Compliance Tracking Simplified: ERP Solutions for Every Contractor
By Jennifer Strand
Now more than ever, contractors must invest in the right resources to track, verify, and report compliance items. While it can be a time-consuming and expensive effort, the cost of noncompliance will almost always exceed the alternative.
In some instances, the cost of noncompliance is explicit and easy to measure (e.g., additional insurance premiums, fines, and penalties); other times, it is more implicit (e.g., a missed opportunity). Either way, companies take a financial risk when they cut corners around compliance tracking. This financial risk is the result of increased operational risk.
With dozens of construction ERP solutions on the market that track compliance, this article will focus on the importance of streamlining compliance according to company needs, the entry-level, mid-market, and enterprise-level solutions available, and their uses.
While annual revenue isn’t the only factor to consider when contemplating an ERP system, here are some broad revenue generalizations: up to $10 million – entry level; up to $25 million – mid-market; and over $25 million – enterprise. Keep in mind that there are companies with revenue in excess of $100 million that use mid-market level systems while others with $20 million in revenue may use enterprise systems.
ERP Solutions for Compliance Tracking
There are various compliance concerns throughout the construction industry. For example, GCs may find it crucial to verify that subcontractors have submitted performance and payment bonds, certified payroll reports, and lien waivers from second-tier suppliers.
Specialty contractors and material suppliers might prioritize running annual credit checks on their customers. Heavy/ highway contractors might focus on the amount of time they spend tracking down equipment. It is possible to track these objectives and more with the help of construction-specific ERP systems.
Before digging deeper into the use of ERP solutions, it is important to first consider how a manual process could be used to track compliance. While three-inch D-ring binders can hold considerable information, physically paging through hundreds of documents to check for a given compliance requirement is time consuming.
Using a Microsoft Excel spreadsheet might work until it becomes clear that all data would need to be manually maintained and verified in the same manner that a paper-based system would require. Plus, the risk of error is dramatically increased with manual systems.
Let’s look at an A/P example to illustrate how compliance automation can impact a company. For some companies, A/P compliance means tracking certificates of insurance and licensing on hired subcontractors by storing physical copies of this critical paperwork in three-ring binders. They manually double-check compliance items against the A/P checks issued, and if a subcontractor is out of compliance, they call the subcontractor to let them know they will only be paid once the paperwork is in order again.
Not only is this manual process long and tedious, but it could also damage vendor relationships. Subcontractors naturally want to be paid as soon as possible, so delaying their payment could hurt business.
Entry-Level ERP Systems
Entry-level ERP systems can deliver noncompliance notifications at the time a subcontract agreement is entered into the system, when an A/P invoice is entered, and again when invoices are paid. While you would still have to update expiration dates in the database, the need to manually check compliance against a paper system would be eliminated.
These proactive notifications can save hours of processing time. For example, cash flow can be improved by using the additional hours to produce A/R statements and follow up on outstanding payments.
Improved cash flow would create numerous benefits such as less interest spent on a revolving line of credit and more discounts earned for paying invoices within their terms. For some contractors, this real-time warning on expiration dates would be immensely helpful. An “out-of-the-box” configuration of the ERP system would handle these requirements with ease.
Other contractors find that there are some limitations to an entry-level ERP solution. For example, certain types of compliance items can be hard coded into a system with no availability to track outside of general liability insurance, workers’ comp insurance, and license expiration dates.
However, while entry-level ERP systems almost certainly allow for user-defined compliance items, they won’t prompt an automatic warning. That means you’ll have to proactively run a report every month, day, or year against those user-defined items to verify compliance.
Mid-Market ERP Solutions
A mid-market ERP solution allows a user to define specific vendor items as required and create scheduled warnings – for example, an uptick in the number of GCs generating a master subcontract agreement to each subcontractor with terms and conditions for all projects they work on in the current year.
In those cases, procuring a notification that a signed copy of the agreement is still outstanding is a crucial step before routing invoices to project managers for approval. This is a truly automated solution and does not rely on manual processes maintained outside the system.
These kinds of scheduled warnings are also useful in tracking lien releases. Conditional or unconditional releases can be generated on demand, and reminders can notify staff of any outstanding lien releases before additional payments are made.
The flexibility around defining compliance items is a considerable step up from entry-level ERP systems. These systems provide a glimpse of what rule-based compliance looks like in enterprise-level ERP solutions.
