Hiring contractors can be a valuable way to improve a project. However, it presents many challenges for the accounting team. This article is dedicated to them. Our primary focus is on identifying the best methods to pay contractors in the construction industry.
Sometimes, the project team you have available isn’t sufficient. Sometimes, you only need someone with a very specific skill set for just one project. Therefore, hiring a full-time employee would make little sense. These and many other situations are easily handled by hiring contract workers. Although there are numerous benefits to bringing contractors on board, there are also new challenges that arise — mainly for the accounting team.
The way contractors are paid differs from that of permanent or even temporary staff. In some ways, it’s more complex and can be quite confusing. But don’t worry - there are methods to make the process so simple that your involvement will be minimal. In this article, we will explore just that.
Contractors in construction are most commonly paid by invoicing the employer. The invoice usually specifies the contract period, hours worked, the rate, and the deliverables. Different umbrella companies and independent contractors typically use different invoice templates.
There are other ways for contractors to receive payment, such as invoicing the full amount either in one payment or in instalments. However, other methods are less commonly used because they offer less transparency and carry greater risks. Nonetheless, invoicing can still present challenges.
There are two main challenges that arise when working with contractors. To the finance team, at least. In theory, they are relatively straightforward. However, in practice, they often become rather troublesome. Let’s discuss them.
While it’s not as common in construction, especially when most projects use permanent staff instead of contractors, differentiating rates are still widespread. They can be a complete headache to calculate, even in small amounts, let alone when multiple workers' timesheets include them. Depending on your team size and how complex the calculations are, this can be a huge time drain.
Not to mention, the risk of making an error increases when dealing with fluctuating rates. As humans, we are imperfect and prone to mistakes, especially when tasks involve more variables or when we repeat the same process multiple times. While it’s understandable that no one is perfect, financial matters such as work compensation are very sensitive topics. A small mistake on either side can cause significant rifts in trust, regardless of how close the relationship was beforehand. And we are sure you cannot afford that.
Holiday accrual is another challenge you are likely to encounter when hiring a contractor for a long-term project. Whether they are fully independent or working through an umbrella company (which is common in construction), they are still legally entitled to a minimum amount of time off. This is often specified in the contract to prevent any confusion and is generally quite clear on paper. However, when mixed with different rates, it can lead to confusion and make calculations very difficult.
For example, a contractor charges different rates for morning and afternoon hours. They work two days a week before lunch and three other days after. One of these three only includes half a day. If they take a week off, there will be three different rates to consider, depending on how much holiday entitlement they have remaining. Essentially, their paid time off depends on their rate rather than the number of days taken for leave. The example may seem quite complex, but it’s actually one of the simpler scenarios. Holiday accrual can become much more complicated than that. Imagine doing it for multiple people.
The good news is that although these challenges can make your life more difficult, they are not hard to fix. In fact, the solutions for both can be combined, helping you kill two birds with one stone.
Timesheets are a useful tool when calculating worker’s compensation and serve as a guide for where the different rates apply. They can also help you become more efficient and precise in making these calculations. Digital timesheets are generally more reliable because it’s harder to tamper with them, and they can also be customised. Not just to a company itself, but even to individual workers. When working with contractors, this can make your job much easier.
Furthermore, solutions like Timesheet Portal also introduce a layer of automation to your timesheets, making them even simpler to process. Specifically, our timesheets are not only customisable to include varying rates and timesheet rules for control, but will also automatically calculate them for you. Depending on whether you are using any of the payroll integrations, they will also be easily transferred into your accounting system.
Digitisation also provides a solution for holiday accruals by taking their calculations off your plate. If you only adopt a holiday management system, you will need to review its features and integrations to ensure it is capable of handling the task. Traditionally, holiday and attendance systems are designed for very basic functions. The good news is that they often include a module within other tools, offering a combination you need for holiday accruals calculation.
Timesheet Portal provides a holiday management module to all users at no extra cost. Since it is part of the same platform where your custom timesheets are created, processed, and analysed, both modules operate together and share information. Put simply, the holiday management module reads the timesheets and extracts data from them. It also considers the implemented timesheet rules, the contractor’s agreed hours and rates, and automatically calculates holiday accrual.
All this might sound promising, but it’s pretty pointless if you don’t know the first thing about software or where to find what you need. The search for ‘software for construction company’ isn’t quite hitting the mark. But don’t worry. We’ve got you.
Since the digitisation of the construction industry is still in its early stages, there aren’t many specialised tools available. Those that are on the market may not be the best fit, either because of their features or their price. However, this doesn’t mean you should abandon the idea altogether. The market is full of tools that can help make your financial operations smoother, even if they aren’t specifically marketed for the construction industry.
We recommend researching tools that are not limited to a specific sector as they tend to be flexible and customisable, allowing users to integrate them into industry-specific platforms. However, this can be a complex process, so unless you have highly automation-savvy staff, we suggest asking the vendor if they have a dedicated implementation team to assist you. For instance, at Timesheet Portal, we always work closely with our potential and new clients to fully understand their required features and scope. We then set up the platform for them, conduct team training, and provide support during the initial 'warm-up’ period.
Contractors are an excellent solution for construction projects. However, involving them can significantly complicate the workload for the accounting team. Many contract workers operate on a variable rate, which can be both difficult and time-consuming to calculate. Additionally, although they are entitled to a minimum holiday, their holiday accrual is linked to the variable rates. This introduces another layer of complexity.
But there’s nothing to worry about. Both of these processes can be simplified through digitisation. While a holiday management system cannot calculate holiday accrual on its own, it works remarkably well when combined with a timesheet tool. And a timesheet solution can automatically calculate differing rates within minutes. Don’t be disheartened if none of these solutions are marketed for construction - you can always develop your own platform with little to no effort.
Unsure where to begin your search? You are already here.