AXIM Fringe Solutions Group would like to welcome you to Maximizing Your Benefits, an educational webinar where we look at fringe benefit costs and compliance strategies that can increase your profits, increase your employee’s satisfaction, and add stability overall to your organization.
and to make sure we’re on the same page when we say fringe benefits, we’re talking about the health and welfare dollars provided by the government to contractors to provide benefits for their employees.
Remember that the government has certain rules for how these benefits are to be provided and these are the benefits that employees frequently ask for in cash, but remember that’s not a rule you have to follow. Contractors always have the choice as to how they want to distribute their fringe benefits.
Because of hassles like employees always wanting cash instead of benefits and when you provide the benefits… it comes with really complicated government compliance reporting, a lot of contractors kind of hate fringe benefits.
They view it as something negative or a bad side of government contracting. The fact is it’s frequently referred to as the worst part of government contracting is having to do these fringes.
However, you need to stop and realize this is still free money from the government to give employees benefits and in a time where benefits are more important than ever… this is a program that should be taken advantage of.
In truth, that’s the goal of this presentation. To realign your perception of fringe benefits and realize that they can be used to help you solve a number of problems you’re facing on a daily basis.
With a handful of simple tweaks to your fringe management strategy, better profitability per contract can be achieved, employee satisfaction for benefits can be increased, and the compliance burden placed on you and your staff in regards to fringe benefits can be eliminated not only allowing you to save time and frustration, but overall contract dollars as well.
All of these solutions can be paid for by government fringe dollars.
We are in the business of fringe benefit management and are a government contractor ourselves. We’ve improved the way that fringes could be managed and we’ve been audited by the Department of Labor over 180 times as of this recording without a single violation. What we provide our clients is 100% transparency and a bottom-line approach that helps save money on the contract and improve their employee’s benefit situation.
With that said, let’s dive right into talking about the three ways contractors most frequently waste their fringe benefit dollars. The first is by using vendors or brokers who don’t really understand government contracting. So whether it’s a vendor who handles your fringe management and maybe your benefits or just a broker that provides benefits if they don’t understand the difficulties and intricacies of working in the government contracting space, then you’re probably leaking dollars somewhere in your fringe benefits whether it’s in compliance management or in the benefits itself.
The last one is anytime you provide cash-in-lieu of fringe benefits, you’re going to increase your tax burden that comes along with it. That amount of money will kill the profitability of a contract which is actually pretty true of all three of these things. The bottom-line impact of misusing your fringes in one of these ways is contract profitability.
So to make sure you’re using fringes correctly, let’s take a deeper look at all of them. First, if you’re using an “old school” traditional fringe management vendor… somebody who’s been around anywhere from 20-40 years and is not a government contractor, most of these things are probably true.
First, you may be unaware of just how much they charge of your fringe spend because often times they take one or two commissions on the sale of the benefits to you and then a compliance fee on top of it. And all the work they don’t guarantee.
In addition, a lot of the workload of the actual compliance ends up falling back on the contractor along with the liability, like we just said. So if this fringe vendor makes a mistake the liability still ends up on the actual contractor and this is in addition to poor reporting and having to sometimes manufacture reports together.
If you’re working with a traditional fringe vendor, you need to ask yourself, how much you’re really being charged for those services and what are you truly getting in the wake of this compliance reporting. And if you were confronted by the DoL would you stand up to those rigorous standards?
If you don’t know the answer to those questions, you should probably find out because it has a big impact on your compliance and your employee’s satisfaction with their benefits. Speaking of inferior benefits, that’s another way contractors often waste their fringe benefit dollars. One thing that’s very true about the recent Obamacare changes in healthcare is that people care about benefits in a way they never really have before.
One of the reasons that many contracting employees don’t want benefits is because oftentimes they’re not very good and so they rather just have the cash. So, whether you’re with an “old school” fringe provider like we just talked about who insists on providing the benefits as well or you’re with a broker who may be well-intentioned but doesn’t understand the contracting space, you need to be sure that you have a benefit plan that your contracting employees actually value.
if not, then you’re going to continually fight with the “I want cash instead of benefits”. One of the other things you need to be aware of in this benefit market is that the cost of health care keeps going up as I’m sure many of you are well aware.
