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In December 2023, Billd surveyed subcontractors across the nation to create the fourth annual National Subcontractor Market Report.
This survey investigated the market conditions subcontractors faced in 2023, yielding the perspectives of nearly 700 construction executives. This information served as the foundation of all insights captured in the 2024 report.
Subcontractors undertake a massive financial burden on every project, acting as the “interest-free banks” of GCs and owners. Financing those projects with bank lines of credit, supplier terms, credit cards, and even cash on hand has tangible costs for the subcontractor. Costs that strain their profit margins. All the while, inputs like labor and materials steadily rise year after year. With financing costs forming a silent but significant burden, the profitability of subcontractors now depends, in part, on their ability to recognize and capture the cost of financing in bids.
Accounting for the cost of financing is a strategic business practice that addresses working capital as a project cost, just like materials and labor. By incorporating this cost into bids and invoices to GCs and property owners, subcontractors are treating working capital as a crucial component of long-term business health. This year’s report shows that it’s a practice that pays off.
Every subcontracting business owner and CFO is deeply familiar with the challenges of slow pay and this year respondents reported the problem worsening. Months of unseen back and forth between GCs and property owners can take place before subcontractors start to receive progress payments for the work they’ve done. The survey saw an 11% increase in the number of subcontractors reporting the problem year-over-year. This contributes to a persistent discrepancy in AP and AR.
While 35% is still significant, it is a dramatic drop from 2022, when 52% of subcontractors felt GCs didn’t understand. It might be anticipated that heightened awareness would mitigate the incidence of delayed payments, or that GCs would engage in more robust advocacy efforts to expedite payments. However, evidence suggests that increased awareness by general contractors has not had an impact on improving the problem. A third of subcontractors don’t believe GCs urge project owners to pay them more promptly; that shortage of advocacy is evident in the increasing incidence of subcontractors affected by slow pay.
As quality skilled labor becomes harder to find, more subcontractors must invest in training programs to upskill their available workforce.
Subcontractors characterize the availability of reliable, high-quality skilled labor as the #1 business risk they face.
Sharp material price hikes defined the pandemic and the years that followed, but in 2023, that impact appeared to soften. Material costs rose, but like with labor, the pace has slowed down.
The correlated price volatility was severe during the pandemic and following two years but has since started to improve. The survey showed that subcontractors are less concerned with volatile and increasing material prices impacting their business.
The unprecedented material shortages and price hikes seen during the pandemic have cooled, but rising material costs are still a concern. 65% of subcontractors forsee price volatility impacting their businesses in 2024. The ability to navigate pricing conversations with GCs will continue to be critical to profitability and business success.
Lead times and material availability appear to be less of an issue than they were in 2022, with 64% saying they negatively impacted business in 2023. This is a nearly 20% drop year over year. There was also a notable decrease in the proportion of subcontractors anticipating an impact on their business due to lead times and material availability in 2024, declining from 76% in the prior year to 55%. Despite this positive trend, approximately half of the subcontractors continue to perceive lead times as having a detrimental effect on their supplier relationships.
Pricing is less of an issue between suppliers and subs. Nearly half as many subcontractors experienced strife with suppliers due to material prices compared to last year.
A broader question on the survey probed into whether respondents sought out new suppliers as a result of material procurement challenges. 61% decisively did, compared to 65% in 2022. The market is not without challenges, that much is sure. But these statistics show some improvement.
Working capital solutions including financing, however vital to getting subcontractors through the cash flow deficits caused by slow pay, have real costs associated with them, be it interest, lost discounts, or opportunity costs. This chart expresses those costs.
Almost half of subcontractors are accounting for the cost of working capital and raising their bids accordingly to protect their profit margins. Much like materials, labor and overhead, the cost of working capital directly impacts a subcontractor’s bottom line. It is not a negligible expense; it is a real cost, regardless of the types of working capital being leveraged.
Increasing bids in response to rising costs is a strategy employed by subcontractors as a means to sustain their business operations. However, they do not always have the leverage to carry out those increases in a competitive market.
Like materials and labor, working capital costs are an input that subcontractors have to consider, calculate and diligently incorporate into bids and change orders. Unlike materials and labor, working capital costs are not always readily apparent or accounted for by subcontractors. Although 48% is a strong start, it leads to a stark split, with the half of subs who account for financing enjoying stronger margins than those who don’t.
