How to Account for Subcontract Labor and Improve Your Financials
The old adage about time is money is still true today.
As an Engineering or Construction firm, your business is PEOPLE, and you make money by turning people into revenue. Because of this, it is easy to understand why it is important to collect labor accurately and in a timely manner, so that your billing and revenue recognition can be done as quickly as possible. This process is difficult enough when your own staff is spread out at job sites or on the road, but when you add subcontract (SubK) labor, the challenges are even greater. The process can take up to 8 weeks from the time labor is charged until is it billed and there is significant manual effort involved. Time collection systems that are manual, disparate, and paper-driven will slow down the process costing the business big bucks. So, what is the solution?
CURRENT STATE PROCESS FOR SUBK LABOR TO REVENUE CYCLE
In the current state, SubK employees are often charging to their own time collection system. All the work authorizations are done on the SubK side. Billings are then submitted to the Prime in a lump sum format with time sheets attached as backup. The submittal is frequently done via email or even snail mail, and doesn’t allow you to shift gears until after payroll has been submitted. The Prime has no idea what is coming in the billing or who has charged what. The labor reconciliation and approval process for the Prime is time consuming and manual. If there are issues, the billing must be sent back to the SubK and additional time and effort are put into the process. This cycle could last for weeks from the initial labor input. Putting an additional month or more into the cycle is costly.
BEST PRACTICE PROCESS FOR ACCOUNTING FOR SUBK LABOR
The process can be dramatically improved by utilizing a system that all SubK’s can access in real-time for charging and billing. This Best Practice Process helps both the SubK and the prime collect money faster and more efficiently, a complete win-win!
SubK’s input their time into the Prime’s time collection system, accessible either in an office environment, on the job site, or on the road. The approvals are done in real-time by both the SubK and the Prime. Labor is then posted to AP, and the time is now available for billing and revenue recognition. There is no manual activity, reconciliations, or mailing of invoices. Best of all, there are no surprises and no lag.
The Best Practice Process helps save time and money for both sides.
Best Practice Process Benefits for Prime:
- Increase in efficiencies in the SubK’s cycle from incurring labor to collecting cash
- Decrease in cash cycle time of 4–8 weeks per SubK to send invoices
- Decrease in accrual amounts
- Decrease in days working capital through reduced days sales outstanding, and increase in days payable outstanding
- Enhance project execution with real-time visibility and front-end controls over SubKs on project
- Ability to dial in the funding and maximize every penny
- Increase profits and cash flow
- Eliminate need to reconcile SubK invoices to contracts/project budgets
- Improve relationship with SubKs
Best Practice Process Benefits for SubKs:
- Faster payment cycle, increasing cash flow
- Less manual effort and fewer mistakes
- No invoices are produced and mailed
- Increase profits and cash flow
- Improve relationship with Prime
Weighing these pros and cons allows your firm to evaluate available solutions for managing your subcontract labor better – allowing for improved financials, for both you and your sub. If you’re looking for reliable, efficient software to manage it all, Unanet is the resource you need. Our Timesheet Software tool is designed to help you accurately record your employees’—and subcontractors’—time to avoid errors and mistakes. Learn how Unanet can help.