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Construction payroll 101: A beginner’s guide for contractors

Picture of a mural depicting a contractor on a ladder (MTA subway) | Construction payroll 101 | Knowify

Everybody looks forward to payday. It’s a time-honored agreement between employer and employee that exchanges honest work for honest pay. However, payroll is more than cutting a check to your employees every two weeks.

Payroll is a vital business process for managing employee benefits, calculating taxes, and ensuring compliance with government regulations. Not to mention the role it plays in improving efficiency and employee retention. Both of which are as important as ever, thanks to an enduring, industry-wide labor shortage.

In this guide, we’ll give contractors everything they need to know to understand the basics of construction payroll.

What is construction payroll?

A construction payroll is a list of all employees used to calculate total earnings for time worked. This serves a crucial business function because calculating an employee’s take-home pay isn’t as simple as just tallying up hours worked and multiplying it against their hourly rate.

Doing so will give you their gross wage–hours worked x hourly rate = gross wage–but gross wages will include much more than just pay, like PTO, overtime, and bonuses, to name a few. On top of that, you’ll need to factor in deductions and remove things like taxes, social security, benefits, etc. 

So as you can see, determining gross wage is only the beginning, but it’s a crucial step as it serves as the foundation for all other payroll calculations to follow. Only after including things like overtime and benefits and deductions like taxes and pension contributions can you arrive at net wages (which is what you’re really after).

Net wages are what’s left over after deductions. For this reason, you’ll hear net wages referred to as “take-home pay” since that is the actual amount a worker will see on their paycheck.

What makes construction payroll different from other industries?

In the construction industry, payroll takes on a heightened level of complexity. Construction business owners must juggle multiple locations, time-tracking complications, unions, and unique concepts such as prevailing wages and certified payroll. We’ll take a look at each of these factors in more detail below. 

Different locations

It’s not uncommon to have multiple projects going on in different locations. Since no two projects are ever the same, each job site will have unique schedules, conditions, tasks, and multiple pay rates.

The challenge this creates is that if a worker is bouncing between multiple job sites, they’ll track two different pay rates with different sets of rules, such as separate overtime policies, labor burden factors, and tax requirements.

If job sites span different counties or states, this again will factor in two different tax requirements, labor laws, and filling processes. Generating accurate and compliant payroll reports in this situation can be a daunting task. 

Time tracking from the field

Tracking time plays a significant role in construction payroll for a few reasons: 

  1. Wages are based directly on the amount of time tracked. 
  2. Time tracking reports are crucial for effective job costing as accurate time tracking from the field allows you to monitor labor costs in real-time as a job is underway.

Obtaining accurate time tracking is easier said than done. It’s hard enough getting your team to track their hours properly. Add in working on multiple job sites, union requirements, prevailing wages, and inaccurate time sheets, and it’s enough to make anyone’s head spin. On top of that, you must have a system in place that can capture, organize, and report on tracked time so you can actually use it for things like payroll, job costing, and scheduling. 

It’s likely that the root cause of these troubles is a disorganized time-tracking system. A disjointed time-tracking process can cause more financial harm than you may realize. For example, inaccurate payroll data will mean some employees get paid too much while others may be underpaid. Over time, these errors can really add up, leaving you wondering where a huge chunk of your cash went. 

In addition, any mix of paper and digital time-tracking methods means you’ll have to spend valuable time translating bad handwriting, verifying hours, and tediously moving data from one system to another. If things get too complicated, you may even need to bring on a bookkeeper to help manage it all, which is another cost to factor into your business that you may not have the capital for.

Union requirements

Union requirements add an extra layer of complexity when running payroll reports. For example, trade unions may stipulate specific benefit packages, pensions, annuity funds, or additional contributions that employers must provide per the collective-bargaining agreement.

Under the National Labor Relations Act of 1935, all workers covered by collective-bargaining agreements receive the full benefits of those agreements, whether they are union members or not. The specifics of each collective bargaining agreement will vary, but most will demand timely payments that comply with agreed rates. Additionally, you’ll need to prepare extensive documentation to prove that you are meeting these requirements.

