payroll may seem like a daunting task. Complexities such as prevailing wage work, outsourcing, and submitting reports can quickly become overwhelming. In this guide, we discuss the unique challenges of construction payroll and how to overcome them.
What is Construction Payroll?
Simply put, construction payroll is the total amount of wages and salaries paid by a company to its employees. The primary goal of construction payroll is to ensure that employees get paid accurately and on time. However, ensuring that contractors and employees submit accurate reports on their working hours and comply with regulations can be an administrative nightmare for businesses.
Why is Construction Payroll Unique?
Construction payroll deals with many complexities that other industries don’t have to worry about, such as prevailing wage and multi-state/multi-city requirements.
Payroll laws frequently change, which can confuse companies and distract them from their day-to-day jobs. Not following correct payroll laws leads to inaccurate payroll and can be detrimental to your business. It can also erode employee trust and create problems. On a larger scale, a single mistake can lead to serious repercussions such as lawsuits and fines. Submitting incorrect payroll amounts for taxes can result in penalties that range from 2%-15% of the total payroll.
Five Reasons Construction Payroll is Unique
1. Multiple Jobs
Keeping track of employees across multiple jobs at different rates can add an additional layer of complexity to your construction payroll. It can be difficult for construction companies to juggle job costing reports with accounting software and create certified payroll reports for government agencies.
2. Multi-Pay Rates
If employees perform more than one task or work on more than one job for the same company, they may earn multiple pay rates. For example, an electrician may earn an hourly wage on one site but a different rate on another site. When overtime is added into the equation, it can make it more complicated to track hours for each worker and their pay rates. It also makes it more of a challenge to pay the correct rates for the correct duties performed.
3. Multi-State and Multi-City Requirements
Multi-state payroll refers to the process of managing the payroll of employees that live in one state but work in another. It can also apply to businesses that operate in more than one state or an employee that works in multiple states. These requirements can be particularly complex because you must factor in managing various regulations, deadlines, and federal/local laws.
More than 5,000 cities across 17 states have their own payroll regulations and city-specific tax rules that employers are required to follow.
Some states require tax reciprocity for employees and companies in neighboring jurisdictions. This means that employers will need to calculate taxes, withholdings, and reports for workers that are employed in more than one jurisdiction. If this is done incorrectly, it can result in employees being underpaid and legal action being taken against the employers.
4. Certified Payroll
Certified payroll refers to a type of payroll documentation that is required for certain government-funded construction projects. It is a detailed record of the wages paid to individual workers employed on a specific construction project, including their hours worked, job classifications, rates of pay, and any applicable deductions.
5. Prevailing Wage
Prevailing wage laws require employers to ensure that their employees are paid no less than the prevailing wage rate — the hourly rate paid to similarly employed workers of the same classification in a certain location. The challenge for electrical contractors, especially if they do not have the correct software in place, is that the standard pay rates may differ for their employees and may be less than the prevailing wage rate.
Employers will need to be able to match employees to the proper job codes and wage rates to create an accurate, certified payroll. Failure to do this could result in incorrect wages being paid and the wrong information being submitted to the government.
Construction Payroll Reports
Contractors can manage their jobs and their business more efficiently by reviewing reports from their payroll service. Some important reports include:
- Job costing: Job costing accurately tracks all costs associated with a job, including labor, materials and overheads — allowing companies to make reliable estimates of said costs. In construction-specific software like Deltek ComputerEase, job costing is part of a standard payroll package.
- Job labor: Job labor reports summarize the total hours (including overtime) and labor costs on each job.
- Job hour variance: Job hour variance reports contain estimated hours and costs versus actual hours and costs of your business’s labor. Typically, they summarize by job but, if necessary, can go into more detail — like comparing actual to estimated cost and hours for each type of work, and comparing actual to estimated hourly labor rates.
- EEO minority compliance: The U.S. Department of Labor collects employee information, including worker’s minority percentages, classifications, trades, and totals of federal and non-federal work hours to ensure they are meeting affirmative action regulations. You will need to ensure that this information is accurately documented and processed so that you do not lose federal contracts or have legal penalties.
- Workers’ compensation: Each state has its own laws for workers’ compensation requirements, and typically construction businesses have stricter requirements than others. It is the company’s responsibility to submit the workers’ compensation payroll report, and particular payroll reports are needed if you are going through an audit.
Benefits of Using Construction Payroll Software
The complex nature of construction payroll makes it difficult to reduce errors and comply with state and federal regulations without the use of construction-specific payroll software. Construction payroll software allows contractors to easily manage the complexities of payroll while remaining in control. Contractors maintain approval rights but alleviate themselves of the burden of double data entry and tracking tax filing deadlines. Construction payroll software can also help in the following ways:
- Automate manual processes: Construction payroll software automates processes that you would otherwise have to input on spreadsheets and other clunky systems. It easily allows you to maintain compliance, so you don’t have to comb through each individual payroll calculation and make lists of jurisdictions, employees, and states. Automated timekeeping can reduce admin and labor costs by ensuring accuracy and verifying that employees are on location for work.
- Manage cash flow: Small businesses often face cash flow challenges. Construction payroll software can eliminate the need to sift through spreadsheets to track down individual records and transactions. It can also provide real-time tracking that allows you to address cash shortages, make payments, and budget.
- Enhance visibility: Construction payroll software enhances the visibility into your business, allowing you to manage workforce time and access real-time dashboards and fast, custom reports.
- Save time with one partner: When your construction accounting software and your payroll provider are the same company, you can save time and simplify entries with just one software, removing the need for double data entry and eliminating redundancies.
How to Choose the Best Construction Payroll Software
Now that you understand the benefits of construction software, the next step is to select the right payroll software for your electrical contracting business. The following considerations can help ensure you choose the best one for your business needs:
- Assess your payroll requirements: Make a list of everything you need the software to do. This could include accounting for seasonal workers, the number of employees, multi-state/multi-locality/multi-job processing, and pay slips.
- Maintain compliance: Any worthwhile payroll software will help to ensure that you remain compliant with state and federal regulations while remaining user-friendly and accurately delivering payroll on time.
- Compare features: Different payroll systems will vary in their features and functionality. This is another reason for assessing your payroll requirements above. Defining the features you need, such as job costing, will make it easier to compare different software and select the best one.
John Meibers and Deltek ComputerEase are bringing an educational series designed to guide electrical contractors through the transformation from standard accounting methods to construction accounting methods. Our last topic will be revenue recognition.
Previous articles in the series are:
The Basics of Construction Accounting (January / February 2023 Insights)
The Complete Guide to Work in Progress (WIP) (March / April 2023 Insights)
The Complete Guide to Construction Job Costing (May/June 2023 Insights)