Tag Archives | vendor

Overhead Expense Reduction

See Also:
Predetermined Overhead Rate
Activity Based Costing vs Traditional Costing
Activity Based Cost Allocation
Standard Cost

Overhead Expense Reduction

As a general precursor to Overhead expense reduction, Group Purchasing Organizations, Co-ops and Consortiums always lead to lower prices because they aggregate spends and create buying power. This may be true for smaller spends but as spends get larger ($100,000+ annually), you will often do better on your own when a supplier can customize a program to your specific purchasing patterns and needs.

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Category Specific Expertise

In reducing overhead expenses, expertise in purchasing for one cost category or in the request for proposal process will produce similar results in another cost category. What expertise in purchasing really means is an understanding of the unique data requirements and what drives supplier pricing to achieve the best results. You may use the same process in different categories. But without the category specific information, the results may not be the same at all.

Category specific information includes changes in the industry, contract nuances, and benchmark data.

Stay Loyal to The Supplier

Loyalty to a supplier always translates into the best value for your company (value = price + service) as well as the best opportunity to reduce overhead expenses. Quite often, long time loyalty leads to complacency from both the supplier and the purchaser. Industries and companies change over time and vendors providing operating supplies and services are no exception. Modest price increases year after year may seem acceptable when in reality the market may have changed, and the cost should actually be going down year after year. Compounding increases add up over the years.

How To Reduce Overhead Expenses

There are three things that you can do to reduce overhead expenses:

  1. Lower Costs with Incumbent Suppliers
  2. Ask Vendors to Help Manage Spend
  3. Create a Competitive Environment for Each Category

Lower Costs With Incumbent Suppliers

Ask your incumbent suppliers what you can do that will result in lower costs from them. Lower Cost can lead to a smaller Overhead-Rate which ultimately can lead to a reduction in overhead expenses. Work with your vendor as a team member – not as an adversary. If you can change a process or an ordering habit in your organization that reduces your vendor’s expense, then your vendor should reward you with lower prices which can lead to reduced overhead expenses.

Ask Vendor to Help Manage Spend

Then, ask your vendor to help you manage the spend. A proactive approach must be taken to reduce overhead expense. Are you leveraging the vendor’s platforms for ordering and managing information? Or can they track purchases by department and provide invoices already allocated to departments to ease the work of your Accounting Department? Can they inform you if employees do not follow established business rules (e.g., buy-off contract)? Do they have the technology to prevent your employees from buying off contract without proper approval?

Create Competitive Environment for Each Category

Finally, create a competitive environment for each category. Let your team and vendors know that there are no “sacred cows“. Have someone other than the supplier’s daily contact manage the expense review process. This enables greater objectivity and keeps personal relationships out of the process. Then give suppliers all of the information they need to sharpen their pencils and minimize their risk. The more they know about your usage and requirements, the better. Customers who inspire confidence and minimize the suppliers’ risk are rewarded with the most aggressive pricing. Reducing overhead expense requires an understanding of both your personnel, as well as the vendor’s.

When you know your overhead and how much you need to reduce it by, you can add real value to your organization.

The CEO's Guide to Improving Cash Flow

Overhead Expense Reduction

Originally posted by Jim Wilkinson on July 24, 2013. 

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A Tinder Moment: Unlocking Value from Vendor Partnerships

value from vendor partnerships

At The Strategic CFO, we believe in the saying “You scratch our back, we scratch yours.” Everyone always sees other businesses as a competition; to some extent, they are. But sometimes, you just need to let people make money.

As we’ve become more focused on optimizing technology, we have started to outsource tasks/projects to outside vendors nationally and, depending on the task, internationally. I was talking to my associate the other day, when we asked our vendor partner to help complete a project. She was concerned about pricing, and whether or not it was worth the money to ask our vendor to do the engagement. They charge about $25 per hour of assistance, and we needed easily 3 or 4 hours of advice.

In the past, this vendor has always stepped up and helped us. That’s because we give him business. Let’s explore why this is important…

Cutting Costs and Unlocking Value

What happens when you need to cut costs while still maintaining the same value? Everyone knows that increasing revenue and cutting costs increases your bottom line. But are you actually maintaining that value or are you manipulating that?

Let’s say you’ve already cut as many costs as you can, but you still need to cut more. This is where you have to make financial decisionsWhat do you value most – your profit or your relationships

Cutting costs doesn’t mean you have to cut out the relationship forever. In fact, unless they do something unforgivable or you won’t ever need them again, you should keep that relationship open. For example, our vendor doesn’t work with us 24/7. However, we still maintain the relationship by giving him tasks once every couple of months. They act as an extension of our team.

