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Managing Construction Payroll: Unique Challenges & Solutions

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Last Updated Feb 20, 2024

construction payroll review illustrated by photo of two people reviewing documents with a calculator and laptop

The significance of payroll in construction may seem obvious at first: paying employees accurately and on time. However, the benefits of a good payroll system reach beyond just paying people. Putting a well-working payroll process in place can in turn troubleshoot project inefficiencies, inform decision-making and give contractors bidding power on future projects.

This article will discuss some unique intricacies of construction payroll and how contractors can develop systems to get extra intelligence from time sheets.

Table of contents

Understanding Construction Payroll

Payroll involves the process of tracking time, processing time sheets, and issuing accurate payments to construction project employees. Payroll systems also calculate taxes and benefits for employees and ensure contractors comply with government regulations regarding employment.

Applying appropriate paid time off, benefits, and overtime pay rates is complicated enough, but certain aspects of construction projects can make payroll even trickier. Construction labor costs represent a good deal of overall project outputs, so it makes sense to take the time to get it right.

The Challenges of Payroll in Construction

Construction payroll is often complicated because construction companies typically run two types of payroll for their employees.

First, construction companies employ staff members who get paid annual salaries to do their jobs. Roles like project manager, project engineer and project executive are internal staff who may get paid their salaried rate on each paycheck.

Secondly, craft workers are paid hourly and sometimes hired through a union hall or hiring agency. Paying for skilled laborers can get complicated. Factors like what each worker is doing, which project they are working on, and what state or municipality that project is in could impact the rate of pay they receive from day to day or even from hour to hour. Calculating accurate payroll requires detailed records for each skilled laborer.

Pay changes by task.

A worker’s wage isn’t static across construction projects — or even within a single project. Typically, workers will have a base standard wage, but that amount can vary depending on what they’re doing each day. 

Operating engineers offer a good example of how complicated things can get. Say an operating engineer’s base rate is $50 an hour. Depending on the equipment they are operating, they may be eligible to earn an additional $20, $40, or even $50 per hour. The operating engineer who is operating a large tower crane may earn a rate of $200 an hour based on the risk, complexity, and skill level involved in the work. However, that same operator can earn a lower hourly rate later that same day for operating a forklift.

Why does the pay rate change based on location?

Construction firms may have projects running in multiple locations at a single time. Workers may be asked to move between project sites, and may be paid different rates at each one.

Rates of pay for construction labor may be impacted by the project’s location, either because of union rules, prevailing wage rates, or the demand for a certain skill set in that region.

  • Union rules:First, the rate of pay may vary based on which union is at home there. A single laborer may work under one union hall when they work in New York, but under another one when they work in New Jersey. Each union may have different fees and regulations that impact pay rate.
  • Prevailing wages: Prevailing wage laws apply to public projects. They stipulate that contractors must pay the majority of workers at least the prevailing wage rate for that location, preventing contractors from finding low-cost non-union labor to staff up their projects. Prevailing wages can even change within a single state. For example, different rules govern the applicable wage rate in New York City compared to areas of upstate New York.

Payroll on Public Projects

Public projects are more likely to use union labor, especially in certain areas of the country like New York or New Jersey. When using union labor, there are regulations and rule sets that dictate the pay rates and benefits workers receive. Contractors will pay a fee to the union hall to administer benefits, too.

Public projects often require certified payroll reports to prove prevailing wage specifications. Certified payroll reports detail specific information that must be captured through the payroll process. Errors in the payroll on public projects — including on-time records and worker classification — could lead to fines or the contractor not being eligible for future public projects.

How Payroll Works

Contractors working on a project will fill out a timesheet at the end of each day. A project manager or superintendent checks time sheets for accuracy. Payroll software will then indicate which taxes will be withheld, applicable wage rates and if overtime pay rates should apply.

Workers are generally responsible for noting whether they accrued overtime during a given period — but contractors need reliable systems to catch and correct any errors when processing payroll. Even with these systems in place, good payroll software will sometimes still catch errors. For example, workers who work at more than one jobsite each day may not realize they’ve exceeded the eight-hour limit, but the software will automatically apply overtime pay rates to that extra time.

Payroll Software

Good payroll software that can capture information for workers, including:

  • Which project they’re working on (and its location)
  • What type of laborers they are ( e.g., electrician, operating engineer)
  • Their level on the union wage scale (apprentice year one, year two, journeyman, etc.)

In the past, construction laborers had to submit paper timesheets to their supervisors each day. Luckily, contractors now have the tools to have laborers fill out timesheets digitally, often from their own cell phones, to make it easier to collect the information in a single spot for review. Consistent formatting helps collect and compare data from time sheets.

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Time Coding

Individual workers and their direct supervisors should keep detailed records and check time sheets carefully, not only to reflect the amount of pay the worker should receive, but also as a written record of how much time the project team spent on every task. Correct time coding is one area that presents consistent challenges.

Timesheets and subsequent payroll software entries use time coding to indicate whether a site employee was pouring concrete, jobsite clearing, or doing odd cleaning jobs. This system allows contractors to track a job’s labor alongside work breakdown, cost breakdown, and schedule. Workers and their supervisors may find it difficult to keep track and accurately code each day’s work. However, the effort can pay off — detail and accuracy in these records gives executives a clearer understanding of true project costs, which enables them to bid better in the future.

Expert Insight

One of the companies I worked for would review all the costs that hit their books for payroll each week. These checks were performed after the field supervisors had completed their typical spots on time cards. Every week they'd go back and review all the costs for how much time and money they spent on project areas, like installing a specific type of electrical work.

They were able to catch things that were coded to the wrong area of the project or by the wrong type of electrical install, because those things stuck out during a full review. The executives would realize, wait, we didn't actually do any work on that, so how is there time coded to it? That's why I always recommend doing a secondary review of labor costs on a weekly basis for self-performing work.

Why it’s Important to Get Payroll Right

There’s one very obvious reason to ensure payroll is accurate every pay cycle: so that workers get paid what they’ve earned. Accurate and timely paychecks make contractors more competitive in the labor market. Equally, contractors need to ensure they’re not overpaying their workforce so that they’re able to maintain a profit margin and run a viable business. Beyond getting paychecks right, payroll costs can inform further decision-making within a construction business.

Expert Insight

When we reviewed payroll each Monday morning, we would call it a labor distribution report. Each week, staff members from engineers, project managers and accountants would gather in that meeting and go page by page, operation by operation, checking to see if we were hitting our targets as far as the actual progress of the work. The time sheets detailed all the time laborers worked during that week, but also indicated what work they did, like how many linear feet of pipe they had laid or how many square feet of land they’d cleared.

In that room, we could say, we spent $3,000 of payroll today but we also cleared 300 square feet, which means that we're spending $10 a square foot to clear all this land. We would track that against our targets and estimates. We could use this information to troubleshoot current progress and get better at bidding over time.

Project leads who review timesheets and payroll reports only to discover that costs are higher than expected or that project progress is slower can use that information to identify inefficiencies or bottlenecks in their operations. For example, if timesheets indicate that laborers have some downtime because they're waiting for certain materials to arrive from somewhere else on the job site, superintendents can try to move the materials earlier.

Categories:

Financial Management

Written by

Ryan O'Donnell

Ryan O'Donnell works at Procore as Senior Product Manager, Financials. He has spent his career working in construction finance -- including roles as Controller & CFO for Terminal Construction Corporation in NYC, AVP of Commercial Real Estate at M&T Bank, and Senior Auditor for Kiewit Infrastructure Group. Ryan earned his MBA in Accounting & Finance from Rutgers University. He lives in New York.

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