Is auto enrolment eating into your margin? Paul Jackson discusses the implications of the policy on the cost of tender submissions.
For most businesses auto enrolment is quite a straightforward matter; they have a fairly static number of employees and can plan financially based on predictable staffing levels. But for construction contractors it’s often not that simple. While setting up a workplace pension scheme and arranging auto enrolment for the permanent team is only as complex and expensive as it is for any other company, predicting the pension costs of future projects as part of the tendering process is much more challenging.
Workplace pensions have been designed to ensure that staff at all levels have the opportunity to save for their retirement. In principle, the changes will be positive for construction workers who earn from project to project and have often slipped through the pension net in the past. For companies that rely on a temporary site workforce, however, the legal obligations surrounding auto enrolment raise questions about the predictability of costs, terms of employment and the viability of passing costs on to the client.
At the centre of this issue is the need to predict the amount of labour a project will require on site at tender stage. Currently, all employees (permanent or temporary, full or part-time) over the age of 22, under pensionable age and subject to minimum salary levels must be enrolled in a pension unless they opt out. This employer obligation means that construction companies must not only consider the number of site workers they will need for the duration of the scheme, but also the basis under which they will employ them.
Building accurate staffing costs into tender submissions has always been a difficult task for contractors, but the added costs of auto enrolment, including the admininistrative burden, have increased the financial management challenges.
Many temporary site personnel are employed via agencies and the agency typically acts as the “employer” and is therefore liable for the auto enrolment administration costs and contributions. However, this does not mean that there is no additional financial planning needed if site workers are employed through agencies. The added agency overheads mean added costs passed on to contractors that choose to staff their site teams this way. As a result, construction companies must calculate the relative costs of using agency workers as opposed to employed labour in order to assess the most cost efficient way of resourcing a project.
Building accurate staffing costs into tender submissions has always been a difficult task for construction contractors, but the added costs of auto enrolment, including the admin burden, have increased the financial management challenges. What’s more, for tenders relating to projects that will take two or more years to deliver, the additional costs will not be static.
Currently, employers are obliged to pay contributions equalling 1% of the employee’s salary from their staging date onwards, but this will increase to 2% from October 2017, and will rise again to 3% from October 2018. What this means for long term projects is that contractors must build the incremental rise in pension contributions into their staff costings for the tender submission, or risk a reduction in margin due to the unforeseen rise in overheads.
The complexities of managing auto enrolment obligations in the construction sector also mean that contractors should take expert advice on the provider they use. Workplace pensions are designed to be flexible because employees must be free to leave or re-join the scheme at any point. However, the sector’s transitory staffing models mean that contractors’ schemes must be tailored to their needs and should be integrated with payroll systems to reduce administration costs.
It is essential to take expert advice on the workplace pension provider, the best financial management solutions and the most viable approach for each project. In a sector where value engineering has become an entrenched culture there may be no simple way to avoid the added overheads of auto enrolment but managing their impact is critical to maintaining margins.
Paul Jackson is employee benefits manager at financial advisory firm Taylor Patterson