However, fringes really haven’t been rising to keep up with that. So contractors need to get creative in ways to provide the absolute best and valuable coverage they can to their contract employees without having to break into their own dollars using that health and welfare for employees.
And as we’ve talked about several times along the way, cash-in-lieu of fringe benefits or “cash fringes” is also one of the ways that contractors waste their fringe dollars. This one isn’t as direct, but it hurts both employee and employer. When you, of course, turn fringe benefits into wages you make them taxable so the government is going to add FICA, FUDA, SUDA of the employer and the employee.
If you have a $4.27 fringe right now, from the employer’s standpoint on just an average Workman’s Comp. it’s going to cost you $5.08/hr, an additional 81 cents per hour per employee to pay for cash fringes. While you may want to avoid not having satisfied employees and avoid compliance reporting, it’s not worth 81 cents per employee per hour on a contract, especially when you have contracts with 50, 100, or even larger amounts of people.
In addition to that, the employee is going to get their $4.27 and then “Uncle Sam” is going to have his bite out of that money and the employee is going to end up with somewhere around three dollars and change. It’s going to be $5.08 for the employer to give them employee three dollars and change for the actual benefit and “Uncle Same” keeps the rest.
So cash fringes are not just expensive for the employer and the contract, they’re expensive for the employee to. Employers should be focused on providing the absolute best benefits they can to employees for a number of different reasons besides just saving money on cash fringes… one our of two employees say that benefits are the reason that they work at their current company.
And the younger workforce is almost 90% saying that benefits are important. So if recruitment, retention, and ultimately profitability coming from those things is something you value as a contractor then you really need to think about having an impressive and good benefits package that gets people to come to your company and makes them want to stay.
We know that a lot of contractors out there do their best to search out the absolute highest quality plan they can for the lowest price they can for their employees. Sometimes they run into roadblocks they didn’t know about or their broker didn’t know about because of government contracting and some other factors.
So what we did here is provide a couple of tips for better benefit spending. The first of which, is to make sure your company is taking advantage of some sort of TeleDoc or online doctor program.
This allows employees to meet with a doctor 24/7 for minor things like cold/flu/minor injuries and get the treatment and prescriptions they need which should help increase employee satisfaction, but also has the effect of lowering your overall claims and medical costs as a whole.
If you’re able to hold those costs down as a group, then you’re insurance won’t rise as much next year. Another thing to think about is making sure your broker has benchmarked your population and understand who works at your company.
Do you have a population that’s older and more experienced? Do you have a lot of younger employees who are moving towards families? or Do you have a lot of families?
What your population is going to demand as far as coverage goes has a huge impact on what you pay out. If you have the wrong plan for the wrong people you have, it’s a huge waste of fringe dollars.
Make sure your broker took the time to understand who your employees are and what they need. Lastly, make sure you’re factoring your healthcare costs against the fringe.
Healthcare costs have risen dramatically and consistently from year to year while fringe dollars haven’t so much. Make sure you accounting for next year, your health care costs may go up, but your fringe dollars may not match.
However, we can’t start discussing maximizing your fringe benefit spend and getting all the value you can out of every single penny til we talk about your compliance reporting. In part that’s because you can’t see fringe benefits as free money from the government until you don’t have to do the compliance reporting anymore and there’s no point on working on a competitive fringe benefits package for contract employees if you end up losing the contract anyway.
Let AXIM guide you through the different aspects and items that the DOL looks for when they look at your compliance reporting for contracts. It may not come as a big surprise to many of you, but compliance reporting is really complicated. Just getting information from the field to their supervision and then that information over to the payroll person or payroll company to get the employees paid takes some doing.
Then the benefit information has to come from HR or another source about what benefits were provided for each and every employee and all that information needs to be combined together and that’s just the first step of doing compliance reporting.
The second step is figuring out how it all fit together and this can be very very difficult. First, you need to be sure that all the information you got from the field is correct in the first place. Were the employees classified in their correct roles to get them the correct pay? From there, you need to make sure the benefits are correct and those are the amounts that were actually paid.
