HOW CONTRACTORS CAN AVOID BUDGET OVERRUNS
FROM A LEADER IN WORKFORCE MANAGEMENT SOLUTIONS
www.mitcsoftware.com
HOW CONTRACTORS CAN AVOID BUDGET OVERRUNS
MINIMIZE THE DANGER OF BUDGET OVERRUNS Contractors are facing pressure from customers to reduce costs. It is now more important than ever to control costs tightly and maximize billings to help avoid unnecessary costs. The biggest single cost for most contractors is payroll-related costs. For many contractors, payroll is a major cause of cost overruns. This publication and the accompanying power point presentation explain how contractors can minimize the danger of budget overruns by following six simple steps: Approve payroll hours against budgeted hours Control overtime Optimize workforce usage using a centralized cheduling system Implement a structured payroll approval system Establish payroll budgets Enforce compliance
APPROVE PAYROLL AGAINST BUDGETED HOURS Many contractors are not used to controlling payroll in real
“It is now more important than ever to control costs tightly and maximize billings to help avoid unnecessary costs.” Payroll leakage is caused by several factors including:
time, before payroll is authorized. Often, payroll departments
Timesheet falsification
do not know how many hours are budgeted for each cost
Payroll data entry errors
center. Managers approving timesheets may be too busy to
Manual miscalculations
make more than a cursory attempt to verify hours worked, or do not have the information to validate hours worked. The first step to reining in payroll costs is to establish budgets by job. This helps to highlight overruns caused by low-level payroll fraud, unauthorized attendance, overlapping shifts and
Under/over hour reports also highlight missing billable hours for customer extra services. For instance, extra services provided outside of a contract will be highlighted by verifying hours worked against contracted or budgeted hours
inaccurate scheduling, before payroll is approved. Use variance
Creating hourly budgets by location or cost center is relatively
reports to track hours by employee, job location, manager and
easy to maintain, as budgets change relatively infrequently.
customer before payroll is approved. Disputed hours can be
Using variance reports makes payroll approval quicker and
queried or withheld until resolution is achieved.
much more accurate. Any budget variances are easily spotted
Using paper timesheets typically costs 1–3% of gross payroll.
using simple summary hour variance reports by cost center or location. More detailed information can then be obtained where discrepancies are highlighted.
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HOW CONTRACTORS CAN AVOID BUDGET OVERRUNS Ideally, time and attendance should be captured in real time to allow these decisions to be made before problems occur. Sometimes contractors are not even aware of payroll overruns or missed billing. Leakage can occur in relatively small amounts of money but collectively have a serious negative impact on profitability and cash flow.
CONTROL OVERTIME Overtime is caused by many factors: Low-level payroll fraud
“Using variance reports makes payroll approval quicker and much more accurate.�
Overlapping shifts Unauthorized attendance Low compliance with policies Ineffective scheduling Sub-optimal hiring
Careful control of payroll costs can result in significantly
Absenteeism
improved levels of profitability. Look at the example to the
Late starts, early finish
right involving only 100 employees.
Lack of planning for holidays
on its origin, cost center and manager to identify the sources of
OPTIMIZE WORKFORCE USAGE WITH A CENTRALIZED SCHEDULING SYSTEM
payroll leakage and cost overruns.
Implementing a structured scheduling system allows
Contractors need reporting systems that track overtime based
A 20% decline in overtime within six months of implementing a new system is usual. For 100 staff that might be a $30,000
contractors to minimize prescheduled overtime, fill open positions and avoid using employees already in overtime.
annual saving.
NOW
GOAL
Number of Staff
100
100
Average Pay Rate
$10
$10
Overtime %
10%
5%
Annual Overrun
$156,000
$78,000
Saving
$0
$78,000
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The same system will allow actual hours worked to be tracked against scheduled hours. This is very important in any campaign to root out unnecessary overtime. For instance, one employee’s overtime might be the result of another employee showing up late. Just reviewing an overtime report might not pinpoint the real cause of the overtime, which could be another employee’s tardy behavior. Similarly, overtime in one cost center might be the result of poor scheduling in another cost center by another manager. Ideally, overtime-reporting systems should automatically allocate the overtime cost to the most appropriate cost center (not necessarily the one where the overtime physically occurred). For instance, if an employee works Monday through Friday 40 hours at one job, but works an unscheduled shift at another job on Wednesday, the overtime should be allocated to the job worked on Wednesday, not the job where the employee is scheduled to work. Eliminating excessive prescheduled overtime may require the hiring and training of additional staff or greater use of part-time staff, whose hours are normally less than 40 hours per week. Some of the changes are not easy. It will require time, patience and perseverance from senior management to
“Implementing a structured scheduling system allows contractors to minimize prescheduled overtime, fill open positions and avoid using employees already in overtime.”
provide leadership during the transition. However, the rewards are significant. An efficient scheduling system allows contractors to identify critical days, such as holidays, weeks in advance and identify available staff for those days.