 Are you ready to unlock real value in your business? Click here to access our three best tools to unlock value! 

Business Meets Tinder

Have you ever used (or heard of) Tinder? Chances are you’ve at least heard of Tinder, especially if you live in the United States. Tinder is a location-based, social search mobile app that connects individuals based on their interests. It’s all user-based, so if the user sees your pictures and swipes right, that means the user would like to meet. If not, then the user probably doesn’t want to meet you, and swipes left to move on to the next person. If both users swipe right, then they have a match! The process is fairly quick, and users on average swipe 30 times per day! (Good thing I’m already married, right?)  

Making the Connection

So how does Tinder connect to your business?

Everyone has that “Tinder” business where you swipe right when you want them, but swipe left and disregard them when you don’t need them. This is a major issue. If we all treated business relationships like Tinder, then we would not have a lot of value, would we? If my associate “swiped left” from the vendor and moved ovalue from vendor partnershipsn to another person, we would not receive the same value. Business would be done quickly and no relationships would be formed.

Keep in mind that conducting vendor relationships is critical for your success. Think about that time when you needed help immediately… If you had a good vendor relationship, they would be able to fix the problem immediately as they already know your business. But if you were a habitual left swiper, then the new vendor would have to get up to speed… Slowing down your progress and leaving money on the table.

Healthy Business = Healthy Business

Ultimately, when you treat vendors frivolously, you’re setting examples for other businesses. Soon enough, those vendors will go out of business because many businesses use the vendors inconsistently and constantly look for a “better deal.” And what happens when that business goes bankrupt? All of the value they put into your company is now gone.

(Keep in mind, you have your own set of vendors AND you are your customer’s vendor. Healthy business equals healthy business.)

What you should really be doing is investing your money, time, and trust in one vendor per task. My associate ended up using the vendor she was skeptical about, because she realized that if she found a new vendor, we would have had to spend the time to get the new vendor up to speed and we would always be looking for someone better and cheaper. It’s a waste of time and time is money.

3 Buckets of Value

There are 3 buckets of value: cheap, timely, and/or good quality. A business can expect to have two of the three when it comes to investing in something valuable, but not all three. This is where you come in as a leader… the best way to solve this problem is to find a compromise.

Pick which bucket(s) you find more valuable. Use that as your foundation or guide to making vendor decisions.

Cheap & Timely

When I first started The Strategic CFO, I wanted everything cheap and timely because I believed in investing in something to get quality work in return. I was young and naive. Customers eat at fast food restaurants because it is cheap and timely, but it isn’t the best quality.

Let’s even use the Tinder example… Constantly looking for new vendors is a cheaper and possibly faster. However, quality is built over time, and you won’t see consistent quality over time.

So think about it… do you really want to compare your business to fast food or Tinder?

 If you like these stories and advice, we recommend you also check out our ultimate CFO resource! Unlock your value today! 

value from vendor partnershipsQuality & Cheap

I was talking to my associate and she told me that she bought a makeup palette from China for only $6, when the price in the United States is $52.00. The only downside is that it took 2 months to get it in the mail! When she finally received it, it looked as if she bought it here in the US. The same concept can be applied to outsourcing tasks internationally, because of the time and language barriers. Sometimes we don’t see the work for 2 weeks to a month. This is good for tasks that don’t need to be completed right away, such as graphics for a future project.

Timely & Quality

For this example, we can use salaries. If you look at your staff, they have to be timely and of good quality. That’s why salaries consume the majority of your expenses. This is because you invest in them for your company. If we started seeing vendor partner as valuably as we do staff, the timeliness and the quality of the work might actually pay off.


In conclusion, you can’t treat businesses like a commodity, because they will treat you like a commodity. You can have cheap, timely, or quality work. You can expect two out of the three, but not all three. If you want to unlock value from vendor partnerships in your business, they need to know they are valued. How can we do that? Let them make money!

If you want to learn more about how to add real value to your company, click here to access our 3 best tools AND learn more about The SCFO Lab.


value from vendor partnerships

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Vendor Finance

See Also:
Time Saving Tip for Filing Vendor Invoices
The Dilemma of Financing a Start Up Company
Mezzanine Debt Financing
Commercial Agents

Vendor Finance Definition

The vendor finance definition is the receiving of financing for an asset from the provider of the asset. Vendor finance is a common way to receive an asset before having the money to pay for it. In addition, vendor finance programs can come on a piece of equipment, real estate, software, and even intangible assets.