Now, if an employee changes location going from one job site to another the rules can easily change on that contract in regards to their pay, benefits, PTO…. every detail could be different and the contract itself could be only a few feet away from where the other one exists. Someone needs to understand how all this information fits together along with the changes that happen to the contract on a regular basis.
The last “super fun” part, again from someone who’s done this before knows, the DOL isn’t super helpful or specific about how these things are to be managed. While you need to know as a compliance person how all this stuff fits together, you don’t have a whole lot of guidelines to start with in the first place and that can make this a very very error-ridden process.
If the government finds out you made a mistake in your compliance reporting, the penalties can be very severe. The DOLrecognizes the complexities of compliance reporting can mess up a contractor from time to time and if you make a mistake and correct it, you’ll be just fine.
On the other hand, if you make a mistake and don’t correct it, even if you didn’t know you were making a mistake or it was just a misinterpretation, you’re still going to be liable for whatever the government decision is going to be your penalty, which could be everything from just being fined on the contract to being kicked off of the contract to being kicked out of government contracting from 3 years (usually called debarment).
They even have a tool called ‘suspension’ where they make you continue working on the contract paying the overhead, but won’t pay you for that work until you fix all the different mistakes you made in your compliance reporting.
One thing to keep in mind is that the penalties of compliance reporting can be very severe for a contractor and one of the easiest ways to prevent it is to take care of your employees because they’re the ones likely to call the Department of Labor and start an audit in the first place.
Knowing that we recommend you provide clear transparent reporting so your employees don’t feel like you’re hiding anything and benefits they actually want wouldn’t hurt too much either. However, no matter what you do, you can never guarantee you’re not going to do something that will set someone off and end up having them call the DOL anyway.
So, we take over a number of different contractors compliance and here are the top three things we usually find that catch up to most contractors. The first one is not understanding the contract from the very start.
As we talked about a little bit earlier, contracts can vary by agency, officer, by type, location, and any number of other factors. The best strategy we can tell you is to treat every contract individually and make sure you understand its differences.
In addition to that, most contractors are aware or semi-aware the fringe rate changes somewhere around July or August every year when the DOL announces what the next year’s fringe rate will be and it can be updated but not so that it’s the only change, but when to enact that rate and how to do so varies again by contract, officer, and any number of other factors.
So they’re not sure how to enact that an when and then a new regulation like Paid Sick Leave comes along, we’re not sure how to enact that either. Another thing that’s key to understanding overall compliance is ‘adjustments’. Corrections are made all the time when people change hours when someone was marked overtime or their hours were relabeled.
Staying on top of the changes that come after the compliance is quote on quote “done” is a huge part of keeping compliant. We recommend that you have an audit structure where you check compliance randomly from time to time. To dive a little deeper into these ideas, knowing the contract from the start comes from examining it individually not just assuming it’s like the contract before it.
Even if you were on the contract for previous years, a subcontractor on it, or you have a contract ( or 100) just like it…. it should still be treated individually because the devil is in the details. Things like classifications, PTO requirements, changes in location can trip up a contractor and again cause huge fines and disagreements with the DOL despite the fact you didn’t know you were making a mistake.
One of the best recommendations we can make for any contractor is to get in close with your agency/organization you contract with making sure you’re always demonstrating that you’re trying to do everything you can comply… asking about rule changes, looking for clarification, and make sure you have paperwork that you genuinely tried to do it right because that stuff matters if they ever come knocking on your door.
Another good rule of thumb, whenever you’re faced with a tough compliance decision is to err on the side of the employee being better off than the company. If the choice is between holding onto the funds until you know or maybe the employee gets a little more for a while, err on the side of the second one. The Department of Labor will always look kindly on that because you were doing the best for your employees.
Holding onto the money just to make sure you’re correct causes the employee’s harm and they’ll see that as more of a selfish move. If it comes down to it, err on the side of the employee getting a little bit more of the benefit and you’ll stay Kosher with the DOL. Another important aspect of your fringe compliance that you want to keep an eye on is carrier rate adjustments.
