The sharp rise in labor and material costs has rocked the construction industry. No party within the construction ecosystem has been affected more than subcontractors, who are often responsible for furnishing labor and materials. While this has been a well-discussed topic, lack of hard data has made it difficult to pinpoint just how acutely subcontractors have been impacted in this challenging environment.
Until now.
This spring, the Billd team released our 2nd annual National Subcontractor Market Report. Our report throws into sharp relief the deep challenges facing subcontractors, specifically how the effects of pent-up demand and supply chain disruptions have led to skyrocketing material and labor costs, and how the broken financing system has left so many with so few solutions to help them weather the crisis.
SURVEY SAYS…
Before discussing the report and what it shows about the construction industry, it is essential to know who participated in this survey. In total, 767 construction professionals from various trades across the industry participated. All work in commercial construction, with nearly half also working residential projects. These leaders provide a perfect snapshot of the industry. Fifty-one percent are subcontractors, 24% general contractors, with 25% working as both sub and general contractors. Established industry veterans, 92% have been in business for at least ten years.
TOP 3 ISSUES:
The 2022 National Subcontractor Market Report asked participants: What do you believe will be the most significant risk to your business in 2022?
- 40% or 307 respondents said that their number one issue is the availability of skilled laborers
- 30% or 230 respondents said material prices and volatility pose a substantial risk to their business
- 16% or 122 respondents said material lead time delays pose a risk to their business
The common denominator among these risks is their ability to be mitigated with financial capital. Two out of the top three pressing challenges center around material cost and procurement, with the number one issue being the availability of skilled workers to complete projects, in which cost also plays a significant role.
MATERIALS COMPLICATIONS
Today, higher material prices are crushing subcontractors. In 2021, flat steel prices rose 131%, lumber prices by 32% and copper by just a little over 50%. According to the U.S. Chamber of Commerce, 95% of contractors expect to experience at least one material shortage. How can subcontractors bid on their next project if the price of materials remains so volatile and may cause a project to become unprofitable? Indeed, 75% of our respondents stated increased material prices and volatility are hurting their business, and 88% said they expect volatility and price increases to continue over the next year.
Part of the issue of rising costs is simply lack of availability. Scarcity drives up the costs and has made it more difficult to complete projects. Overall, nearly 80% of contractors said materials’ availability and increased lead times have harmed their business. Unfortunately, as demand continues to soar and supply chain issues continue to linger, this reality will not improve and subcontractors know it, with 87% stating long lead times will continue to plague their businesses.
SKILLED LABOR SCARCITY
Lack of skilled labor, however, is the number one issue facing the construction industry. Labor shortages in construction have been building for multiple years. The workforce was already aging, then came the COVID-19 pandemic, prompting waves of early retirements. Other industries can deal with the labor shortage by raising wages. However, subcontractors are already dealing with a highly competitive bid environment, which is putting strain on project profitability. Any major increases in labor costs will only amplify this issue.
NEW SOLUTIONS
The 2022 National Subcontractor Market Report highlights a core construction industry issue: the payment cycle is broken and puts subcontractors in particular behind the 8-ball. Subcontractors are at the end of the payment road, often waiting 90+ days to get paid for completed work, limiting their potential to bid on new, and larger projects. Relying on cash on hand is too unpredictable to comfortably pay for labor or materials upfront, much less reliably finance the sizable expenses that come with scaling a construction business.
Fortunately, innovative financing solutions help subcontractors’ projects come to life. These new options, specifically designed for subcontractors, allow project materials to be purchased with up to 120-day terms that align with payment cycles. Effective material financing solutions pay suppliers upfront, provide subcontractors with funding for same-day purchasing, and help subs lock in the best prices with the negotiating leverage of a cash buyer.
Advance pay options also provide same-day financing to cover labor costs and provide a stable, secure source of revenue, eliminating the responsibility of the subcontractor to float their own capital to fund projects and pay their workforce. Designed specifically for subcontractors to guarantee quick payment, and with up to 120-day repayment terms, payment advance solutions can help subs more effectively manage expenses throughout the entire project.
CLOSING THOUGHT
As we continue through 2022, subcontractors will be impacted by material prices and volatility, compounded with labor shortages. To give them every fighting chance, they will need more financial options to help them negotiate the complex construction industry dynamics and slow payment cycles. Subcontractors are left to support the $1.4 trillion industry with limited cash flow solutions. For subcontractors to succeed and thrive in this unpredictable economic environment, they will need the support of financiers who are built specifically for them, and who provide the credit limits they need to do the best work of their lives.
About the Author:
Christopher Doyle is an entrepreneur and business leader with extensive construction industry experience and a record of launching successful startups. He is the co-founder and CEO of Billd, a disruptive payment solution for the construction industry that helps subcontractors grow their businesses with less hassle and risk. Recognizing the cash flow hurdles subcontractors face when purchasing materials, Doyle launched Billd to make traditional Wall Street working capital accessible to business owners in the construction industry. For more, visit billd.com.
Modern Contractor Solutions, July 2022
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