Vendor Finance Meaning

Vendor finance means receiving financing from a vendor rather than a bank or investor. This often creates a mutual benefit; the buyer wants the item now in order to pay for it through increased productivity, while the seller of an item appreciates increased income from selling and financing an item rather than receiving just the sales price.

Vendor financed companies can agree to either debt or equity financing. To phrase this another way, a company can receive vendor financing in 2 ways. First, the business can receive the item at a sales price with an agreed amount of interest, on the sales price, which accrues as time progresses. Alternatively, a firm can receive the item in exchange for a certain amount of company stock. Here, no monetary repayment of the asset is needed because the vendor has already been paid in stock. Generally, vendor finance in the form of equity is more common for startup businesses. A vendor finance association may be available in some areas to gain advice and planning on the subject.

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Vendor Finance Example

For example, Jonathan works at a business brokering firm. His employer, a company which arranges the sale of a business between the exiting entrepreneur and a buyer, is a successful company with a professional reputation. Jonathan enjoys his work because he assists people in their exit plan, assists people in starting a business, and gets experience in a variety of entrepreneurial firms while he does it.

Recently, Jonathan is brokering the sale of a small, yet successful, chain of ice cream shops. The exiting business woman, the founder of the firm, has worked to the bone to grow the company. She has earned her retirement with her application of sweat equity.

Jonathan eventually comes across a soon-to-be entrepreneur. His experience in the restaurant industry makes him a likely candidate. The buyer is interested in applying the expertise he learned, mainly focused on growing restaurants, to a company where he will be the main controller of company success. Jonathan arranges a meeting between the two business people.

At the meeting, Jonathan makes a discovery: the potential buyer has slightly less to invest in the business than the seller’s price. This appears to both to be a major issue which stands in the way of the sale of the company. Jonathan, at this point, steps in with another option: use a vendor finance plan on the remaining amount to be paid to the seller. Once Jonathan poses this option, the two parties restart negotiations.


The two decide on vendor equity financing for the remaining amount of money to be paid to the seller. To her this seems like an excellent idea: she can reduce risk while still taking benefit from growth of the company that she started. The buyer also appreciates this option: he can go into business by buying a reputable company which already has customers. The two resolve to complete the purchase. They also agree on a one year transition where the buyer will be able to receive consultation from the experienced manager.

Jonathan is pleased by his achievement. He takes great joy from helping one person harvest the benefits of their work while allowing another to begin the process without the struggles of the startup phase. He receives his commission from the sale. This achievement pleases Jonathan.

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

vendor finance, Vendor Finance Example, Vendor Finance Definition
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vendor finance, Vendor Finance Example, Vendor Finance Definition

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Time Saving Tip for Filing Vendor Invoices

See Also:
Accounts Payable Turnover
Accounts Receivable
Accounts Receivable Turnover
Chart of Accounts (COA)
Problems in Chart of Accounts Design

Current Practice

How do you file your paid vendor invoices? Alphabetically? Who taught you to do it that way? Have you ever wondered why?

How often do you go back and research a paid accounts payable invoice? How much time does it take?

Have you ever thought that there might be a better way?


Filing vendor invoices alphabetically has been a practice since before the time of computers. With accounting theory in existence for centuries it is safe to say that the practice has been in place for some time. In a manual environment, it is useful to be able to research invoices, especially if there is a lot of volume involved. But is it necessary in today’s computer environment to manually sort data?

Best Practice for Filing Vendor Invoices

By using the computer to sort for information, you no longer need to do so manually. Once a vendor invoice has been paid you should then file it in check number sequence or by date. This practice will save both the time to prepare the file folders, sort the paid invoices and the filing of those invoices. Additional benefits include not having to use as much supplies nor take as much space to store.’

Arguments Against

The most common argument against this best practice (other than that’s not the way we have been doing it!) is that we need to be able to go back to the original invoice. There might be certain situations such as construction job costing that would require you to review previous bids. However, most often this objection can be countered by recording the required information in the computer, negating the need to go to the source document. In fact, as more companies adopt scanning of original source documents the ability to use a manual filing system will go away.


If you have not re-engineered your filing practices for paid vendor invoices then you are not realizing all of the time savings efficiencies of the computer. In fact, your system is a hybrid manual and computer system. Instead of designing your accounting system around the computer, you take the computer and wrapped it around your manual system!

filing vendor invoices

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Retainage Definition

What is retainage? What is a retainage fee? In the contracting business, vendors define this term as a portion of the payment that is withheld until the completion of a project. The client doesn’t pay the contractor remaining payment until all work on the project is complete. It is defined the risk clients take when paying contractors. Its result is a protection for their money, time, and other resources.

