Construction payroll is more complex than payroll in more “traditional” industries. Your payroll can fluctuate when a new project starts, and every week throughout the job right up to its completion. Managing payroll internally is time-consuming, inefficient, and potentially exposes you to mistakes, lost revenue, theft and fraud.
Yet, many contracting companies still choose to keep payroll internal. Worse, they process payroll along with all other expenses from their Operations account.
We sat down with Bruce Patz, President of Associated HCM, to shed some light on common issues in construction payroll and offer a few tips to improve yours.
Why should construction contractors separate their payroll account from their operations account?
One of the biggest reasons to set up a dedicated payroll checking account is cash flow, says Patz. “A lot of business owners operate on what the bank says, not their actual cash flow. That means one person can write payroll checks believing the money is in there, and then another person write a check for supplies, which causes payroll checks to bounce.”
It’s not that subcontractors are inherently bad with money, but managing all of that outgoing cash is tricky, especially when several members of the team have access to the account.
A separate payroll account ensures the money you have assigned for your employees paychecks is safe. With a dedicated payroll account, there is zero chance of someone else writing a check for other expenses which would impact your team’s payroll.
Another reason to separate payroll? Ease of accounting. Whether you balance the books yourself or have a CPA (and you really should have a CPA), separating your payroll from your operations account makes life, and bookkeeping, a lot easier.
Tips for smarter construction payroll.
Plan ahead. With good financial oversight, based on data from the previous year’s payroll and your expected projects and growth rate this year, you can determine an estimated forecast of your payroll expenses.
Don’t forget about payroll taxes. “A lot of contractors forecast labor on a new project, but they forget the employer taxes when they estimate the payroll expense, “says Patz. “Taxes can be 15-20%, so they need to be in your estimate.”
Separate your payroll and operations. Seriously, it’s that important. If you work with a payroll company and have a dedicated payroll account, you know on Monday what your payroll expense is going to be. It gives you a few days to figure it out if you find yourself short. This is better than the 24-hours-or-less panic that often ends with a contractor taking out a high-risk Merchant Cash Advance Loan (MCA).
Do you have questions about payroll during the COVID-19 pandemic? Check out our YouTube video with Bruce Patz and Caroline Catlender.
Cash flow is always an issue in construction. How can contractors best ensure payroll ALWAYS gets met?
“Work with a payroll service that understands your industry and your cash flow cycles, so they can make recommendations,” says Patz. “And hire a CPA, or a payroll service that has accounting as a service, to help with budgeting, reporting, and forecasting. The more you can plan ahead, the more you can get ahead of any problems.”
And planning ahead allows you to better plan for growth and capitalize on opportunities when they arise.
Patz also recommends having a financial partner. “Go with your line of credit first, if you have one,” he says. If you don’t have a line of credit, don’t panic. There are financial partners out there who can help you.
What is the benefit to hiring a 3rd party payroll service versus doing it in-house?
A good payroll company can help with a lot of things beyond processing payroll, such as:
- HR Compliance
- Employee Handbooks
- Equal Pay Act Compliance
- IRS forms for talent acquisition
- Worker’s Comp payments processed along with payroll, rather than a lump sum
- Out of state payroll tax calculations
- Calculating exact payroll per project
- Managing the different wages by project (Ex: Davis – Bacon Act Wages)
- Providing Certified Payroll Reporting
Many payroll companies also offer payroll finance programs. Some will also help calculate employer taxes and offer other accounting services.
For Patz, being a great payroll service comes down to that one word: service. “What sets us apart is that we are a small business, and we have a personal relationship with our clients,” says Patz. “We’re very different from the big payroll companies. A lot of the bigger companies don’t care how their clients make payroll. We start at the beginning. We talk about cash flow to understand it and create payroll solutions that work for you. Our services mirror and align with who you are and what you need.”
What should a construction contractor look for in a payroll company?
Finding a payroll service that specializes in construction can be tricky, and there are plenty who say that they understand the cash flow realities of construction subcontractors. Patz recommends starting with a simple search. “Google them,” he says, “and see if they have ever been accused of stealing tax money. That’s an easy and important first step!”
Next, be ready to vet the company by asking a few questions. Do they reconcile their tax accounts daily? This helps prevent errors and fraud. What is their liability coverage? And finally, can they provide referrals or case studies from other construction companies they’ve worked with?
Construction payroll is complex, but it doesn’t have to be painful. Save yourself and your team the headache of processing payroll yourselves and instead focus on what matters most — performing the work and growing your business.
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