The inclusion of working capital costs has a palpable impact on the profitability of subcontractors. 59% of those who did reported having a more profitable year, compared with just 50% of those who didn’t
The actual margins of these two subsets were also different, with capital-cost-conscious subcontractors reporting an average profit margin of 14.1%, nearly 2 percentage points higher than their non-accounting peers.
Subcontractors who account for the cost of working capital tend to have better GC relationships than those who don’t account for it. Both groups experienced slow pay with the same frequency, but there were other benchmarks that cost-accounting subs outperformed their peers on.
These subcontractors were more likely to report that their GCs understood the importance of prompt payment to trade partners. Those GCs were also more likely to pass that message along to property owners. This mutual understanding is a signifier of more harmonious working relationships.
There was a significant difference in the business growth prospects of this subset as well. 79% of subcontractors who increased bids planned for growth in 2024, compared to just 67% of those who didn’t raise their bids.
They were also 7% more likely to take on larger projects in 2024, and 15% less likely to fund their growth with their own cash, a practice that takes valuable working capital away from growth initiatives.
When pressed as to how they plan to fund growth, a majority of subcontractors favor using finite cash reserves. While cash on hand is the most popular way to fund business growth, very few subcontractors rely exclusively on cash. Most use supplementary financing methods in combination with cash.
Financing tools are vital to a subcontractors’ formula for growth, but the ability to attain new financing is a struggle for many.
We’ve seen an uptick in technology adoption across the industry for well over a decade. The survey showed that more and more companies are turning to the widely available technologies that serve construction. Estimating and takeoff software are now used by 71% of respondents, compared with 62% just one year ago. Bid management and project accounting also saw significant year over year gains, pushing construction toward a more modern future.
One thing genuinely struck me in this year’s report: the fact that half of subs don’t charge for the cost of their working capital. However, it was clear why those that do have demonstrably higher profit, higher revenue and have bigger growth plans for this year.
Accounting for costs matters in an industry where staying in the black is an uphill battle. Unlike other markets, construction operates on a razor thin margin and turbulent cash flow. Subs are constantly fighting to get paid fairly on change orders, compete with lower bids, and collect payment before working capital options reserves run dry. That means a few percentage points of profit carry a lot of weight. You won’t catch 50% of subs saying they don’t charge for materials, labor, equipment or change orders. But cost of working capital–nearly half of all subs admittedly eat the cost? At Billd, we advocate for subcontractors at every level. We want to see them get paid fairly and promptly, but they can’t collect on what they never charged for.
We hope that the report emboldens subcontractors nationwide to seek out the timely payment they deserve. Subs incur astronomic cash deficits when they don’t leverage all their working capital options (cash, supplier terms, bank lines of credit and material financing). While cash may have the lowest, real costs, its finite and subcontractors should have all other options available to manage their working capital proactively. When you combine that capital stack, the costs should be included in all bids. Reflecting that cost in bids ensures the sub can financially thrive, but most importantly, that they can grow. The true injustice here is not that 48% of subs are eating the cost of financing; it’s that they’re hindering their own growth.
Every year, this report shows financial challenges and opportunities facing the subcontractor. Billd is a company that formed in response to that. Our subcontractor-specific financing tools are the closest thing to a cure for the financial pains that subs endure. As a company, we were built with subs in mind. Billd is in constant search of new ways to support the trades. Without fail, when surveyed, subs show a determination to grow their business. We are singularly committed to propelling that growth.
Christopher Doyle is an entrepreneur and business leader with extensive construction and finance industry experience. He is the co-founder and CEO of Billd, a disruptive payment solution for the construction industry that helps subcontractors and suppliers grow their businesses with less hassle and risk. Recognizing the cash flow hurdles that contractors face, Doyle launched Billd to make traditional Wall Street working capital accessible to business owners in the construction industry.
Billd stands alone as a partner that truly champions the subcontractor. Their financial and payment products empower subcontractors to bypass project hurdles by providing access to upfront funds to cover their most pressing costs, including materials and labor. Unlike traditional financing outlets, Billd provides flexible lines of credit to accommodate the unpredictability of cash flow in construction, and extends their customers longer terms to align with industry payment standards. Billd knows traditional credit metrics are poor predictors for risk and has built a variety of industry-specific, proprietary analytic and financing tools to allow subcontractors to stabilize cash flow and more effectively grow their businesses.
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