Negotiate retainage upfront and represent it as a percentage of the overall cost of the project. A common withheld payment amount is 10%. This incentivizes the contractor to provide quality work up until the very end of the project. As a deal-sweetener, or for small scale projects and rushed jobs, a client may offer to forego this percentage to a familiar and reputable contractor. This definition can vary somewhat depending on industry and company focus.

Retainage Collection

Similar to accounts receivable and other forms of trade credit, an uncollected retainage receivable is essentially an interest-free loan with a cost equal to the cost of financing current assets and the time value of money.

Therefore, from the contractor’s perspective, a shorter collection period is optimal. Typical collection periods for retainage accounts receivable can be as long as 6 months or as short as 45 days. If you want to be very efficient, then consistently collect the withheld amount from clients within 90 days of project completion. A reduction is surely needed if collection occurs beyond the marker of 6 months.

Collection Hurdles

Typically there are three steps to complete before the contractor can collect retainage. These three steps are: completing the punch list, putting together the close-out package, and submitting this invoice.

Define a punch list as a list of minor details and leftover items related to the project. The bulk of the project may be complete, but small tasks may remain unfinished. For instance, a punch list may include an unpainted portion of a ceiling, faulty wiring for a light bulb, or a problem with plumbing. The client will not pay the retainage until these minor items have been taken care of, so this is an important step to complete in speeding up collections.

The close-out package is a collection of documents related to the project. Some clients, especially in the medical field, expect a close-out package prior to paying retainage. The close-out package consists of copies of legal documents, liens, warranties, certificate of occupancy, test results, operations and maintenance manuals, and other relevant paperwork and documentation. Gather these documents and send them to the client in a timely manner to ensure prompt payment of retainage.

And finally, it is important to submit the retainage invoice to the client as soon as possible after all other necessary steps have been completed. Prior to submitting the invoice, finalize all subcontractor pricing.

Three Steps for Retainage Collection

1. Complete the punch list
2. Assemble the close-out package
3. Mail the retainage invoice


Certain matters can complicate retainage negotiations, retainage collection, and retainage release. These issues can arise from change orders and arrangements with subcontractors.

Often, over the course of a contracted project, the client will request changes deviating from the original project plans. For instance, in a construction project the client may request to move a wall, alter or relocate windows or doorways, or add or change other features. These change orders inevitably add to the cost of the project as a whole and change the amount withheld.

Getting pricing in from all subcontractors on additional work can be difficult. A project manager must rely on subcontractors to submit pricing in a timely manner so that they can generate the final progress billing and retainage billing. Oftentimes, pricing can snowball at the end of a project.

A dedicated project manager will be pro-active with regards to pricing from subcontractors. So that he may invoice the retainage as soon as possible after they complete the project.

Retainage bonds further confuse the matter, with needs varying by location and governing body. Generally, file some kinds of retainage bond with the local municipality. Amounts and requirements are subject to the preferences of local government. Make sure to consult an expert when filing for any type of payment bond.

Guiding Your CEO

The CEO of a company requires someone they trust to work out how to package collections. If you’re interested in becoming the trusted advisor your CEO needs, then download your free How to be a Wingman guide here.


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See Also:
Progress Billing for a General Contractor
How to Maintain an Effective Job Schedule
Work in Progress
How to manage inventory
Trade Credit

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Define Payment Terms

See Also:
Terms of Sale
Net 30 Credit Terms
Cost Recovery
2/10 net 30
Down Payment

Define Payment Terms

Define payment terms as the terms required for payment on a product, are a function of the service offering of a vendor. These terms are an extension of how a vendor wants to treat a customer. Common policies are 2/10 net 30, pay in 30 days, payment terms l c (line of credit), cash on delivery, telegraphic transfer, and more. A payment terms discount may even be offered by vendors as a benefit of a purchase.

Download The A/R Checklist

Payment Terms Explanation

Payment terms, explained as the terms which dictate when a vendor must be paid, vary in policy. Some businesses accept no payment terms: they receive cash on delivery (cod) or even before the product is given to the customer. Other businesses offer payment terms as a perk of becoming a client. These terms may be pay in 30 days, a 2% discount for paying within 10 days (2/1 net 30), and other terms which allow the customer to pay later.

