Industry Insights

Many contractors have found consistent risk management will lead to increased job-site performance. The contractor’s job-site environment can make implementing and maintaining an effective system of controls a challenge. Many times, the job sites are remote and removed from direct oversight. This adds challenges to job management. Specifically, payroll and purchasing activities at the job site can increase contractors’ risks if proper oversight and monitoring is lacking. Effective management oversight and internal controls can reduce the risk of asset misappropriation, improve operation effectiveness and help keep costs in line with budgets.

In general, one of the largest expenses for a contractor is payroll. Because a high number of employees typically work at the job site, the employer must process at least a portion of the payroll there. However, if proper preventive and detective controls are not in place, these job-site payroll activities can increase the risk of improper time recording or inclusion of fictitious employees on the job payroll. The key to mitigating these risks lies in management oversight. For example, contractors should consider having the job superintendent(s) review the payroll register before payroll is processed and submitted. This will help identify any terminated or “ghost” employees scheduled to receive paychecks. Also, job superintendent(s) should review hours worked to ensure each employee is being paid for the actual number of hours worked. Another measure is to have an independent management team member physically distribute the weekly payroll checks. This process will help identify any “ghost” employees. Implementing these simple procedures can prevent costly and time-consuming payroll errors, not to mention protect the company’s cash and job profit.

Contractors also should expect to reduce risks and improve operations by minimizing job-site purchases and placing greater focus on centralized purchasing of all significant materials and supplies. Centralized purchasing with contract controls can ensure the company uses only approved vendors, rates and terms. In addition, it may allow the company to protect against legal risks, take advantage of volume discounts and reduce the risk of vendor kickbacks to field employees. Effective job-cost estimating and frequent comparisons of actual costs to estimated costs can identify purchasing inefficiencies or other potential internal control issues. At the end of the project, performing supplier audits can identify potential recoveries for services or materials not delivered or not billed per agreements. Project management should be heavily involved in the purchasing, estimating and overall job progress to make sure the company’s practices bring about effective internal controls and improved operations.

Overall, direct supervisory and/or management involvement is key to effective internal control at job sites. Sometimes, just letting employees know someone is monitoring their activities can deter inappropriate conduct. However, savvy individuals will see through inadequate systems of internal control within a relatively short period of time and may look for ways to take advantage of a poorly designed system. Managers should keep a close eye on payroll, purchasing and overall job management. Today’s razor-thin profit margins leave little room for error.

For more information on this issue or related matters, please consult your BKD advisor.