U.S. subcontractors are heading into the second half of 2023 facing a mixed bag of issues.
Inflation costs and labor availability add persistent pressure, and pandemic-induced supply chain issues haven’t entirely resolved. But most subs had business revenue growth in 2022 and expect growth this year.
That’s what Billd, an Austin, Texas-based construction financial support firm, found in its third annual National Subcontractor Market Report Survey of nearly 900 subcontractors in January. Those working to keep the subcontractor part of the construction industry afloat while still fighting some tricky headwinds have different strategies for navigating the uncertain landscape.
Here are some of their top concerns:
Skilled worker shortage
Labor continues to be an issue for subcontractors. Billd found that 49% of respondents said lack of availability of skilled, affordable construction labor will be the biggest risk to their business this year. Part of that is financial: Labor costs have gone up 15% since 2022, according to the report.
But it’s also demand. The $1.2 trillion Infrastructure Investment and Jobs Act means that contractors will need hundreds of thousands of workers to deliver those projects. At the same time, pandemic-related retirements have created a gaping talent hole.
“A lot of folks that were in their early 60s got out and they didn’t come back,” said Chuck Goodrich, president and CEO of Indianapolis, Indiana-based Gaylor Electric. “We’re replacing those 30-year vets, 40-year vets, with 18- to 30-year-olds who have either entered the construction force or are just coming out of school.”
A determined focus on training and education, such as investment in programs that recruit young people, is helping, said Goodrich. That includes a change to negative perceptions of working in the construction trades and providing education and training opportunities directly to high school students to prepare them for careers in the field. (Goodrich is also a member of the Indiana House of Representatives, and works on initiatives in this direction.)
But rushing workers into these jobs can backfire, said Spencer Krebs, associate at Cleveland-based law firm Tucker Ellis LLP.
“When you don’t have quality workers, you tend to hire folks who are less qualified and result in potential claims, or delays or defects. These issues have a trickle-down effect and really hurt their bottom line,” he said of subcontractors.
Inflation and materials issues
While many pandemic-related pressures have eased, inflation has not. Billd found that subcontractors paid an extra $97 billion in materials (26% increase) and labor (15% increase) than expected. In addition, one third of subcontractors reported a decline in profits because bids were not rising fast enough to stay in line with input costs.
This has especially become a problem for subcontractors that signed fixed price contracts, as diesel and fuel prices have skyrocketed, said Krebs. Some of his firm’s clients aren’t as worried about making a profit as worried about “not going into the red,” he said, because prices have spiked.
The good news is that supply chain chaos has leveled off, said Goodrich. Lead times are still long, but they’re consistent. During the pandemic, for example, the lead time for a 200-amp switchboard might have started at 12 weeks and stretched to around 40 weeks or even 60 weeks. While the lead time still may be 40 weeks, at least it’s sticking in one place.
“It’s still tremendously long, but at least now it can be built into schedules,” he said.
Cash flow disruptions
Subcontractors are still paying out of pocket before getting paid themselves, according to Billd: 87% of respondents reported doing so, up from 62% in 2022.
Goodrich said he sees shades of the 2008-2009 recession where it was “not so much that we weren’t running our business, but that we stopped getting paid,” he said. Payment terms went out as far as 90 days, but vendors expected to be paid in 30. Right now, subcontractors pay for labor and materials before getting paid themselves, with an average wait time of 74 days, the survey said.
Working closely with general contractors and owners and having ongoing discussions about these pressures, has helped, as has working together to stick to a finish date and determine “what we’re going to do to get there.” Such collaboration means “having a partnership instead of adversarial relationship,” Goodrich said.
Despite these continuing disruptions, not all is lost. Despite 57% of respondents reporting a decrease in profitability, 61% still had business revenue growth in 2022, and 72% of subcontractors plan for growth in 2023.
Goodrich admits that he’s an “unapologetic, passionate optimist,” and that he sees continuing better days ahead for subcontractors.
“Inflation has come down. We’re working tremendously hard on students coming into our business, so I think that will improve,” he said.