Furthermore, vendor financing is another payment term. The occurs when the customer pays interest but is allowed to repay the cost of the product they have received as they see fit. A line of credit is a form of vendor financing when it is received from the provider of goods. Payment terms are often negotiable, so some businesses may have the policy of payment terms dnd. Dnd, here, means do not disclose. This generally means that the vendor will want to talk with the client to allow for assessment and negotiation of individual situations.

Additionally, payment terms and conditions exist. Conditions on payment may be as briefly listed above; cash on delivery (cod), payment is to be received in a foreign currency, and more. In this situation it is up to the vendor to decide the payment terms and conditions which should be offered to the client.

Additionally, certain payment methods may be required. Payment terms t t indicate that telegraphic transfer is required. Other methods differ greatly depending on the situations of both parties.

Payment Terms Example

For example, Joel has a company which provides cleaning of outdoor areas. Their business has many specialties that include pressure washing, chemical cleaning, and even cleaning residential back yards with dogs and other pets. This industry also requires many products and tools for operations.

Joel needs a new pressure washer. To get this item, he will purchase it from one of his favorite vendors. Fortunately, they provide payment terms which Joel appreciates.

This company offers 2/10 net 30 terms. This means that Joel can pay within 30 days of receive a 2% discount by paying in 10 days. Joel likes this because it will allow him flexibility in his decision making.

With these terms Joel decided to pay in 10 days. By receiving the discount, he has more cash to use on his business. With payment terms like this, he will stay with this vendor for a long time. For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.

Define Payment Terms

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How to Select a PEO

See also:
Defining a Professional Employer Organization
Advantages of PEO Services for the Business Owner
PEO Compared to Outsourcing Payroll
Professional Employer Organization (PEO) FAQ’s
Service Department Costs

How to Select a PEO

Creating a successful partnership with a Professional Employer Organization (PEO), for the co-employment of your employees, requires that the Business Owner apply the same standards used when selecting a CPA, an Agent of Record, an Attorney or any other trusted partner/advisor/consultant. Now, let’s look how to select a PEO.

First, assess your business to determine your Payroll, Employee Benefits, Human Resources and Safety and Risk Management needs. Then, decide whether to build internal capacity or execute a Customer Service Agreement (CSA) with a Texas Licensed PEO for that capacity. After, confirm that the PEO Vendor is Licensed to conduct business in the State of Texas. Contact the Texas Department of Licensing and Regulation to confirm licensing. Reach them either by calling 800.803.9202 or visiting (www.license.state.tx.us). When you visit the website, (right side of page) CLICK on “Search Licensees by License Type”. Then CLICK “Inquire by License Type”. Then SELECT “Staff Leasing Services.” After that, SELECT “Inquire by Name”. Finally, type in the Company Name, and then CLICK “Search”.

Download The 5 Guiding Principles For Recruiting a Star-Quality Team

Select a Certified PEO Vendor

Confirm that the PEO Vendor is certified through the Employer Service Assurance Corporation (ESAC). In addition, they provide independent professional verification that a PEO has met the highest ethical, financial and operational industry standards through comprehensive certification and ongoing monitoring. For more information, visit www.esacorp.org then CLICK on “Verify” then type in “PEO Name” then type in “City” then SELECT “State” then CLICK “Submit”.

Verify that the PEO Vendor is certified through the Certification Institute. It provides an independent professional verification that a PEO’s risk management program is meeting proven insurance industry risk management best practices to control WC insurance losses. Certification provides WC insurance companies with ongoing assurance that a PEO is in fact implementing industry best practices in a consistent and effective manner. Visit (www.certificationinstitute.org) then “CLICK Go Workers’ Compensation Risk Management Certification” then CLICK (Top Tab) Certified Companies” then type in “PEO Name” then type in “City” then SELECT “State” then CLICK “Search”.

Verify Your PEO Vendor

First, verify the length of time that the PEO Vendor has been in business.

Then, verify that the PEO Vendor possess the Financial Strength to deliver the contracted services and meet the financial requirements. (Ask for a Copy the PEO’s Dun and Bradstreet Financial Rating). (Note: An ESAC Certified PEO is Audited Annually and is Financially Assured with a $1,000,000 Surety Bond plus an Excess Surety Bond of $5,000,000 for Key Services.)

When you have verified the above, verify that the PEO Vendor possess the Workers’ Compensation and General Liability Insurances (Copies of Certificate of Insurances) necessary fulfill the contractual obligations associated with a PEO Arrangement.

