Why Subcontractors Need Better Access to Financial Capital

The effects of COVID-19 continue to ripple through the entire economy, and the construction industry has not been spared. Two years on, supply chains remain broken, affecting the availability and the price of materials critical to projects of all sizes. Skilled laborers left the industry during the pandemic, exacerbating an already severe shortage, and increased consumer and business construction demand has pushed subcontractors’ bottom lines to the breaking point.

To get a more holistic view of the growing challenges impacting the industry, Billd’s National Subcontractor Market Report provides an in-depth review of industry trends impacting the construction industry and how they affect subcontractors’ ability to navigate an increasingly difficult environment.

Top 3 Hurdles

The 2022 National Subcontractor Market Report asked respondents: What do you believe will be the most significant risk to your business in 2022?

• The No. 1 issue, listed by 40% of respondents is the availability of skilled laborers.
• The No. 2 issue, listed by 30% of respondents, is material price and volatility posed a significant risk to the business.
• The third most cited business risk, listed by 16% of respondents, is material lead time delays.
  
  These three issues can be directly linked by one common thread -- access to financial capital. Two out of the Top 3 challenges facing subcontractors are related to materials and their costs, with the No. 1 issue being the availability of skilled workers to complete projects, in which cost will also play a crucial role.

The Main Challenge: Labor

This report magnifies a long-known Achilles heel to the construction industry - the skilled labor gap. It has now become the number one challenge dogging subcontractors. While other industries may be able to combat labor shortages though wage increases, that option is not available to the construction industry due to already significantly higher hourly pay. Compounded by the fact that subcontractors must also balance a highly competitive bid environment, their project profitability will start to crack under the pressure.

The U.S. economy came to a grinding halt during the pandemic, skilled labor, or the absence thereof – have become a significant challenge across the entire economy. Public health, shutdowns and closures, federal stimulus funding and more have led to a repositioning of responsibilities in the labor market and a decline in the number of workers in the economy. The construction industry was not immune to these new changes, compounded by an aging workforce and a sharp rise in demand, the construction industry is now in dire straights and in need workers.

Material, a 2 for 1 issue

Two out of the three critical issues facing subcontractors directly linked to materials. In 2021, flat steel prices rose 131%, lumber prices by 32% and copper by just a little over 50%, ready-mix concrete prices rose from $128 in January 2020 to $144 today, a 12.5% increase. This begs the questions, how are subcontractors supposed to bid on their next project while the prices of materials remain volatile and could easily cause a project to become unprofitable?

As material prices continue down their volatile path, they are going to continue to crush subcontractors. Based upon our report, 88% of contractors said volatility and price increases had a negative impact on their business, and nearly 80% said material shortages and increased lead times have already harmed their business. Going forward, 87% of subcontractors fear long lead times will continue to be a major issue.

Despite all these challenges that are stacked against them, subcontractors are confident that they will be able to navigate the challenges with 71% reporting they planned to grow their business over the next year. What they need is more help.

Subcontractors Utilizing 21^st Century Solutions

While subcontractors are satisfied with their credit options and financing options, they do feel the pressure of paying for substantial material and labor costs upfront, introducing havoc into their cash flow.

According to the data, 59% of contractors intend to rely on cash to fund business growth in 2022. However, half stated cash flow remains a significant challenge.

This year’s report shines a light on a core construction industry fault – a broken payment cycle that continuously places subcontractors into a disadvantageous position compared to their counterparts. Subcontractors are often the last to receive payment for their completed work, thus impacting their ability to bid on potential projects. In this current volatile market, cash on hand does not offer reliability and security to pay for materials and labor upfront, much less provide the ability to finance a business’s sizeable expenses when it comes time to scale operations.

However, things may begin to change for the better, thanks to financing solutions specifically created for subcontractors. These new financing solutions come in the form of 120-day terms, instead of the 30-day industry standard. These longer terms still allow suppliers to be paid upfront, while also providing flexibility to manage other needed purchases and help lock in the best prices with the negotiating leverage of a cash buyer.

When it comes time for labor costs, new, reliable advance financing tools have begun to infiltrate the marketplace. These new pay advance options will help subcontractors address rising labor costs in the construction industry, and the severe impact it has on cash flow and overall liquidity of commercial construction projects. They stabilize cash flow and allow subcontractors to continue to grow their business.

Halfway through 2022, we have a have already seen how rising material prices, continued supply disruptions and the labor shortage have impacted subcontractors. For subcontractors to have a chance to be successful, they will need more tools in their financial arsenal belt to help them negotiate the complex, painfully broken payment cycle. Subcontractors are left to support the $1.4 trillion industry while they are left with limited cash flow solutions. For subcontractors to succeed and thrive through the next market cycles, they will need to be supported by financiers specifically created for them and who provide sufficient credit limits needed to do the best work of their lives.