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The second annual National Subcontractor Market Report provides industry insights and trends based on an in-depth survey of contractors conducted in February of 2022.
This report examines how macroeconomic conditions impacted contractors in 2021 and how this has shaped their outlook on 2022.
Contractors of all sizes expect material prices to remain volatile, with availability scarce and lead times bloated. Despite market turbulence, 71% of contractors remain optimistic and are planning for business growth in 2022.
Subcontractors operate in a highly competitive bid environment, where competition is fierce for winning work. While both reputation and price factor into decision-making with competitive bidding, it is often a race to the bottom for subcontractors, who bear the brunt of the financial responsibilities and reduced margins.
With rising material and labor prices, subcontractors are hesitant to raise bids too high and price themselves out, so many are biting the bullet on profitability by maintaining bid prices.
2021 brought significant challenges to the construction industry and has thus created an understandable caution among business owners. Subcontractors’ interest in growing their businesses has dropped 3% compared to 2021, while desire to go after larger projects has dropped by 12% compared to 2021. Despite the slight drop, the lion’s share of subcontractors still show a strong entrepreneurial spirit and have their sights set on business growth.
The risky reliance on existing cash flow to fund business growth has soared to almost two thirds, compared to last year’s 44%. Between supplier terms tightening, interest rates rising, and banks exhibiting more caution in their underwriting, subcontractors are forced to finance growth through their own cash flow. Additionally, considering the historically broken, unreliable payment cycles in the construction industry, subcontractors should begin to seek new ways to finance growth without having to dip into their own cash reserves.
The increased dependence on existing cash flow coincided with greater utilization of material financing. More and more contractors are beginning to use the suite of new financial tools designed specifically for their needs.
Contractors view cash flow as a solid source of growth-stimulating capital but admit that managing cash flow continues to be a “big challenge.” This is a given in an industry with unpredictable project payment cycles, which place subcontractors at the bottom of the financial payment chain. The construction industry, as it has been for decades, has created an environment that leverages the subcontractor as the ultimate financier every time they’re responsible for fronting material and labor before getting paid.
Attesting to the frustration and prevalence of the slow payment cycle, subcontractors reported they would be willing to accept a discount on their pay application if it meant getting paid faster — an incredible illustration of just how deep the challenge of maintaining strong working capital really is.
Billd wanted to learn more about the degree to which subcontractors were using new, emerging tools built to advance their businesses — not only in the realm of financing, but across the board.
The adoption of technology can help streamline efficiencies and improve margins through increased productivity. As margins are compressing and bids are remaining stagnant, subcontractors are beginning to seek new ways to find cost efficiencies, with the adoption of technology being a main driver.
Widespread technology adoption still has a long way to go. Amid the acknowledged volatility of the market, the scant 7% use of lien management technology stands out. Lien management is instrumental in protecting subcontractors against the risk of non-payment in this high-risk environment. Although roughly half maintain their lien rights, the efficiency of lien management could suffer without an organized lien management software.
While a strong 63% are using estimating and takeoff software, the remaining 37% are falling behind the curve if they still rely on paper estimates or tedious Excel sheets.
While the pandemic seems to be drawing to a close (as of April 15th, 2022), the effects of it are still felt throughout the construction industry. As inflation begins to rear its head and gas prices reach levels not seen in years, new challenges are hitting the industry. While the infrastructure bill will bring a multi-billion dollar supply of new construction projects for subcontractors to bid on, the reality is that subcontractors find themselves in competitive bid environments and facing decreasing profits. With all that said, there’s still never been a better time to be in construction. Demand continues to rise and there’s optimism around continued business growth.
Despite the innate optimism from the subcontractor community, it doesn’t change the fundamental truth that subcontractors occupy an unjust spot in their own industry. Circumstances have long pushed the sub to the back of the line, in more ways than one — they wait longer than anyone for project payment; lack meaningful leverage on bid day; absorb the blow of material price hikes; take frequent hits to their cash flow, withstand limited support from the financial industry, and can’t always support the business growth they strive for.
The fact of the matter is, subcontractors need advocates. They need financiers and suppliers and GC’s who truly align their success with the sub’s. They need partners who will help them weather a volatile market and unpredictable price changes. The old industry model has to evolve. If it doesn’t, those shrinking profit margins and insufficient supplier terms could lead to fewer subcontractors on the market. That means better terms, better management of material and labor price hikes, adoption of new technology, and greater project efficiency will be key in 2022. I’m proud to say that Billd is doing our part — offering subcontractors crucial tools to alleviate the cash flow crunch subcontractors so often encounter. As champions of the sub, we see you, we hear you, and we’re ready to help you excel in 2022.
