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Subcontractors paid $97B more in 2022 due to high material and labor cost

Subcontractors paid $97B more in 2022 due to high material and labor cost

Subcontractors (subs) paid an additional USD 97 billion in 2022, according to Billd’s 2023 National Subcontractor Market Report. Overpaying is never ideal, but they were faced with circumstances that resulted in them bearing massive financial burdens. What led to the overpay? There are many reasons, but it boils down to increased construction material costs and labor shortages.

The report states that most subs had to pay in excess for materials and labor. This was before they themselves were paid! Most subs had to wait for an average of 74 days before getting paid by their General Contractors (GC). The report states that there was a 15% increase in labor costs in 2022

Furthermore, high material costs, increases in lead times, and losing discounts added to the expenses. The COVID-19 pandemic and subsequent lockdowns led to supply chain disruptions and price hikes. Amid acquiring raw materials without losing precious time and negotiating prices and terms, many subs had a falling out of sorts with suppliers.

Subcontractors hit hard by increased construction input and commodities costs

Just last week, we discussed inflated construction input and commodities prices. Compared to February 2020, i.e., before COVID-19, the prices today are sky-high! Inputs to construction, non-residential, commercial, and healthcare are 39% higher. As for the construction commodities, here’s what the situation was before the pandemic-

  • Adhesives and Sealants were 32% cheaper
  • Concrete products were 29% cheaper
  • Gypsum products were 44% cheaper
  • Steel Mill products were 70% cheaper
  • Natural Gas was 57% cheaper
  • Hot Rolled Steel Bars, Plates, and Structural Shapes were 52% cheaper

That’s a lot. 

Suppliers do offer discounts on upfront payments, but the problem is, since subs weren’t getting paid on time, they were not able to make upfront payments. Billd’s report states that 91% of subs would offer 1-5% discounts to GCs or property owners for guaranteed payment within 3 days.

One way to tackle rising costs, at least to some extent, would be to increase bids. 78% of respondents from Billd’s survey said they increased bids to counter the rising material costs. But the bids were not able to keep up and there was a decline in profitability. Out of the total respondents, 61% recorded revenue growth in 2022, but 57% saw a decline in profitability. 

They are optimistic for 2023

Subcontractors might have overpaid due to increases in materials cost and shortage of labor, but they are not discouraged. According to the report, 72% of subcontractors intend to grow this year by trying their hand on larger projects, focusing on conserving cash, and getting their hands on funds through financing! The 28% who don’t intend to grow, have cited “market conditions, limited access to financing, and inconsistent cash flow” as reasons. 

The ones who want to grow will try different methods of funding their growth like cash on hand, different lines of credit, credit cards, and material financing. 

From these methods, the material financing method is the one that will allow them to acquire materials easily with significant discounts. It should be leveraged as much as possible but according to the report, only 7% of subcontractors leverage from it. Billd has also highlighted Pay App Advance – their very own tool that will give subcontractors funds to acquire materials without having to wait for their payments from GC. This gives them “greater financial predictability around their receivables, and allows them to cover their largest, immediate expenses with greater ease,” Billd says in the report.

In the press release, Chris Doyle, CEO of Billd said “Subcontractors are the foundation of the construction industry, providing all material and labor to complete a project. They purchase that material and pay for that labor upfront, not being paid for their work for 74 days, a result of the dysfunctional payment cycle. If you add unplanned expenses due to rising costs in material and labor, it puts an unrealistic burden on subcontractors to provide that foundation.”

“Despite these compounding challenges, subcontractors remain optimistic about their businesses. This report highlights the entrepreneurial spirit subcontractors continue to exhibit each and every year,” he added.

Technology can help them even further, given that they are willing to try new tools! Some already use tools for bid management, project management, and more. 

In the report, Chris says “We at Billd can’t fix inflation, material volatility, or a thinning labor market. But, we can get subs access to working capital that will make these challenges less consequential. And, we can make sure subs know the cost of all financing (Billd products, cost of cash, cost of supplier terms, cost of bank line of credit, etc.) and include that cost in their contracts. Tools that provide the flexibility to pay upfront with terms that align with their payment cycles can help subs survive a volatile material market. The cost of financing can easily be offset by adding it to their bids. This type of cash flow flexibility will actually give way to profitability – and that’s what subs need.” 

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