Labour is typically the largest controllable cost on a construction project. Yet most growing contractors still struggle with the same question: how do you allocate labour costs accurately to projects and cost codes without exposing what individual employees are paid?
It's a tension that sits across finance, operations, payroll, and HR. Project managers want accurate job costs. Finance wants payroll reconciliation. HR wants salary confidentiality. Executives want to know whether project profitability is being measured correctly. These objectives are not mutually exclusive, and resolving them cleanly is a sign of a mature construction finance function.
The answer used by the most sophisticated contractors is a labour clearing and recovery model. Here is how it works and why it matters.
The problem with costing actual salaries to projects
Many growing contractors start by pushing actual employee payroll costs directly into job costing. At first glance this looks logical.
| Labour class | Annual salary | Actual cost per hour |
|---|---|---|
| Site Supervisor | $160,000 | $96.15 |
| Project Engineer | $135,000 | $81.25 |
| Carpenter | $95,000 | $57.20 |
The problems compound quickly. Salary information becomes visible to operational staff. Job costs shift every time a pay review occurs, making period comparisons unreliable. Forecasting becomes difficult because the underlying rate changes. And if executive or management salaries flow through the same process, you have a salary disclosure problem disguised as a costing model.
Most sophisticated contractors move away from this approach. The better model uses standard labour recovery rates.
Standard labour recovery rates: what they are and how they work
Employees still record their hours against projects, cost codes, activities, and work packages. But instead of applying their actual salary, the system applies a predetermined rate by labour class.
| Labour class | Recovery rate |
|---|---|
| Site Supervisor | $115/hr |
| Project Engineer | $100/hr |
| Carpenter | $82/hr |
| Labourer | $58/hr |
These rates are not arbitrary. They are built to recover base wages, superannuation, payroll tax, workers compensation, leave entitlements, and any other labour-related overhead that the business needs to recover across its project portfolio. Project managers see the labour cost allocated to their project. They do not see what any individual employee is paid. Finance retains complete control over the payroll.
How mature is your construction finance function?
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The missing piece: labour clearing accounts
The question that comes up in almost every ERP implementation is: if we are not costing actual payroll to projects, how do we prove that total labour costs still reconcile?
The answer is a labour clearing account. It acts as a temporary holding account, a reconciliation bridge, between the payroll system and project costing. Every dollar of payroll enters the clearing account. Every dollar recovered to projects exits it. Any remaining balance represents under-recovered labour that needs to be explained.
A worked example
A commercial construction business has the following weekly payroll:
| Cost type | Amount |
|---|---|
| Wages | $420,000 |
| Superannuation | $40,000 |
| Payroll tax | $20,000 |
| Leave accruals and on-costs | $20,000 |
| Total labour cost | $500,000 |
The labour cost is recognised and posted to the clearing account. No project allocation has happened yet.
| Account | Debit | Credit |
|---|---|---|
| Labour Clearing | $500,000 | |
| Payroll Liabilities | $500,000 |
Cash leaves the bank. The clearing account is not affected. Payroll and project costing remain separate processes.
| Account | Debit | Credit |
|---|---|---|
| Payroll Liabilities | $500,000 | |
| Bank | $500,000 |
Approved timesheets drive the recovery. Standard rates are applied. Project WIP and job costs are updated.
| Project | Labour recovered |
|---|---|
| Project A | $220,000 |
| Project B | $180,000 |
| Project C | $70,000 |
| Total recovered | $470,000 |
| Account | Debit | Credit |
|---|---|---|
| Project WIP / Job Costs | $470,000 | |
| Labour Clearing | $470,000 |
The clearing account now shows a $30,000 balance. This is the under-recovered labour, and it needs to be explained and cleared.
This $30,000 may represent annual leave, sick leave, training time, toolbox meetings, mobilisation, internal administration, or idle labour. The clearing account makes it visible. Without it, this cost would either be invisible or misallocated.
| Account | Debit | Credit |
|---|---|---|
| Labour Recovery Variance Expense | $30,000 | |
| Labour Clearing | $30,000 |
The clearing account returns to zero. Every payroll dollar is now accounted for: either recovered to a project, or categorised as non-productive labour and expensed.
Why CFOs choose this model
Payroll confidentiality
Project managers see labour costs allocated to their jobs. They do not see what any individual is paid. Salary data stays where it belongs.
Accurate job costing
Every hour is allocated to the correct project, stage, cost code, and activity. The result is job cost reporting you can actually rely on.
Consistent forecasting
Because rates are standardised, project forecasts stay stable and comparable across the life of the project, regardless of pay reviews or staff changes.
Complete reconciliation
Finance can prove exactly where every payroll dollar went: into a project, or into non-productive labour. Nothing disappears. Nothing is assumed.
What this requires from your finance system
To run this model properly, your ERP needs to support it natively. The payroll system manages employee records, salary calculations, awards, leave, and compliance. A time capture system records hours against projects, cost codes, and activities. The ERP applies standard recovery rates, runs the clearing account, produces the WIP schedule, and generates the variance analysis.
Sage Intacct handles all three layers for construction businesses. Labour class rates are configured in the system. Timesheet data flows into project costing at those rates automatically. The clearing account and variance analysis are part of the standard month-end process, not a workaround built in a spreadsheet.
The clearing account balance at month-end is one of the clearest signals of how well a construction business is managing its workforce. A consistently high variance means labour is not being captured against projects accurately, or that non-productive time is not being managed. A business that can explain its clearing account balance every month has a materially better understanding of its project economics than one that cannot.
The measure of a mature construction finance function is not whether payroll can be allocated to jobs. It is whether every labour dollar can be traced from the payroll run, through the clearing account, into project WIP, and out to project profitability. Standard labour recovery rates make that possible. Actual salary costing makes it almost impossible.
See also: A CFO guide to construction job costing, The hidden cost of spreadsheet WIP reporting, and Sage Intacct for general contractors.