Last year, lawmakers in Washington passed a massive $1.2 trillion bipartisan infrastructure plan, representing the most significant investment in highways, ports, and other critical projects for years to come.
That funding is now beginning to launch projects across the country, rebuilding the nation and boosting the construction industry, but new opportunities are adding to the two core challenges subcontractors face every day: how to secure capital for the high upfront costs of materials and finding (as well as keeping) skilled labor.
Large public infrastructure projects are creating thousands of jobs, but they also are increasing the demand for limited materials. As a result, over the course of two years, material costs skyrocketed and lead times increased, forcing contractors to pay significantly more out of pocket to procure materials.
According to one recent study, since the pandemic began, lumber costs increased 122 percent, steel mill products 123 percent, copper and wire cable 101 percent, and diesel fuel 201 percent, while demand continues to rise. These materials are the backbone of every type of construction project, and large infrastructure projects are poised to continue increasing demand, while reducing subcontractors' access to them.
While lead time delays and the volatility of material prices is clearly a significant challenge for commercial and residential builders, an equally large challenge is the worsening skilled labor shortage. The COVID labor crisis has impacted nearly every industry and has severely exacerbated long-standing construction staffing woes.
According to the U.S. Chamber of Commerce Commercial Construction Index (CCI), more than 90 percent of commercial contractors reported some level of difficulty finding skilled workers, and 62 percent indicated high levels of difficulty — a 7 percent jump from Q3.
Pandemic-related project delays also have increased, with two-thirds (66 percent) of contractors expecting delays on some projects. This difficulty in finding workers contributes directly to the strain on contractors' bottom lines.
Unlike other industries, simply offering higher pay is not a viable, long-term solution. First, the average hourly construction wage is already 46 percent higher than the average $11.26 hourly U.S. wage. Furthermore, 73 percent of contractors report they have already increased base pay rates during the past year, with little success in reducing the shortage. Finally, housing and commercial costs are soaring in part because of pent-up demand, scarcity and high material costs.
Adding more wage increases into the mix will only further raise those costs, decimate small contractors with limited resources, and lead to significantly higher prices for consumers.
As more major infrastructure projects get under way, subcontractors must compete with the giant firms and the biggest contractors for the same limited materials and scarce skilled workers, a battle in which they are severely overmatched. That's because subcontractors have little control and few options when it comes to managing their cash flow and gaining access to credit.
The truth is that supply chain finance in the construction industry is terribly broken and has been for decades. Today, subcontractors sit at the bottom of the payment pyramid. Subcontractors are typically the last to get paid, often waiting 60 to 90 days to be paid for completed work. Relying on cash on hand is far too unpredictable to comfortably pay for labor or materials upfront, much less reliably finance the sizable expenses that come with scaling a construction business.
Either those subcontractors go to traditional banks — which are often unwilling to offer financing — or they go to an alternative lender for a product that's prohibitive to their growth — extremely expensive and not tailored for construction. Subcontractors need more options to compete.
Fortunately, new financing alternatives designed to champion the subcontractor are coming into existence, helping subs tackle cash flow challenges and overall liquidity of commercial construction projects. These innovative, flexible financing solutions provide subcontractors with 120-day terms to pay for materials, helping them balance multiple projects and maintain healthy relationships with suppliers. Material finance options also allow suppliers to be paid in cash up front, guaranteeing materials will be delivered reliably. Not only do material deliveries flow in, but subcontractors have more time to pay for them.
In addition, new, reliable labor advance financing has become available to ensure subcontractors have the liquidity to pay their crew on time and deliver successful results. As labor costs have spiked, pay advance options can help stabilize cash flow, allowing subcontractors to continue to grow their businesses. These effective solutions provide subcontractors same-day financing on completed work with approved pay apps, eliminating the subcontractor's responsibility to float their own capital to fund projects and pay their workers.
Complete solutions on the market give commercial subcontractors access to financing for the two largest expenses on a project — materials and labor — and secures the resources and purchasing power they need to remain liquid throughout the entire project, take control of their cash flow, and finally do business on their terms.
Skyrocketing material costs and the detrimental impacts of the construction labor shortage are hampering subcontractors. With no signs of demand slowing and few options to quickly increase the number of workers, subcontractors need new, reliable options to help bridge the gap between their outgoing capital responsibilities and incoming cash flow. Pay application advance options are a critical new tool that can help subcontractors pay for the things they need to ensure projects are completed and to lay the foundation for future growth and success.
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.
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