For all types of companies, construction businesses included, payroll costs go far beyond compensation meted out every week or two. Contractors, however, really need to understand the total cost of payroll so they can track how much each project is costing them. Here’s how to accurately and efficiently accrue on-site workers’ benefits and insurance costs under an automated job-costing process.
Identifying the costs
According to standards set forth by the Financial Accounting Standards Board, construction job costs should be identified in much the same way that inventoriable costs are recognized in manufacturing accounting. (Such costs include any of those incurred to bring a product to completion.)
In this manner, direct construction costs are those incurred on the jobsite for expenditures such as materials and workers’ wages. Meanwhile, indirect construction costs are those directly applicable to the construction company itself. These include amounts related to an employer-provided retirement plan, workers’ compensation coverage and health insurance.
You must allocate indirect costs to your jobs for a couple of reasons. First, bills for these payments come monthly and include groups of employees in one payment. Second, indirect costs aren’t identified with any one project; they may pertain to many jobs — even for the same employee.
To properly accrue field workers’ benefits and insurance costs, your first step is to itemize every applicable cost. Such a list will typically include:
- Employer-side FICA taxes,
- State unemployment taxes,
- Mandatory disability taxes, and
- Employer contributions to defined-benefit or defined-contribution retirement accounts.
Don’t forget insurance costs — such as employer payments for workers’ compensation insurance and health care coverage, as well as costs associated with jobsite liability and builder’s risk policies.
Calculating benefits amounts
A typical job-cost accrual protocol will include two types: time-based accruals and wage-based accruals. Health insurance is an example of a time-based accrual. It’s time-based because each person’s employer-paid health insurance premium is the same every month. To calculate this accrual, first identify the price points that you pay for employees who elect family coverage, individual health care coverage and no coverage. Then divide that monthly amount by the number of pay periods in a month.
Wage-based accruals can be demonstrated using FICA tax. Just because FICA tax is a fixed percentage of wages doesn’t mean it shouldn’t be job-costed. To calculate this accrual, take the percentage of gross wage that the employer is responsible for paying and apply it as an hourly rate.
For example, the employer may be responsible for 7.65% of gross pay for payroll tax. Therefore, every dollar spent on that employee (that is, job-costed) will have an extra 7.65 cents added on top of it (costed to that same job) by journal entry. (More on this below.) You can calculate other wage-based accruals, such as contributions to pension plans, the same way.
Factoring in insurance accruals
Insurance accruals involve a cooperative effort. Some workers’ compensation and liability insurers calculate their premiums based on total gross payroll. Others calculate their premiums based on company sales revenue. Insurance accruals involve some detailed accounting, so work closely with the broker or agent who sold you the insurance.
Taking workers’ compensation as an example, if you can anticipate the annual premium and know what gross payroll is feeding that premium, you can calculate a dollar rate for workers’ compensation insurance per hour. However, the dollar rate will be different for each workers’ compensation employee class. To calculate other accruals, apply the same formula.
Applying the allocations
Many construction-specific accounting software programs have categories, sometimes called items or macros, that allow you to record journal entries for each employee that will automatically accompany every paycheck. Set up these automated journal entries to accompany each employee’s payroll entry.
First, assign each employee one time-based accrual class (or category) for each time-based accrual that applies to him or her. Using health insurance as an example, you assign each employee either the family coverage option, individual coverage option or no insurance. Then you calculate the accrual based on the amounts determined in the calculations for those plan elections. If you run payroll twice a month, you’ll job-cost half of that employer-provided health insurance premium payment based on that employee’s work schedule.
Second, give each employee a wage-based multiplier that corresponds to each wage-based accrual that applies to him or her. With retirement plans, tiered employer contributions require each employee to be assigned a wage-based multiplier corresponding to what retirement tier he or she belongs to.
So, for instance, if one employee has 3% of his wages added to his retirement account, while another employee has 5% of her wages paid by the employer into her retirement account, the first employee will be assigned 3% while the second employee will be assigned 5%. The journal entry will add either 3% or 5% to the job cost for each project, corresponding to that employee’s work schedule.
Again, the objective of all these mathematical machinations is to give you the most accurate assessment of precisely how much you’re spending on payroll for each job so you can optimally manage your construction company’s finances. Ask your CPA for help.
Truing up job-cost accruals at month end
No job-cost accrual protocol for workers’ benefits and insurance is going to produce perfect results every month. You must reconcile accruals with actual cash expenditures. To do so, your job-cost journal entries (see main article) should debit the project in question and credit a liability account.
This way, when cash is disbursed to pay the health insurance bill, payroll tax liability or employer-sponsored retirement plan, those disbursements will hit the liability established to aid in this reconciliation. Such forethought will allow you to see each month how much the job-cost accruals “missed the mark” of the actual cash disbursements, so you can adjust the job-cost entries.
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