High Input Prices Cost U.S. Subcontractors $97B in Extra ExpensesMay 15th, 2023 by Joshua Huff
Subcontractors bore the brunt of uncertain microeconomic conditions and struggled to overcome increased input costs that outpaced bids in 2022, reports Billd, a financing solutions provider. The company recently released its annual National Subcontractor Market Report survey, which dives into the economic realities of subcontractors. Nearly 900 subcontractors participated.
The report highlights the struggles that subcontractors faced in 2022. It found that not only did subcontractors pay an additional $97 billion in materials and labor in 2022, but more than 50% reported a decline in profitability, nearly a quarter faced obstacles securing finances and most paid for labor and materials before getting paid.
Bob Massey, president and CEO of Massey’s Plate Glass & Aluminum, told [DWM] sister publication USGNN™ that in 2022 his company had to wait as long as 70 days for payment. In some cases, the wait time was measured in months. Massey added that the biggest challenge his company faced in 2022 was deposits for specialty items.
“This is even beyond getting paid because it’s a requirement for you to secure materials,” he said. “And you have to hope at the end of the day that they will still be in business and have the materials.”
However, despite the overall struggles of this past year, 61% of subcontractors said their business revenue grew, and 72% expect growth in 2023.
Tight profit margins tangled with increases in labor and material spending in 2022. The report found that 87% of subcontractors paid out of pocket for labor before receiving payment, a 5% increase from 2021 and a 24% increase from 2020. Respondents also reported that labor costs increased by 15% on average in 2022, which clashed with an increased need for workers following the passage of the trillion-dollar Infrastructure Investment and Jobs Act.
Procuring materials was also a challenge. Most respondents stated that high material prices had a negative effect in 2022, leading them to increase bids. Eighty percent of respondents said they expect volatile material prices to impact businesses in 2023. Lead times were also an issue in 2022. The report found that 81% of subcontractors said the availability of materials and increased lead times negatively impacted business this past year.
Over half of the respondents said lead times negatively impacted their supply relationships. Though some trades have experienced material price volatility relief, subcontractors stated that the inconsistency of prices has impacted supplier relationships. This led to uncomfortable conversations about price hicks, longer lead times and inflexible terms. More than 65% of respondents explained they sought out new suppliers as a result of procurement challenges.
On top of that, 41% of subcontractors felt that suppliers don’t support their business by being flexible with their credit terms, and 32% of respondents said their suppliers negatively adjusted their terms in 2022.
“This year, we saw subcontractors’ supplier terms be cut, making those terms even more inadequate against even longer AR timelines,” says Billd CEO Chris Doyle. “Their direct costs have increased to the tune of $97 billion, but their bids and contracts can’t always keep up. What’s worse is that most general contractors will not provide the contract provisions to the subcontractor to ensure they can pass price increases to the property owner. That means the cushion of cash in the business is being squeezed to its limit. If that wasn’t enough, in 2023, we continue staring down the barrel of significant labor shortages and premiums.”
According to the report, slow payments are now an inevitability. The majority of subcontractors reported that they were not paid within a reasonable amount of time by general contractors. In fact, the average wait time to get paid is 74 days.
More than 70% of subcontractors said they paid out of pocket for materials before receiving payment from a general contractor, up from 66% in 2021. This has led to most subcontractors believing that general contractors don’t understand the importance of prompt payments.
Though the past two years have thrown various curveballs at subcontractors, most are optimistic about the future. In fact, 72% plan to grow their business in 2023, and 58% are interested in going after larger projects in 2023. The subcontractors that don’t intend to grow their businesses this year cited market conditions, limited access to financing and inconsistent cash flows.
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