Verify how the PEO Vendor’s Employee Benefits Plan is tailored. Is the Employee Benefits Plan an all or nothing proposition? Or after a cost/benefit comparison has been completed? If the current plan is more cost effective to remain in force, then will the PEO accommodate such an arrangement? Will the Employee Benefits Plan fit the needs of Your employees?

Verify how the PEO Vendor funds Employee Benefits. Is the PEO fully-insured, self-funded, or partially self-funded? (Note: In the State of Texas it is unlawful for a PEO to self-fund or partially self-fund a Medical Health Plan) Who is the third-party administrator (TPA) or carrier? Finally, is their TPA or carrier authorized to do business in the State of Texas?

Then, verify how the PEO Vendor will Collect Premiums for Employee Benefits. Do they collect the premiums weekly (as-you-go) or monthly (in advance)?

Review PEO Customer Service Agreement

Review the PEO Customer Service Agreement (CSA) carefully. Construct the CSA to comply with the requirements of the Texas Staff Leasing Services Act. It is a “Service Agreement” titled “… / Client Leasing Agreement (Texas Employees). Are the respective parties’ responsibilities and liabilities clearly stated? What guarantees are provided? Also, what is the Contract Period and Extension(s)? What provision(s) permit cancellation or termination of the CSA?

Request a Personal Presentation by the PEO Vendor. Sales brochures and fancy proposals are easy to print; however, One-on-One contact reinforces credibility.

Key Words for the Business Owner’s Consideration

Look at the following key words for the business owner’s consideration:

“Responsible for…” – means that the PEO Vendor is the lead and assumes all cost and liability associated with the action.

“Assist with…” – means that the Business Owner is the lead and assumes all cost and liability associated with the action. The PEO Vendor’s role is to help and support the Business Owner in that action.

“Advise on…” – means that the Business Owner is the lead and assumes all cost and liability associated with the action. The PEO Vendor’s role is to recommend and suggest to the Business Owner regarding that action.

“Consulting…” – means that the Business Owner is the lead and assumes all cost and liability associated with the action. The PEO Vendor’s role is to provide expert advice or information to the Business Owner regarding that action.

Costing Methods

Identifying the Business Owner’s Hard Dollar Cost

For purposes of this Guide, the Business Owner’s Hard Dollar Costs are defined as fully allocated costs for an activity(s) that include the following:

  • All direct and indirect personnel
  • Payroll (Federal Insurance Contributions Act Social Security and Medicare (FICA)
  • Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA))
  • Insurance (Workers’ Compensation (WC) Premium and Annual Audit)
  • Materials and supplies
  • Equipment
  • Software
  • Capital depreciation
  • Rent
  • Maintenance and repairs
  • Utilities
  • Travel
  • General / administrative overhead

Pricing Formula for PEO Services

The Cost Elements typical to PEO Service Pricing includes the following formula:

FICA + FUTA + SUTA + WC Premium (Pay-As-You-Go) + Administrative Fee = Billing Rate.

Variables That Affect PEO Pricing

The Variables that affect PEO Pricing are: (1) the Annual Amount of Payroll as a Ratio to the Number of Employees, (2) the NCCI Experience Modifier Rate, (3) the Risk associated with the Business Type, and (4) the SUTA Rate based on the Annual Employee Turnover and Unemployment Claims Paid.

Therefore, PEO pricing is usually related to gross payroll, and is a “Billing Rate” stated as a cost per $100 of gross payroll. Most PEO’s combine all employee related costs (Bundled Price) into a factor for each workers’ compensation class code, to allow for a single payment, which is simple and predicable for the Business Owner.

Once the “Billing Rate” has been established, the cost per $100 of payroll remains fixed, excluding any statutory increase in the minimum wage, employees taxes, sales tax or workers’ compensation rates. Keep in mind, a PEO Vendor may or may not charge a one-time “Set-Up Fee”.

In addition, a PEO Vendor may or may not require a one-time (one pay period) payroll, payroll taxes, workers’ compensation, and employee benefits premium Deposit, prior to the processing of the First Payroll.

Note: A PEO Vendor may or may not charge for Pre-Employment Services such as: Background Checks, Drug Screens, and Credit Checks.

Employee Benefits – Health – Welfare – Retirement

The information in this chapter has been written to provide the basic information about Group Health Insurance Plans, Welfare Plans (Ancillary Products), 401(k) Retirement Plans, and how they are typically implemented in a Co-Employer Arrangement.

Additionally, to minimize any risk to the Business Owner, offering benefits to Your Employees must be done correctly and in compliance with IRS/DOL/ERISA regulatory guidelines.