This is when the carriers charge you something one month, but retroactively goes back and adjusts how much pay for it “after the fact”. So you have an employee that you paid X number of dollars for in March, but then you find out in May that they actually charged wrong.
So whether it’s more for the employee’s insurance or less, it doesn’t really matter from a compliance standpoint… you’re going to have to go back and recalculate their fringe to find out if you owe them money or if they got a little more than they should have.
These carrier adjustments to rates happen all the time and if someone isn’t going back and double-checking that these rates were adjusted in regards to compliance, it could create a huge problem with the DOL because you were made aware of the adjustments and not going back would be seen as something negligent by the DOL (or at least could be seen that way.
When you go back to examine your own compliance processes make sure someone is accounting for this on your compliance team. Otherwise, you may have to go back and fix a lot of compliance from the last few years. The last (and best) piece of advice we can offer you as a government contractor is to remember this one true fact about government contracting… sooner or later the regulations (whatever they are) are going to change.
Because of the DOL and any number of other factors, laws, rules, and regulations change all the time with the DOL. We already told you that on the mid-year, the fringe rates change and when they go into effect depends on the contract and the contracting officer and any number of other factors or those new regulations will be built in time and those new regulations are going to include new ways of reporting and those new forms of reporting may need revision over time.
Another important thing to keep in mind is the Paid Sick Leave regulation that came out recently now should be taking effect for the majority of contracts it is going to. So if you had a fringe rate that was higher like $4.41 rate because didn’t have Paid Sick Leave included, now you’re probably going to have to start putting Paid Sick Leave in your contracts very soon which means you’re going to have a lower fringe rate now at $4.13 to account for that Paid Sick Leave which means you now have less money to spend on your fringe.
If you have any questions about these changes or something that’s coming up, never hesitate to contact AXIM whereas a government contractor here to help our fellow contractors understand the very complicated world of compliance tracking.
Now once you feel safe and secure in your compliance reporting, you can scale those results as you grow your contracts. The next thing to examine is how you spend every penny of that fringe and what you can be doing more to gain advantages for you and your employees on every contract.
That’s without a doubt, the name of the game in modern government contracting. Form what I just talked to you about a few seconds ago, where fringe rates are about to go down for a number of contractors over to the idea that most GovCons are now operating on a profit margin of 1-5%, which is a very tight rope to walk between making a profit and working for free.
During that same period of time, benefits costs continue to rise for contractors while fringe rates are not (or even going backward) for them. Contractors need to study how they can do more with their fringe spend despite not getting any more to work with.
And remember most contractors have a very negative opinion of fringe benefits because of the ugly reporting that comes with them, but what most of them are painfully unaware of is that they could be using those fringe benefits to take care of the compliance reporting they don’t like.
That’s actually true, there’s a loophole in which the government allows a contractor to provide fringe benefit management services and compliance reporting services as an actual fringe benefit for the employee.
Not only can it impact the way the employees see their benefits, but it can also impact the bottom line of the contractor as well.
By using fringe benefits as a part of the compliance, you can have a massive impact on your organization. You can remove the headaches, burden, adjustments, and the constant changes that come from the government in regards to compliance reporting and push the burden and liability on cost on to another organization- all out of the fixed cost of the money you had to spend anyway.
The right firm can even provide reporting to your employees and help them see they’re getting the benefits that they’re entitled to as a worker on the contract. Think about subcontracting your compliance reporting as a part of your fringe spend as a way to improve your benefits for your employees, as well as, limiting the amount of liability and struggle that comes with compliance reporting.
Once you evaluate your compliance reporting as part of your fringe spend, there are a few other things you may want to take a look at. If you are working with a vendor who provides your compliance reporting and or benefits for you, examine how much they charge you in commissions and compliance fees.
If you don’t know the answer to that question, you should probably ask that. If they can’t provide you with a straight answer, you should probably be worried because chances are that answer is something you don’t want to hear. Next up is, are your employees happy with your coverage… and I know that’s always going to be a loaded question because even Abraham Lincoln said, ” you can’t make all the people happy all the time.”
Does your coverage fit who your population is? Are you taking advantage of the fact you may have a younger or older population and steering your plans towards those people?