Certified payroll

Certified payroll is a weekly report submitted to government agencies that certify that you’ve paid employees the correct prevailing wage rate. These requirements first came into use as a result of the labor movements of the Great Depression. The Davis-Bacon and Related Acts, passed in 1931, laid the foundation for both prevailing wages and certified payroll. The act states that general contractors and subcontractors on federal projects over $2,000 must pay laborers and mechanics at the prevailing wage of similarly contracted projects. 

The Department of Labor is responsible for setting and enforcing ‌labor standards per the Davis-Bacon Act, as well as making sure you pay overtime for more than 40 hours worked per week.

What’s included in a certified payroll report:

  • Basic employee information (name, address)
  • Every employee’s wage (gross and net earnings for the week)
  • Taxes/deductions
  • Fringe benefits
  • Type of work they performed
  • Hours worked (the hours an employee worked that week with a break down of the pay rates for those hours)

The federal certified payroll form is the WH347, but many states have their own forms for reporting. Some states require specific websites and processes for submitting, so you’ll need to contact your local municipality to ensure you have the correct process in place. If you need help getting started, you can read the Department of Labor’s guide on creating a WH347 payroll form.

Prevailing wage

While the certified payroll report ensures that you pay employees a fair rate, the prevailing wage describes what that fair rate is. One of the problems that Davis-Beacon was trying to solve had to do with projects that hired workers from multiple states outside of the job site.

These domestic migrant workers were often willing to perform work for a much lower wage than the local labor market. This created a problem as local workers and employers felt they were getting priced out because of the cheaper labor supplied by out-of-state workers. To combat this, Davis-Beacon mandated the creation of prevailing wages–the hourly rate (wages + benefits) paid to similarly employed workers in a certain location.

State legislatures have the agency to determine the prevailing wage for each occupation. To do this, state governments take the average hourly rate paid to the majority of workers in a specific location for a particular trade.

Additional requirements dictate that employers must match workers to the proper job codes and wage rates to create an accurate, certified payroll report. It’s important not to forget about labor burden during this process. When running payroll, you’ll need to take the employee’s prevailing wage plus fringe benefits to arrive at a fully burned rate for the employee.

Prevailing wage may not always apply, so it’s crucial to double-check any government or military contracts to see if there is a prevailing wage requirement. The Department of Labor provides many resources to help contractors get better acquainted with prevailing wages, including a calculator that you can use to plug in your own numbers to determine a simple average for prevailing wage.

How to do payroll for a construction company

If you’re just starting as a contractor or need to optimize your current payroll system, ask yourself the following basic payroll questions:

  • How will employees track time? Steer away from paper-based systems (more on this later)
  • If going digital, what tool will you use, and how will you sort and organize data?
  • What benefits will you offer, and which employees will receive them?
  • What is the pay schedule? All states will have specific payday requirements. Some require weekly, monthly, and semi-monthly pay schedules. It’s crucial to understand these requirements because it’ll help you pay state or local taxes, but you must know these rates in order to stay compliant.
  • How will you calculate and factor in labor burden and come to accurate numbers?
  • How will you pay? By physical check, direct deposit, paycards, cash? State laws and regulations apply here, too.
  • Have you collected a W-4 from every employee?
  • Are you immediately sending and receiving signatures on I-9 forms by all new employees?

You shouldn’t leave any of these questions unanswered. They’re vital for creating a functional payroll system that works for everyone. With these questions addressed, we’ll now take a look at how to optimize your payroll system to further improve efficiency and accuracy.

Switch to digital time tracking

The payroll process begins with time tracking. Keeping an accurate count of working hours for each employee lays the foundation for all other components of your payroll system. This process will involve having employees clock in and out, recording start and end times, and tracking the number of hours worked each day and each week.

How you track time, whether it be manually or digitally, has huge ramifications on the efficiency and accuracy of your payroll process. Especially when trying to sort through tracked time across multiple projects and job sites. If employees are texting in their hours, or even worse, writing on the back of a piece of paper, then human error will eventually take its course. 

Additionally, some employees may forget to track their time, meaning you’ll have to go back and verify their time and make the necessary adjustments. Accuracy will be impossible to guarantee, resulting in incorrect payroll calculations. This can lead to under or overpaying your employees with no real way of understanding where things went wrong. 

If you’re tracking time manually, then you’re likely reentering this information into a spreadsheet or your payroll software. In this case, manual tracking is just creating duplicate work. Why not just have your team track time digitally?