PEO Vendors bring to the table a selection of plans that will have different requirements for participation, different underwriting and enrollment procedures, and different premium payment timelines.


With no consideration of a cost/benefit comparison of the current Benefit Plan(s) in-force and available to Your Employees; PEO Vendors whom require that their Group Health Insurance Plan, and/or their Welfare Plans (Ancillary Products), and/or their 401(k) Retirement Plans be adopted as the only option(s) available to the Your Employees; are generally more interested in establishing an “Exit Barrier” to the PEO Arrangement.

Group Health Insurance Plan – Requirements for Participation

Health Carriers will set a specific minimum percentage of the monthly premium, for Employee Only, to be paid by the “Work Site” Employer (Business Owner), with the balance of the monthly premium as the responsibility of the employee.

Additionally, a minimum percentage of eligible employees must participate in the plan. Typically, these percentages will be 50% of the monthly premium, for Employee Only, to be paid by the “Work Site” Employer (Business Owner) with 75% of the eligible employees participating.

Note: The 75% participation requirement does not include employees who already participating in a group or personal health plan. For example, they are covered on their spouse’s medical plan. Also non-eligible are employees or employee dependents that are on a Social Security disability.

Group Health Insurance Plan – Underwriting and Enrollment Procedures

Medical Election Form

First, the PEO Vendor should provide the Business Owner with a Medical Election Form. The form acts as documentation of the desire to enroll the Your Employees in a Group Health Insurance Plan. It also provides acknowledgement, by the Business Owner, of the participation and eligibility requirements of the Group Health Insurance Plan being offered.

Medical Consensus Form

Then, all the employees who will be participating in the plan must complete a Medical Census Form. Then, they review these forms to provide a quote of monthly premiums for a Group Health Insurance Plan. The PEO quotes these premiums based on rates associated with the type of coverage (80/60, 90/70, etc.), the optional yearly deductible, the geographic region, and the type of prescription drug coverage selected.

Group Health Insurance Plan Application

Then, the employees then fill out the Group Health Insurance Plan Application, which includes the employee, spouse and dependents information. Those employees not participating will fill out the portion of the application where they decline coverage.

Cafeteria 125 Plan

Finally, upon completion of the application, employees may be given, depending upon the PEO Vendor, an opportunity to enroll in a Cafeteria 125 Plan. They can select or decline this option but they must sign documentation verifying their decision.

As the “Work Site” Employer (Business Owner) offering benefits to Your Employees, there is an absolute obligation to meet Internal Revenue Service (IRS), U.S. Department of Labor (DOL) and Employee Retirement Income Security Act (ERISA) compliance requirements in presenting and offering these benefits.

Group Health Insurance Plan – Premium Payment Timelines

Typical to the PEO marketplace are two (2) ways of payment for insurance product premiums: Payment (1) is referred to as “Pay As You Go” which is payment by pay period for effective coverage only for the next pay period, and Payment (2) is referred to as “Monthly Pay In Advance” which is payment for effective coverage for the month following the last pay period.

Because Payment (1) “Pay As You Go” does not provide for coverage beyond one pay period, this method for collecting premium payment is often used, by a PEO Vendor, as an “Exit Barrier” Strategy. Meaning, with a Payment (1) premium schedule, terminating the CSA may have an immediate impact on the continuation of Your Employees’ insurance coverage.

However, Payment (2) “Monthly Pay In Advance” does provide for coverage until the end of the month for which premiums have been paid.

Welfare Plan (Ancillary Products) – Requirements for Participation

Welfare Plans (Ancillary Products) generally including: Dental Plan, Vision Plan, Short-Term Disability Insurance, Long-Term Disability Insurance, Life Insurance, Accident Insurance, Cancer Insurance, Critical Illness Insurance, Hospital Confinement Insurance, Term Life Insurance.

Offerings for a Welfare Plan are individual purchases with no “Work Site” Employer (Business Owner) premium payment requirements.

Underwriting and Enrollment Procedures

The Insurance Representatives generally conduct Underwriting and Enrollment for Ancillary Products on-site (and not the PEO Vendor).

Insurance Representatives use Applications/Enrollment documents to create a data file on each policyholder. They use this data to print individual insurance cards, provider listings and to provide a mailing address for sending the employee a copy of the policy.

Welfare Plan (Ancillary Products) – Premium Payment Timelines

Normally, premium payments are “Monthly Pay In Advance” which is payment for effective coverage for the month following the last pay period.

