When Does It Make Sense to Outsource Construction Payroll?

Processing payroll can be difficult and tedious for any business but nothing compares to the difficulty of construction payroll.

Within other industries, outsourcing payroll is often regarded as a smart business decision. Even small companies with just a few employees can save money by turning over time-consuming payroll activities to someone else. What’s more, by hiring a payroll service, businesses can rid themselves of tax reporting responsibilities and other payroll processing burdens. Construction payroll, however, does not resemble the typical business payroll. 

More often than not, employees don’t work in one location, and most workers are not paid straight salaries every couple weeks. Instead, contractors must deal with unique complications such as shifting pay rates, multi-state and local taxes, unions, workers’ compensation and certified payroll, just to name a few. While many contractors would love to outsource all of their payroll responsibilities to an outside company, payroll service firms are not designed to handle the special requirements of construction. Paying a firm to process payroll (i.e., calculating pay and withholdings, printing/delivering checks, handling taxes) does not eliminate much of the labor-intensive work involved in construction payroll. 

For example, many contractors will still need someone to manually gather payroll data from timesheets and then re-enter payroll data into other systems to record payroll data by job, create necessary reports, etc. So for contractors, does it ever make sense to outsource payroll? The answer is absolutely . . . but only if they choose the right payroll service partner. At a minimum, there are two things contractors should look for in a provider:

1. Construction-Specific Payroll Reporting

Most traditional payroll service companies are not equipped to offer the numerous must-have construction reports that are generated through payroll. These include:

• Certified payroll reports-A mandatory requirement for all federally-funded prevailing wage jobs (and used/followed by many states), these reports are complex and cumbersome to prepare without the help of an automated system. A construction-specific payroll service should be able to instantly prepare these reports-for every laborer on the job-according to the U.S. Department of Labor’s form WH-347, as well as specialized forms for individual states and municipalities.
• Union reporting-Unions require detailed reporting for their members. And since many contractors work with multiple unions, reporting requirements can quickly become overwhelming. A good construction-specific payroll service should be able to handle all the requirements, regardless of complexity.
• Job cost reporting-Since standard payroll services cannot break payroll data down by job, many contractors spend a lot of time manually entering labor hours into spreadsheets or other systems to see how their jobs are doing. Contractors should look for a service that will at least track labor hours, dollars and burden (FICA, FUTA, SUTA, workers’ compensation, etc.) by job. A comprehensive service will offer more sophisticated reports, such as tracking by cost code, estimate vs. actual, percent complete, production, unit pricing, projected costs to complete and more.
• New hire reporting, EEO minority compliance, workers’ compensation, etc.-It’s not always easy for labor-intensive contractors to comply with federal employment laws. Trying to manually track field employees who routinely change jobs and workers’ compensation classifications, for example, can be a time-consuming job. Choosing the right payroll service means that critical employee data is automatically tracked and accurately reported.

2. Multiple Jobs, States, Localities and Pay Rates

When it comes to payroll, all companies are required by law to pay certain employee taxes (state and federal, as well as county and local taxes depending on where a business is located). In construction, payroll taxes become complicated because employees can work in multiple states and localities-often within a single pay period. What’s more, it’s not uncommon for an employees’ pay rate (and withholdings) to fluctuate as they move from job to job. A good payroll service not only has the ability to compute complex payroll, but it also stays current on various local, state, and federal withholdings that are mandated by the government. 

Most importantly, a contractor can put compliance into the hands of the experts. It is the payroll service-not the contractor-that assumes responsibility for filling out forms properly and paying taxes on time, whether weekly, monthly, quarterly or annually. There are many reasons why a business owner might choose to outsource payroll. It could be to relieve the in-house staff of mundane tasks so that these employees can concentrate on more business-centric tasks. Or perhaps the company would like to shift the tax-burden responsibility on to someone else. Or maybe confidentiality of sensitive payroll data has come into play. 

For contractors, these benefits are all secondary to what matters most: Finding a payroll service that understands construction and offers the construction-specific features they need. 

Construction Business Owner, November 2009