And have you sat down in any one contract and compared the side-by-side advantages of doing the compliance yourself or working with a firm like AXIM or cash-in-lieu of benefits and seeing which one will give you the best advantage on your contracts? and which one will give you the best advantages for your employees?
Think about all of those things when you go to consider fringe spend. You should also be examining, if you have a benefits package that makes people really want to stay at your company and a byproduct of that is whether or not it makes them want to come to your company in the first place. As we talked about earlier, benefits are important to people in a way they never were before.
Say what you will about Obamacare, but it did change how people think about their benefits and out there you can compete in trying to raise wages getting these different types of workers which contractors are trying, but it’s not a sustainable approach.
Somebody who will go across the street who will work for someone else for 50 cents will come back to you for 75 cents but go somewhere else for $1.25. If you have a benefits package that’s hard to walk away from, it’s an ultimate recruiting and retention advantage. Since you’re getting money from the government to pay for benefits in the first place, it’s an inexpensive one for contractors to take advantage of.
So employee satisfaction, while again a difficult goal to attain is mega-important when it comes to actually recruiting and retaining your employees. Whether it’s the employees you have now or the ones that are leaving, make sure you get what their real opinion is to their benefits package and seek to improve the things they may not find satisfying about it.
If a contractor is willing to make a few tweaks to their overall compliance structure and alter the quality of their overall fringe benefits package they could see a dramatic impact in their ability to go after and win bids without sacrificing their profit margin because they’ll have a different overhead factor in their wrap rate.
A wrap rate is a basic equation that contractors can use to help figure out their labor pricing on a contract. By averaging our the different rates on the job to give one average wage rate. Then you add things like fringes, taxes, and other indirect costs that just come from doing payroll.
From there you factor in any general an administrative overhead costs… things that include the fringe benefits, as well as, any overhead or fee that comes with your compliance.
You add all those things together, you get a total amount of expense for the employee per hour factoring in all the different parts of labor. Now all you need to do is know how many hours are on the job to figure out the total labor price. Now that wrap rate, of course, is just a basic equation to start from.
There’s a number of other factors you may want to consider when you’re doing your labor pricing. For example, any double-time, overtime, or holiday pay that may come with the job, as well as, any weird collective bargaining agreements, any other PTO requirements that you may have to deal with as well.
And of course, don’t forget about the normal turnover rate and replacement costs that come with finding new workers. You may want to throw in a profit margin in there as well.
Once you reach the point of truly understanding your labor costs (or the best that you can) based on the information you have, now you can go about making changes to those labor costs and improving your overall ability to bid on contracts.
To better understand that, let’s take a look back at that wrap rate. The first two parts of the wrap rate are going to be difficult to make any impact on.
The average rate/hr per job plus the fringe rate and the FICA and all the things that come with paying people, those are all standardized things the government will change if it comes up. Where a contractor can attack a wrap rate is in the G&A and Overhead section.
This is where limiting things like turnover and the back-office expense that comes with compliance reporting and all the administrative expenses that comes with both those things can have a huge impact in your ability to lower your labor costs along with any other overhead and administrative costs you can save as well.
Doing that makes you a fierce competitor against other bidders who are not doing their fringe benefit management and not paying attention to how they can maximize their benefits to keep employees onboard.
This is how a contractor can truly use fringes to win more bids by using it to attack their G&A and Overhead costs and make them be able to bid lower.
We’ve thrown a lot of information at you in a very short period of time, so we want to take a moment to “Wrap up” (I know it’s bad!) and make sure that you come away with the things you need to improve your business from our time together.
What we really sincerely hope is that you’ve taken a moment to learn a little bit more about fringe spend and compare what you’re doing with different ways to approach your overall fringe position.
With everything from compliance reporting to how you do your wrap rates to how to value your fringes and present them to your employees. Are you doing everything you can to maximize the money the government gives you for benefits?
If you are, how could you be taking advantage of that to grow your company and win more bids? If you have any questions about any topic we’ve talked about today or just a question about compliance for a fellow government contractor, don’t hesitate to contact us.
We’re happy to help. Thank you again for your time and attention and have a wonderful day.