7 Common Construction Payroll Mistakes — And How To Avoid Them

One of the most complex aspects of running a construction business is payroll. Stringent regulations, union laws, and the need for a single employee to split time across multiple job codes make processing payroll uniquely difficult for construction companies. 

To illustrate how common mistakes are — even for highly experienced specialists — a 2024 Gartner survey showed that 18% of polled accountants say they’ve made data entry (financial) errors daily. A staggering 60% of those polled acknowledged making, at a minimum, multiple errors per month.  

But, even though the risk of payroll mistakes is higher in construction, there are both convenient and simple ways to reduce or eliminate them. Read on to learn the most common payroll mistakes in construction and the best ways to save time and money while avoiding legal issues. 

Impact of Payroll Mistakes in Construction 

Payroll mistakes have far-reaching consequences in any business, but this is especially true in construction. The first step to avoiding them is documenting the risks your business (regardless of scale) takes on when payroll processes lack accuracy standards. 

Financial Consequences  

Payroll specialists have a lot on their plate managing payroll without trying to correct mistakes with time sheets, job codes, etc., and those mistakes add up. Based on studies by Ernst & Young, each manual HR task (like payroll entry) costs US businesses almost $5.  

You could also be risking fines and penalties if your bookkeeping isn’t organized and up-to-date.  

Employee Morale and Retention  

Payroll mistakes can damage the relationship between you and your team. With wages and salaries on the rise and skilled professionals on the fall, paycheck errors are a sure way to see turnover skyrocket. 

Legal and Compliance Risks  

One of the most daunting repercussions of payroll mistakes is the legal ramifications. All businesses care about complying with the law, but the many regulations unique to the construction industry mean it’s a much finer line to walk. 

The IRS uncovered more than $4 million worth of cases in civil employment tax penalties in 2023. Such penalties incurred payments exceeding $1.5 billion. 

These factors, along with the continuing impact of COVID-19 and excruciatingly high material costs, play a major role in the high failure rate for construction businesses (over 80%).  

The 7 Most Common Construction Payroll Mistakes 

Construction businesses can’t control the regulations they must follow, the material costs they pay, or even (to some extent) the wages they must offer to compensate for labor shortages. So, it’s important to optimize costs wherever possible.  

The first step in controlling your payroll management system (and mitigating the risk of costly errors) is knowing exactly what mistakes to look for in your current processes. 

1. Incorrect Time Tracking
   Workers may travel to multiple locations daily, and it can be easy to record the hours worked and their corresponding job codes inaccurately. Additionally, timesheet entry mistakes can result in miscalculations in overtime, premium pay, etc. This is especially the case with paper timesheets or manual entry. 

2. Misclassification of Employees 

   On the back-office side of things, the first area in which mistakes can happen is when trying to categorize different employee types. For example, confusing independent contractors and employees or misclassifying tax-exempt versus non-exempt employees can both occur.  

3. Inaccurate Overtime Calculations

   Circling back to inaccurate overtime calculations, when this information is entered incorrectly (either by the employee or the payroll specialist dealing with thousands of lines of data entry), it can cause you to unintentionally violate overtime laws and regulations. 
   
   

4. Delayed or Missed Payments

   The cost of living is putting pressure on people just to scrape by, and a Business Wire report revealed that errors like late payments, missed payments to subcontractors, inaccurate payment amounts, etc., drive 1 out of 4 workers to look for new employment after a single mistake with their payroll. 

5. Failure To Deduct Accurate Taxes and Benefits 

   With the many other aspects of job costing to consider, incorrect tax withholdings and benefit deductions can happen. These, plus other legal missteps like errors in handling garnishments and deductions, can make you the target of unwanted, IRS-oriented consequences.
   
   

6. Non-Compliance With Prevailing Wage Laws

   If your payroll specialist is spread too thin or is too inexperienced to monitor updates in wage laws, you can risk failing to comply with local, state, and federal wage requirements. Again, this could subject you to costly penalties and fines.
    

7. Lack of Proper Record-Keeping 

   It’s hard to position your company for growth, yield a great profit, and stay competitive without a clear picture of your operational and financial wellness.

   Because manual payroll is so time-intensive and complex, detailed record-keeping can fall through the cracks. This can lead to incomplete, or inaccurate payroll records, which makes tax time a nightmare if you fail to maintain required documentation for audits.  

5 Steps To Eliminate Payroll Mistakes in Construction 

With a list of issues to review within your own payroll processing system, the following offers six strategies to help you avoid (or solve) payroll mistakes in your construction business. 

1. Implementing Automated Time-Tracking Systems 

   Eliminating manual data entry is the most effective way to avoid payroll issues. When you implement automated time-tracking software, you can create a centralized, continuously up-to-date, convenient, and accurate method of data entry for your field and office team. 

   But be warned, not all time-tracking tools are created equal. Some of the features to look for include: 

   • Industry-specific features and tools that help you stay aligned with regulations 

   • Mobile, remote, and desktop compatibility 

   • Customizable job coding lists 

   • Job costing analytics 

   • Automated payroll and approval processes 

   • Integration with ERP, accounting, and productivity software

     
     

2. Offering Regular Training and Education 

   Create time for you and your accounting team to focus on professional development and training. From staying updated on industry changes or laws to learning new software or features, ongoing training for project managers, supervisors, and payroll specialists encourages positive results.  

3. Conducting Regular Audits

   Even if you implement software and processes that accomplish your current payroll goals, stay proactive. Schedule and execute periodic payroll audits to monitor what’s working and what needs adjusting. Even if nothing is wrong, you may realize that your business has outgrown your current processes, and you may need to adapt accordingly.  

   Here’s how to perform an effective audit:  

Step 1: Establish KPIs (Key Performance Indicators) so you know how to measure the efficacy of your current system. 

Step 2: Get an accurate number on how much your company is currently spending on labor costs (especially overhead). You can compare your costs with the average in your industry to help you identify areas of overspending. 

Step 3: Speak with your payroll and field teams to get their feedback on current processes. Find out how much time they’re spending on time tracking and payroll now (versus pre-automation), and what obstacles both sides face. 

Step 4: Create a list of priorities in order of their urgency, so you have a plan of action. 

Step 5: Research and implement solutions using the data you’ve collected. 

Bonus tip: Speak with representatives of your current software to learn if they have a feature or suggestion to help.

4. Maintaining Clear Communication Channels 

Few things inhibit productivity and growth like poor communication. It’s crucial to encourage open communication between payroll staff and field workers, as well as to provide a system for reporting and resolving payroll issues.  

5. Staying Updated on Wage and Labor Laws 

Schedule research time to stay informed about changes in labor laws and regulations. You can do this by subscribing to industry newsletters, attending relevant seminars, or using intuitive tools that update automatically.  

Run Error-Free Payroll Faster than Ever 

Looking for an all-in-one payroll solution that connects your entire ERP ecosystem and reduces payroll errors by at least 70%? Book a demo to see how hh2’s Remote Payroll can help run error-free payroll faster than ever.