401(k) Plan Overview

Through the PEO Vendor, the Business Owner, as the co-employer, may choose to offer a 401(k) Plan to Your Employees. This type of retirement vehicle is a single multiple plan designed by legal experts to conform to IRS regulations that address plans in a PEO/Client relationship/contract. Essentially, the plan is set as a single plan with the PEO Vendor as the fiduciary and with provisions for multiple participating co-employers. Furthermore as the co-employer, the Business Owner adopts the plan through an adoption agreement to make it available for their employees to participate. The PEO Vendor’s Third Party Administrator (TPA)’s responsibility includes the following:

  • All non-discrimination testing
  • Government filings
  • Other administrative actions


During the adoption process, the Business Owner has the option to choose to provide or not provide some level of employer “matching” contribution. Likewise, the Business Owner determines what the eligibility criteria will be.

Payment Requirements

The following includes information about payment requirements.

Payment of Employment Taxes and Wages

In addition to FICA, FUTA, SUTA, and WC Premium. by contract, the PEO Vendor assumes the responsibilities for payment of wages, salary, or other compensation made on a recurring basis to Your Employees.

The provisions or the Texas Staff Leasing Services Act guides the entire process.

Payment for PEO Services

Prior to the “Pay Date” the PEO Vendor will Invoice the Business Owner at the contracted “Billing Rate” per $100 of Processed Payroll plus Insurance Premiums, plus 401(k) Contributions, plus Miscellaneous Deductions, and any additional charges for such services as Pre-Employment Background Checks, etc.

Prior to Payroll Processing, the Business Owner reconciles and approves the Invoice Amount.

Then before the actual payroll processing begins, the Business Owner will simultaneously transmit approval and payment of the Invoice Amount to the PEO Vendor.

Upon receipt of payment, the PEO Vendor processes payroll and directs payment to the individual “co-employees”.

What PEO Vendors Need to Know

To assist a PEO Vendor to properly prepare a Request for Service Proposal, the following information is necessary:

1. Identify if a PEO Arrangement is currently in effect.

2. Please provide the Company Name of the current PEO.

3. Please provide the current “employer of record’s” Federal ID #.

4. Please provide the current “employer of record’s” SUTA Rate.

5. Please provide a copy of the most recent Payroll Report.

6. Please provide the number of Full-Time and Part-Time employees.

7. Identify the current Payroll Frequency.

8. Please provide the current Workers’ Compensation Wage information: WC Class Code, Number of Employees in that Code and the Annual Wages Paid in that Code.

9. Please provide a copy of the Workers’ Compensation Policy Declaration Page.

10. Please provide a copy of the current “employer of record’s” Workers’ Compensation Loss Runs for the Previous Three (3) Years.

11. Please provide a copy of the OSHA Logs for the previous 3 years.

12. Please provide a copy of the General Liability Declaration Page.

13. Please provide a copy of the Schedule of Benefits for the current Health Care Plan.

14. Identify the name of the current “employer of record’s” current Health Plan Provider.

15. Provide the employee census (DO NOT include NAMES or ANY PERSONAL IDENTIFIERS) for the current “employer of record’s” current Health Care Plan.

What Questions to Ask the PEO Vendor

If you want to assure a low risk factor for the Business Owner and to evaluate a Request for Service Proposal, then request each PEO Vendor to provide the following information:

  • State and address any and all “Set-Up Fees”.
  • State and address any and all services included in the “Billing Rate”.
  • The Staff Transition Process.
  • Their Communication Method(s) used when interacting with Your and Your “co-employees”.
  • The Customer Service Model.
  • Description of theirPayroll Services. (Input Methods, Payment Methods and Reporting) and (Responsible for…, Assist with…).
  • Description of their Employee Benefits Plans. (Health, Welfare and Retirement).
  • How they fund Employee Benefits.
  • How they pay Employee Benefits. (“Pay As You Go” or “Monthly Pay In Advance”).
  • Describe their Human Resources Services. (Responsible for…, Assist with…, Advise on…, and Consulting…).
  • Describe their Safety and Risk Services. (Responsible for…, Assist with…, Advise on…, and Consulting…).
  • Provide copies of their Certificate of Insurance for both Workers’ Compensation and General Liability.
  • Describe their Background and History. (Length of Time in the PEO Business).
  • Describe their Qualifications. (License, NAPEO, ESAC, Certification Institute, Principles and Key Staff).
  • At the Personal Presentation, Request that the PEO Vendor provide a Sample copy of their “… / Client Leasing Agreement (Texas Employees)

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