A guide to in-house payroll vs. outsourcing for construction companies

A contractor just landed two sought-after contracts, one federally funded and one state funded. Great news! But there’s a problem.

Up to now, the contractor’s payroll system has been working out fine. One crew, one jurisdiction, and no prevailing wage requirements to worry about. Suddenly, they need to manage payroll for crews in multiple states, pay the right prevailing wage rates for federal and state-sponsored jobs, and submit weekly certified payroll reports.

At this point, the existing payroll system hits a breaking point. But should the HR team outsource payroll or manage it in-house?

This guide explores the pros and cons of in-house payroll versus outsourcing to help growing contractors understand the trade-offs. The wrong choice can mean compliance exposure, lost time, or an HR team stretched too thin during a growth phase.

What is in-house payroll?

In-house payroll means internal systems and staff manage payroll. At the extreme, it involves running every aspect of payroll completely by hand. More commonly, HR teams use payroll software to streamline the process. Keeping control over payroll while using tools to handle error-prone work is sometimes called “co-sourcing.” 

Teams who handle payroll in-house have to manage: 

• Gross pay 
• Wages
• Overtime 
• Fringe benefits
• Tax filing and remittance
• Payroll compliance reporting

Teams with smaller HR departments or companies taking on more complex projects may have a hard time managing each of these processes by hand. That’s why some turn to outsourcing.

What is payroll outsourcing? 

Payroll outsourcing involves offloading some or all of the responsibility of processing payroll to a third-party company such as a professional employee organization (PEO) or payroll software. A contractor might hand over the entire process or outsource some tasks while keeping others in-house.

For example, a contractor might use an outsourced provider to take care of tax filing and certified payroll reporting while keeping time tracking and pay approvals internal. This mixed approach lets HR teams hold onto ultimate control and oversight while still easing the payroll burden.

Giving the bulk of the work to outsourced payroll services isn’t a completely hands-off solution. Outsourcing can reduce compliance risk and significantly lighten the administrative load, but payroll teams typically still need to be involved for quality assurance. Even with a reliable provider, errors occur, and in-house HR remains responsible for catching them before payroll runs.

The amount of oversight might be limited, like sending over timesheets, or more involved, like double-checking that fringe and prevailing wage rates were applied correctly.

Key differences between in-house payroll vs. outsourcing

Here’s a summary of the main factors that set in-house payroll and outsourced payroll apart.

Both in-house and outsourced payroll offer a varying amount of involvement and control. Miter Payroll takes the best from both approaches. HR teams maintain as much control as they need while offloading the most time-consuming and error-prone tasks onto the software.

Should construction companies choose in-house or outsourced payroll?

Why do construction companies consider outsourcing payroll, and what holds them back? Let’s find out by examining the benefits and drawbacks of both approaches.

Pros of in-house payroll

• Direct control: Keeping payroll in-house keeps control in-house, too. Contractors can hire subject-matter experts and develop compliant processes where it counts. For instance, accurately paying prevailing wages in California is complex; it’s worth bringing on a knowledgeable team member who can handle the pay rates, fringe credits, and certified payroll reports correctly.
• More customization: Construction companies that choose to run payroll internally can customize every detail. This is especially attractive for contractors that use company-specific pay codes, project structures, and workflows that third parties don’t have access to.
• Faster internal handling of payroll questions or changes: If something unusual happens or needs to be updated, in-house payroll teams can address it immediately. Outsourced payroll approaches might require a potentially lengthy back-and-forth with the provider before the issue can be resolved.
• Perceived lower cost by avoiding vendor fees: Third-party payroll providers can be expensive to work with, and in-house payroll limits these costs. 

