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Aug 30, 2022 Matt Venuto

How Payroll Impacts Construction Job Costing

How Payroll Impacts Construction Job Costing

You wouldn’t suggest that your client start a build without plans; so why should they run a business without a financial strategy? 

Variables such as labor and material costs are often estimated and assumed until the dust is settled and a project is completed. But leaving too much room for the unknown is a massive risk for your client’s construction business. 

The Need For Job Costing

At times, construction management projects can seem ambiguous or “never-ending.” Build timelines can span for months, to years, and sometimes even decades before reaching the completion date. Developers are left managing thousands of smaller projects per month and each project has unique properties. 

If your client is not job costing, they could be losing thousands of dollars overpaying for labor or materials. Tracking labor costs by job can be applied to the smallest of projects like changing a light fixture, or all the way through a massive, commercial skyscraper build. 

The principle of tracking labor costs per job helps your client to monitor billing, revenue, and can maximize cash flow. That’s why it’s ideal for construction firms to track time based on project-based timekeeping. 

What Is Project-Based Timekeeping?

Project-based timekeeping is a process that measures the dollar value of a specific project. This type of timekeeping breaks down each job based on the labor, materials, and overhead cost. 

This concept can be applied on a per-job, per-project, per-division, or per-phase basis. 

Changing Systems

Switching from a basic hourly time-keeping schedule to a project-based system can solve many problems for your construction management clients. Opting to use advanced digital time cards will help track labor costs, and define a linear scope of projects being completed. 

Job Costing Can Improve Payroll 

Job costing occurs one step before payroll can be processed but it certainly improves payroll. Using a payroll provider generates labor allocation reports that can be run with a date range, by year to date, month to date, quarter to date, and for the most recent payroll. These labor allocation reports are critical for balancing books. 

Payroll and Job Costing: Where They Meet

The first step in processing payroll is recording hours spent working. Project managers report their hours, tracked in a job costing format, to their payroll service representative in a couple of different ways. 

Some payroll providers provide their own worksheet where managers can track hours manually and then share with a payroll provider online. Third-party, digital time cards like Jibble, or Workyard, are popular with larger firms because they offer geofencing and GPS capabilities. Depending on the relationship with your payroll provider, some clients will give hours right over the phone. 

Multiple States; One Process

It’s standard for construction firms to work on multiple projects across multiple states. Payroll providers have systems in place to record this data and process payments accurately depending on the state the employee is working in. 

Clients with employees working across states should register an employee ID per each employee per state for tax purposes. Consider a flat-rate contractor who works for one firm. She works in New Hampshire, Vermont, and Massachusetts depending on the day. She should have three employee IDs at her firm. When it’s time to process payroll, the service representative enters the necessary employee ID and the employee is compensated accurately using the payroll system. 

Advanced payroll providers like ConnectPay will merge the employee ID’s together at the end of the year to consolidate W2’s. 

The Labor Allocation Summary Report

Payroll providers have access to reports that can help you balance books all year round. 

The labor allocation summary report is a good “check-up” for your client’s book of business. This report allows you to see MTD, QTD, and YTD totals for labor, taxes, and deductions. At the end of the report, the YTD total job cost is reported by department. A report like this is helpful for a proactive internal audit. 

Payroll providers also have access to a “Labor allocation detail report” that takes a deeper dive into projects employee-by-employee. 

Job costing gives firm owners a clear view of their time expenses, providing the runway to bid on manageable jobs and run them profitably. 

Helping Your Clients Start Job Costing

We know CPAs are busy. Whether you want quick clarification about job costing software, or you’re stumped by a complicated multi-state payroll tax situation, your Connected Services Rep can quickly get you accurate answers to meet your clients’ needs. Let’s connect today.

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Published by Matt Venuto August 30, 2022