Hiring contractors can be a great way to elevate the project. However, it comes with a lot of headaches for the accounting staff. This article is for them. And our main focus is on discovering what is the best way to pay contractors in the construction industry.
Sometimes, the project team you have on hand isn’t enough. Sometimes, you simply need someone with a very specific skill set, but for no more than one project. Therefore hiring a full-time employee would make no sense. These and many other scenarios are easily addressed by hiring contract workers. Although there are a vast number of benefits when it comes to bringing contractors on board, there are also new challenges that come along. Mostly to the accounting team.
The way contractors are paid is different from that of permanent or even temporary workers. In a way, it’s more intricate and can be downright confusing. But don’t worry - there are ways of making the task so simple your involvement will be barely needed at all. And in this article, we will be discussing just that.
What is the Most Common Payment Method for Construction?
Contractors in construction are most commonly paid by invoicing the employer. The invoice will normally state the period of the contract, the hours worked, the rate and the deliverables. Different umbrella companies and independent contractors normally have different invoice templates.
There are other ways for the contractors to receive compensation, such as billing the full sum in either one go or instalments. Other methods, however, aren’t as widely used as they offer less transparency and involve more risks. Invoicing, however, can still pose challenges.
Potential Challenges
There are two main challenges that arise when working with contractors. To the finance team, at least. In theory, they are relatively easy. However, in practice, they often become rather troublesome. Let’s talk about them.
Differentiating Rates
While it’s not as frequent in construction, especially when most projects include permanent staff rather than contractors, differentiating rates are still common. They can be an absolute nightmare to calculate even in small amounts, let alone when multiple worker timesheets include them. Depending on how big your team it and how complicated the calculation will be, this can be an absolute time waster.
Not to mention, the risk of making an error increases when dealing with differentiating rates. As humans, we are imperfect and bound to make mistakes, especially when the tasks contain more variables. Or if we are repeating the same process over and over. While it’s understandable that no one is perfect, financial matters like work compensation are a very sensitive topic. A small mistake on either part can cause big rifts in trust, no matter how close the relationship was prior. And we are sure you cannot afford that.
Holiday Accrual
Holiday accrual is another challenge you are likely to run into when hiring a contractor for an extended period. Whether they are fully independent or working through an umbrella company (the latter is mostly true in construction), they are still legally entitled to a minimal time off. It will often be outlined in the contract to avoid any sort of confusion and is, in fact, pretty self-explanatory on paper. However, when paired with differentiating rates, it can cause a lot of confusion and become very difficult to calculate.
For example, a contractor charges different rates for AM and PM hours. They work two days a week before the afternoon, and then three others after lunch. One of the said three only includes half of a day. If they take a week off, there will be three different rates to take into consideration, based on which it will depend on how much holiday entitlement they have left. Simply put, their paid time off depends on their rate rather than on the number of days used for leave. The above example sounds pretty complex, but it’s one of the easier scenarios. Holiday accrual can get much more complicated than that. Imagine doing it for multiple people.
Digitise the Process
The good news is that while these challenges can complicate your life, they aren’t complicated to solve. In fact, the solutions for both can be combined, helping you kill two birds with one stone.
Custom Timesheets and Automation
Timesheets are a handy tool when calculating worker’s compensation, as well as your pointer on where the differentiating rates come into play. However, they can also help you in becoming more efficient and accurate in calculating them. Digital timesheets are generally more trustworthy in terms of it’s more difficult to tamper with them, but they can also be customised. Not just to a company itself, but even to workers individually. When working with the contractors, this can make your life a whole lot easier.
What’s more, solutions like Timesheet Portal also add a layer of automation to your timesheets, making them even easier to process. Namely, our timesheets aren’t just customisable to include differentiating rates and timesheet rules to control them, but will also automatically calculate them for you. Depending on whether you are utilising any of the payroll integrations, they will also be easily transferred into your accounting system.
Holiday Management System
Digitisation also offers a solution to holiday accruals, namely by taking their calculations off your hands. Now if you adopt a holiday management system alone, you would need to scan through features and integrations to ensure it is actually up for the task. Traditionally, holiday and attendance systems are designed for very basic functionality. The good news is that they often come with a module within other tools, a mix you need for holiday accruals calculation.
Timesheet Portal offers a holiday management module to all users by default, without an extra charge. Given it’s literally the same platform where your custom timesheets are created, processed and analysed, the two modules work in tandem and share the information. To put it more bluntly, the holiday management module reads the timesheets and crunches information from them. It also takes into consideration the timesheet rules implemented, the contractor’s agreed hours and rates, and then does the holiday accrual calculation automatically.
Find a System for Your Needs
Now all this may sound great, but pretty useless if you don’t know the first thing about software or where to find the type you need. The search inquiry with ‘software for construction company’ is not quite ticking your boxes. But don’t worry. We got you.
Prioritise Customisation
Since the digitisation of the construction industry is still underdeveloped at this point, there aren’t many specialist tools out there. And those that are available may not be the best fit, whether due to their features or the price range. This doesn’t mean you should give up on the idea altogether, however. The market is full of tools that can help your financial operations become smoother, even if they aren’t marketed for the construction industry specifically.
We advise researching tools that aren’t bound to a specific sector as they are usually flexible and customisable, meaning they can be built into an industry-specific platform by the user. However, it can be a complicated process, so unless you have some very automation-savvy employees, we recommend asking the vendor if they have a designated implementation team to help you. For example, at Timesheet Portal we always work closely with our potential and new clients to fully understand what features and to what extent are required. We then set the platform up for them, do team training and offer support for the ‘warm up’ period.
Summary
Contractors are a great solution for construction projects. However, bringing them on board can seriously complicate the lives of the accounting team. Many contract workers operate on a differentiating rate, which can be both difficult and time-consuming to calculate. Additionally, while granted a minimum holiday requirement, their holiday accrual works in relation to the said differentiating rates. This adds another layer of complexity.
But there’s nothing to worry about. Both of these processes can be simplified with digitisation. While a holiday management system cannot calculate holiday accrual on its own, it works wonders when teamed with a timesheet tool. And a timesheet solution can automatically calculate differentiating rates within minutes. Don’t be disheartened if none of these solutions are marketed for construction - you can always build your own platform with little to no effort.
Unsure where to start looking? You are already here.