Cons of in-house payroll

• Single point of failure: When only one or two people run payroll, there’s little room for error. Sick days, resignations, and competing priorities all get in the way of accurate, timely payroll.
• More manual work: Keeping everything in-house means calculating prevailing wage rates by classification, tracking fringe benefit offsets, and producing certified payroll reports by hand for every public works job.
• Knowledge gaps: Changing tax and compliance requirements can be tough to keep up with. When teams fall behind, they might make costly mistakes.
• Increased risk of errors: Complex areas like certified payroll, prevailing wage requirements, and benefits deductions are more likely to go wrong when tasks are performed manually. Discrepancies are expensive, leading to back pay, fines, and even legal action.

Pros of outsourcing payroll

• Time savings: Why outsource payroll? Outsourcing can cut hours from every pay cycle, freeing up HR to work on more impactful projects like onboarding, compliance, and field support.
• Specialized expertise: Payroll services do one thing, and they do it well. Tapping into this expertise can give contractors peace of mind and reduce compliance risks.
• Better scalability: When a construction company scales, the payroll burden grows with it. Third-party payroll companies are prepared to adapt to these changing needs.

Cons of outsourcing payroll

• Less day-to-day control: The trade-off for less work is less control. Contractors have to trust their provider to handle sensitive employee data, meet deadlines, and catch errors.
• Potentially higher costs: Outsourced payroll solutions aren’t free. Depending on the chosen provider’s pricing structure and fees, outsourcing may be a less cost-effective solution.
• Delayed issue resolution: If the provider has slow response times, getting answers and solving problems may be difficult. Serious issues like underpaying employees or missing federal deposit deadlines need timely solutions. Otherwise, contractors are on the hook for back pay, fines, and legal action.

Getting the best of both options with specialized construction payroll software

Contractors don’t have to choose between control and efficiency. Miter Payroll takes the biggest benefits of in-house and outsourced payroll for an approach we like to call co-sourcing.

Co-sourcing enables contractors to automate the most time-consuming and error-prone payroll tasks without sacrificing control. Miter is a full payroll processor, so it handles all the following processes in one system: 

• Tax filing and remittance
• Certified payroll report generation
• Union fringe benefits and reporting
• State-specific overtime
• Fully-burdened labor costing
• Expense management

On top of that, Miter integrates with ERP tools like Sage Intacct and QuickBooks as well as project management platforms like Procore and BuildOps. Time data can come from Miter or a connected project management tool, and fully burdened labor costs flow from payroll into ERPs for accurate job costing. With Miter in hand, the internal HR team stays in charge, but administering payroll no longer dominates their week.

How to choose an outsourced payroll service provider

Consider these factors to find the perfect payroll provider or software to partner with.

Core payroll capabilities

The provider should have a perfect track record of handling fundamental payroll tasks such as direct deposits, payroll tax remittance, and garnishments. Check user reviews to see how well the provider handles each of these tasks.

Construction-specific functionality

Generic payroll solutions don’t have the infrastructure or experience to handle complex construction workflows. Look for a company or construction-specific payroll software that’s able to manage certified payroll reporting, prevailing wage calculations, and multi-state tax and compliance considerations. 

Integration with existing tools

One of the key selling points of outsourcing payroll is saving time. Lacking integrations with ERPs (like Sage and QuickBooks) and project management platforms (like Procore and BuildOps) means your payroll data lives in multiple silos, and an in-house team still has to manually transfer information, wasting time and creating more chances to introduce errors.

Responsive support

Outsourcing payroll doesn’t mean issues will never come up. When something goes wrong, contractors need to know they can get timely support to fix it.

Oversight and visibility

Look for a provider with a model that allows for custom control. HR needs to maintain oversight while still saving time since that’s what makes outsourcing appealing in the first place.

Get the best of both payroll worlds with Miter.

Choosing between in-house and outsourced payroll management doesn’t have to be a one-or-the-other decision. 

With Miter Payroll, contractors retain full oversight over payroll while simplifying the tedious and error-prone tasks that drain their resources. Accurate calculations, tax considerations, and compliance and reporting all become a matter of routine. In fact, thousands of contractors use Miter to reduce their payroll workload, some by 90% or more.