“Ideally, overtime-reporting systems should automatically allocate the overtime cost to the most appropriate cost center.”
Some contractors opt for a centralized scheduling system with administration taking over the function of filling open positions. Other contractors leave the responsibility with their managers and hold them accountable for any cost overruns.
IMPLEMENT A STRUCTURED PAYROLL APPROVAL SYSTEM For many contractors there is little or no integration between payroll, schedules and budgets. Schedules are often in one place, payroll in another, and budgets inaccessible to managers. The result is that no one is in control on a day-to-day basis of a contractor’s biggest single cost — payroll. The consequence is cost overruns and low profitability.
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HOW CONTRACTORS CAN AVOID BUDGET OVERRUNS Change is not easy. But counting paper clip consumption is probably not going to turn around a budget shortfall or loss. Hours worked need to be reported by employee, job, customer, manager and division. Payroll should be approved against budget and schedule. Disputed hours may be withheld until clarification is achieved, even if that results in the pay for that shift not being processed until the next payroll. Ideally,
hours
worked
should
be
reviewed
daily
“Tracking payroll cost variances to payroll budget will highlight cost centers with overtime, compliance, scheduling and/or attendance problems.”
and approved weekly, not just after the pay period has closed. Employees should be provided with a clear statement of the
employee, and customer on an ongoing basis to ensure that
details of their hours worked either on their payroll check stub,
weak practices are minimized or eradicated.
in a separate report enclosed with the payment, or on the
Tracking payroll cost variances to payroll budget will highlight
internet.
ESTABLISH PAYROLL BUDGETS You get what you inspect, not what you expect. During and after each payroll, it is important that contractors are able to identify the exact source of any cost overruns by manager,
cost centers with overtime, compliance, scheduling and/or attendance problems. Payroll and any subcontracted costs need to be included in the actual budget. “Manage at a glance” with graphs generated in Excel to display adverse trends by agency, cost center or program.
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ENFORCE COMPLIANCE Establish organizational goals to reduce payroll costs and keep your agency on budget. For instance, if overtime is 10% of payroll, the goal might be to reduce it to 5% over 6 months. Establish penalties and rewards for managers and employees. It is not uncommon for manager compensation to be tied to the ability to minimize overtime. Share the savings with managers responsible for achieving change through better timekeeping and scheduling of resources. Track employees who fail to comply with company policies, have
Written rules in the form of amendments to the company’s
attendanceissues,arrivelate,leaveearly,takeunplannedabsences,
employee handbook are required. Employees should sign a
etc. Forgetting to clock-in/out accurately is an attendance
new agreement and the same should be incorporated into new
violation. It is no different from not submitting a timesheet or
hiring procedures.
time record.
Rewards for good performance can take the form of additional
Employees who forget to clock-in/out should suffer a delay in
individual compensation for a group of employees. One MITC
payment for that shift while the failure to comply with company
customer provides a pizza party each payroll period to groups
policy is investigated.
whom clock-in/out 100% on time. Another MITC customer
Without consistent and strong compliance policies, employees are rewarded for forgetting to clock-in when they are late or
provides a small flat-amount bonus if employees work their scheduled hours 100%.
leave early.
ABOUT MITC MITC provides modular workforce management solutions and services to support all the needs of contractors — time and attendance, advanced employee scheduling, payroll rules and reporting engine, workforce analytics, payroll and billing integration, and more. For 25 years, MITC has grown to serve over 1,500 organizations (with anywhere form 5 to 10,000 employees) in the USA, the UK , Africa, Australia, Canada, Ireland and New Zealand. They have selected MITC to help control costs, save time, improve productivity and ensure compliance.
Visit www.mitcsoftware.com to learn more.
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