Digital time tracking is the ability to track time via digital applications right from your phone. This allows you and your team to track hours instantly from the job site. Some of the more robust tools, like Knowify, include GPS-verified check-in/check-out timesheets that can be a true lifesaver when working on multiple locations. 

Another advantage of digital time tracking is the ability to integrate time data with other tools. This means you’ll be able to use time data with your budgets, project plans, and reporting in a much more effective way. Automated time tracking also makes it much easier for your crew to track time accurately, and they can do so right from the field. Immediate time tracking eliminates errors caused by workers guessing their time days after the fact.

Digital tracking also removes the need to interpret or validate time since it’s automatically stored and organized in a single location. This not only buttons up your payroll system but also allows you to use your labor data to strengthen other areas of your business. Organized, clean time tracking can be a huge boost to improving your job costing, scheduling, pricing, estimating, and more.

Create a checklist

With something as important as payroll, a systematic approach is best. Your payroll process must be precise to avoid any payment issues or legal requirements. These include collecting hours, verifying time worked, recognizing withholdings, and issuing paychecks. If working on government contracts, there’ll be even more steps, such as handling prevailing wages, fringe benefits, and verifying work classifications.

Using a checklist can serve as another line of defense, ensuring you and your bookkeeper don’t miss any steps. Create a list detailing every step of your payroll process. Then, use this list every pay period to ensure no step is ever missed. Your list is also a checkpoint, allowing you to quickly identify missed and problematic steps. Even if you’re using a construction payroll service provider, a checklist can help you stay organized and in the know as a business owner.

A payroll checklist may include the following:

  • Verify employee information
  • Verify all time tracked and calculations
  • Apply overtime rates where applicable
  • Calculate gross pay
  • Deduct withholding, benefits, and taxes
  • Issue payments by deadline
  • Record and report payroll taxes
  • Store the most recent payroll report in an easily accessible location

Unify technology

Technology is there to help simplify running your business. However, this isn’t a set-it-and-forget type of relationship. Using multiple tools can create silos making your data unusable from one system to another.

For this reason, you must ensure you can export your time tracking data in a format that’s compatible with your job costing and accounting software. Some of the more advanced tools (like Knowify) integrate all three together, so there’s no need to manually import and export data. Try to find systems that work together so you can use your data effectively for job costing, scheduling, invoicing, and more.

Payroll mistakes to avoid

With so many moving parts, it’s all too easy to make payroll mistakes. Any misstep in the process and you’ll face angry employees and the scorn of the IRS. However, there are a handful of common mistakes that cause most of the payroll woes for business owners. 

Below we’ve listed some of the most prevalent mistakes to avoid when running payroll and a few tips to help you avoid them.

Reliance on manual processes

We’ve already mentioned this several times in this article, but it’s worth mentioning again. Manual processes hold you back and hurt the overall efficiency of your business. Digital time tracking tools, such as clocking in with a mobile app, will give you a modern, paperless way to capture hours.  

Using payroll software or working with a payroll service keeps your payroll calculations accurate while helping you stay compliant with payroll regulations. In addition, if you integrate time tracking and payroll software with your bookkeeping and job costing tools, you’ll have a powerful foundation for growing and scaling your business through enhanced efficiency and profitability. Integrating time tracking with job costing gives you accurate labor data on a per-project basis. With this information, you can mitigate cash flow issues, schedule the right mix of workers, and adjust budgets.

Not accounting for overtime pay

Failing to consider overtime pay or miscalculating it can result in costly fines and penalties. This is another area where digital time tracking will help capture all hours that qualify for overtime pay. This may include work during breaks, travel between sites, team meetings, etc. You must appropriately classify overtime hours to ensure employees are fairly compensated.

Failing to verify employee hours and pay rates

Never take someone’s word for it. Check and verify that employee hours are correct. Payroll mistakes can occur for many reasons, including missed overtime reporting or from employees forgetting to clock in or out. Verifying is a key part of doing your due diligence as a business owner when running a payroll report.

Incorrect tax forms

Whether you discover you have incorrect amounts on your taxes, late submissions, or include inconsistent information, tax errors require immediate action. You can get in serious trouble for under or overpaying payroll taxes. If caught, at a minimum, you’ll pay hefty fines. But tax errors can also impact your employees. If Form 941 (Employer’s Quarterly Federal Tax Return) does not match their W-2, they’ll have to sort through loads of paperwork that could delay their refund.