Enterprise-Level ERP Solutions
An enterprise-level ERP solution offers the flexibility of user-defined compliance items with a trigger-based action feature. This means that not all compliance items revolve around an expiration date. In some cases, a prompt asking if compliance has been reached is more relevant than an expiration date warning.
A signed lien waiver is a good example of such an item. There is no need to track an expiration date on this document, but companies that require lien waivers understand the importance of verifying that a conditional lien waiver is received prior to paying an invoice. Enterprise-level ERP systems typically offer prompts and recurring warnings outside of expiration dates like this for a yes/no example. These features allow staff to complete the A/P process accurately and with confidence that compliance items are in check.
Noncompliance notifications are just the beginning in enterprise-level ERP solutions. What if someone accidentally ignores the warning? Will your ERP lock down the possibility of check issuance? Trigger-based actions allow you to design workflow around noncompliance.
Enterprise-level ERP solutions also include project-based compliance tracking. Think of the physical or mental checklist used when an invoice is processed for a subcontractor.
There are additional aspects to consider aside from insurance certificates. Did the subcontractors send in their certified payroll reports? Has a copy of their performance and payment bond been received? Did their material suppliers and/or second-tier subcontractors send lien waivers? Enterprise-level ERP systems handle these types of situations and more.
Compliance Solutions for Employee Information & Management
Vendor compliance is just one of many areas in which contractors are expected to maintain compliance. For instance, consider all the employee data that a company collects. Occupational Safety and Health Administration (OSHA) training and credential verification top the list because of the potential high cost of noncompliance. The construction section of Training Requirements in OSHA contains more than 90 pages of training requirements in our industry.1
Also, consider documenting that employees are receiving ongoing training. Will the data an investigator requests be up-to-date? Many mid-market ERP solutions track basic information about OSHA training and certifications such as description, date, and next required date of training.
Employee ERP solutions allow for user-defined data collection points like the date of an employee’s last drug test and benefit eligibility dates. Both entry-level and mid-market solutions require users to proactively manage these compliance items.
In these instances, it is recommended that a report of upcoming training needs becomes a regular part of the month-end process to ensure your company is staying on top of training compliance. Enterprise-level ERP solutions add in the functionality of due date reminders, and users experience a more automated process.
Employee management is an area in which noncompliance can become very expensive. For 2018, OSHA fines for serious violations begin at $12,9342 and have been as high as $673,582.3 To further compound the cost, countless staff hours and attorney fees could be spent in order to defend a violation. Therefore, the cost incurred for an ERP solution could outweigh the potential penalties incurred for noncompliance.
Compliance Solutions for Equipment
Equipment compliance is an area that heavy/highway contractors in particular prioritize. It’s reasonable to expect entry-level ERP solutions to track equipment licensing, warranty, and insurance expiration dates. Mid-market ERP solutions will allow additional compliance types such as inspections and categorize them as federal, state, or local requirements. Enterprise-level ERP solutions can also auto-generate equipment work orders and schedule inspections or other types of service-based compliance items.
Consider how much time your company spends managing spreadsheets around equipment compliance, filling out manual work orders, and walking back to the shop to gather a piece of missing information. This will vary greatly from company to company based on the amount of equipment maintained, but for example, if we estimate four hours a week at the burdened rate of $35 per hour, then a company is spending about $7,200 a year for a manual process.
Along with any additional costs incurred due to noncompliance on issues that fall through the cracks, it becomes evident that spending the money to manage equipment compliance in an ERP system is cost effective.
The key to successfully implementing any type of compliance tracking system is to know your workflow, assess where the risks of noncompliance are greatest, and then prioritize the resources necessary to manage those risks.
JENNIFER STRAND is Manager of Sales Engineering at Viewpoint Construction Software in Portland, OR. Jennifer began her career in the construction industry in 1992 as a surety bond underwriter. Previously, she has been a CFO for a luxury home builder and remodeling firm and an implementation consultant. She is a past president of the Association of Women Contractors (AWC).
Copyright © 2018 by the Construction Financial Management Association (CFMA). All rights reserved. This article first appeared in CFMA Building Profits and is reprinted with permission. CFMA Building Profits is a member-only benefit; join CFMA to receive the magazine.
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