In 2020, more construction companies will start outsourcing payroll while also keeping their ERP. It's a trend that we expect to gain momentum over the next several years as payroll technology continues to develop and ERPs focus more efforts on their core functionality (instead of payroll/HR).
This is a smart move for contractors, but it can introduce new problems if you don't properly vet payroll vendors.
The problem comes when companies ask sales reps about bringing job cost details back into the ERP system. The vendor assures the construction company that their HCM system can handle the task of passing financial costing information, and the project moves forward.
Everyone thinks they're on the same page, until testing begins. The customer discovers that their payroll is designed to only send them General Ledger details. Any job cost information excludes vital non-payroll data, so their job costing is incomplete. It turns out that the payroll system can't meet expectations, and the new solution introduces fresh frustrations.
By this time, you're already deep into the process, and you have to find manual workarounds — or revert back to your in-house payroll and the challenges that caused you to change in the first place.
Related reading: The HCM System Buying Guide for Contractor Companies
What Went Wrong?
We've spoken with contractor after contractor who unsuccessfully tried outsourcing payroll. Third-party payroll systems typically can't handle complex construction pay policies for prevailing wage, fringe and union wage and benefit rules. When it comes to the job costing, only costs that come directly from payroll can be brought back into the ERP system.
While outsourced payroll systems have visibility into the labor costs and benefits paid through payroll, they don't have access to other employer paid "burden" costs such as medical, dental, and 401K — which are all paid to different vendors. These non-payroll costs have a large impact on job costing. Without them, you can't get an accurate sense of your project's profitability.
It's not that your payroll provider was dishonest or negligent. The complexities of job costing are simply beyond payroll systems, and many sales reps who don't specialize in construction don't understand how job costing works.
In the past, the only way to get the best of both worlds — an HCM and an ERP system — was to run payroll in both systems and deal with maintaining and reconciling data in each system along with a lot of manual edits. It's a highly labor-intensive and error-prone task.
But more and more companies are offering a better option.
Payroll Systems + Job Costing
Complementary solutions, such as Contractor Central, can help bridge the gap. Contractor Central is IDI's comprehensive web-based application for construction companies that want to outsource payroll while keeping their best-of-breed ERP.
The system ensures employees are paid correctly, automates Certified Payroll and other reports, and exchanges job cost data with leading ERP systems. The solution is automated and customized to your company's unique job cost setup.
Here's one success story:
For years, a mechanical contractor had been accepting a lesser level of detail for job costing, because they had originally set up their ERP sub-optimally. Eventually, they realized they were operating on hazy assumptions that were guided by incomplete data. They couldn't assess the true costs and profits of their jobs.
They reached out to IDI and were delighted to learn they could get deeper details on their earnings and benefits costs. They hadn't realized it could be done. Now the contractor enjoys a much more detailed picture of their true costs and profitability.
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Don't Get Caught By Surprise
If you're shopping around for a third-party payroll provider, make sure you make job costing a central part of your dialogue with vendors. If you aren't confident that they understand the breadth of your needs, keep looking.
Here are a few best practices to ensure you hire an HCM company that will meet your job cost needs.
- Don't start vetting vendors until you know what costs and details you need to have included from payroll to meet your job costing and general ledger needs. This sets you up to be as forthcoming as possible to the vendors during the selection process.
- Share job cost reports that indicate the different details you expect. Highlight the data you need, so your vendor clearly understands what goes into the reports.
- Leave enough time in your purchasing process to be sure you're on the same page. Don't rush the process, and take the time that's needed before you sign on the dotted line. Over-communicate with vendors — job costing is too important to make assumptions.
- If it looks like a vendor can't provide what you need on their own, ask them if they have partners like IDI, who can integrate with their system to get the job cost details you need.
- Most importantly, don't assume payroll companies understand everything about job costing — even if they bring it up or seem to know the basics. Many sales reps know enough to get by, but will rely on you to help them understand the details they need to know. Job costing is unique to every organization — it's not a one-size-fits-all.
To be successful, you'll need to work closely with the payroll provider and communicate clearly. Take responsibility for making sure they have all the information they need. Raise the issues, ask questions, and supply what you're expecting so that vendors can review and reply accordingly.