Time tracking and payroll software will go a long way in helping you secure accurate tax information on every payroll report, but there are steps you should take to safeguard your business and ensure you’re staying compliant.

These include double checking your numbers, staying current on your state’s tax laws, and consulting with a tax professional who can help you cross your t’s and dot your i’s on your tax forms.

Misclassifying employees

Employees classify as either exempt or non-exempt to ensure the proper treatment under the Fair Labor Standards Act. Consider whether a worker is permanent, contracted, paid a salary, or paid hourly wages.‍

Exempt employees are:

  • Paid a salary
  • Don’t qualify for overtime

Non-exempt employees:

  • Paid an hourly wage
  • Paid overtime if they work more than 40 hours per week

Not having a separate bank account for payroll 

Consider creating a separate bank account for payroll transactions unconnected to your business account. Doing so can help organize your funds so that you can clearly see what you’re paying in payroll and what portion of that is going towards taxes. 

How does payroll factor into job costing/construction accounting?

Payroll is a critical part of job costing because it tracks the labor costs associated with each job. This helps you understand your labor costs, crew efficiency, and scheduling effectiveness on a per-job basis. This perfectly matches the goal of job costing, where you’re trying to track all costs and associate them with an individual job.

For many trades, labor will account for the largest share of job costs. A service business, for example, will see 50% or more of total costs allocated toward labor. Even the slightest increase in labor costs can be enough to sink any hopes of job profitability.

However, accurate time tracking and payroll reports will provide crucial pieces of insight that you can use to improve your labor efficiency. This is where your payroll system and job costing system can work together. 

You can find ways to solve crew productivity issues by evaluating time cards. Doing so will help you understand how efficient each crew was on every task of a job. It could be that there are too many workers in one phase or not enough in another. Use this information to better allocate your crew for tasks that you know will require extra hands or tasks that a limited crew can complete. 

In contrast, if your team is consistently completing projects on time and under budget, it could be an indication that you need to raise your bid price or cut costs elsewhere to hit your profitability goals. Again the key to arriving at these conclusions is through clean labor data captured and reported through your payroll system.

Tools and services to help manage payroll

There are hundreds of payroll software services out there, but many aren’t equipped to handle the complex and nuanced needs of the construction industry. For this reason, finding the best construction payroll software that can meet the needs of your specific trade can be quite challenging. To help you make the right decision, we’ve put together a quick construction payroll software guide with some of the more popular options.

Construction payroll software


eBacon is a cloud-based solution designed for construction companies to manage payroll and manage fringe benefits. eBacon aims to have all necessary payroll documents, such as pay stubs and tax documents in one location with the ability to create weekly payroll reports. Additional features include time tracking, fringe management, and payroll reporting.

QuickBooks Payroll

QuickBooks Payroll from Intuit delivers cloud-based payroll services, including automated tax calculations, tax filing, payroll runs, and reporting. Although it lacks time tracking, QuickBooks Payroll is another trusted tool from a long list of high-performing products from Intuit. Additional features include tax penalty prevention, same-day direct deposit, automatic tax calculation filing, and payment of payroll taxes.


Vista bills itself as human capital management (HCM) software that specializes in workflow, tax management, worker’s compensation, and training management. In addition, Vista offers self-service HR and payroll capabilities.


Payroll4Construction is a robust payroll system built specifically for the construction industry. It will handle an assortment of payroll related tasks such as, tax reporting, tax filing, preparing certified payroll reports, fringe benefit management, union reporting, and more. Their certified payroll services are of note here. They’ll handle complex prevailing wage calculations and mandatory certified payroll reporting helping simplify these processes through automated calculations. 


Gusto is a payroll and HR software platform. Built with small businesses in mind, Gusto aims to help with employee payroll for small contractors, including services for employee benefits, health, retirement, and other labor burden-specific information.

Time tracking with Knowify

Schedule a live demo with Knowify today to see firsthand how easy it is to streamline your time tracking and payroll process. With Knowify, you can easily access the information you need, when you need it. Build your business with confidence through Knowify’s paperless, efficient, construction accounting and project management software.