A Look at Financing as a Stopgap for Shortages & Supply Chain Issues

After decades of gridlock and inattention, there appears to be a breakthrough on infrastructure investment. Passage of the currently proposed plan will provide the most significant investment in highways, ports and other critical projects in decades and would bring with it extraordinary opportunities for growth. But silver linings often conceal dark clouds. How will contractors and subcontractors, already facing labor crunch and historic supply chain challenges, find the needed resources to complete projects currently in the pipeline and strengthen their position?

In July 2021, the United States Senate passed the $1.2 trillion bipartisan infrastructure plan, and an even larger $3.5 trillion plan is still under consideration. The Infrastructure Investment and Jobs Act (IIJA) provides $550 billion in spending on vital new road, bridge, water, utility green energy and broadband projects. Taken together, the proposal represents the most significant investment in critical infrastructure projects in decades. While this substantial infusion of money into important projects is a net positive for the industry, it will also exacerbate current difficulties and create new challenges by forcing housing, commercial and infrastructure projects to battle for labor and materials.

More Money, More Problems

When the COVID-19 pandemic struck in 2020, the construction industry was not spared from the economic downturn. Construction employment plunged by 15% — 1.1 million jobs — in the first two months, nearly identical to the drop experienced across other sectors. The federal Paycheck Protection Program (PPP) allowed the industry to keep many workers and projects online. Demand for housing exploded, leading to a record in new home starts, which even now shows little sign of abating. Homebuilding growth buoyed the entire industry last year.

In contrast, commercial construction experienced little overall growth in 2020, and not much has changed in 2021. According to the Association of General Contractors (AGC), nearly 4 in 5 contractors reported one or more projects had been canceled or postponed since the beginning of the pandemic. At the same time, only one-fourth reported winning new work or add-ons to existing projects because of the pandemic. Commercial contractors are struggling to recover, and the pandemic has exacerbated longtime, systemic challenges. Perhaps the greatest challenge facing commercial construction industry is a dramatic shortage of skilled workers. The AGC believes that an additional 430,000 workers this year and 1 million more over the next two years are needed to keep up with demand. Finding skilled workers has long been a problem in commercial construction. And COVID-19 has only made it worse.

According to the U.S. Chamber of Commerce, 88% of contractors are finding it difficult to attract skilled construction workers, with 45% reporting a high level of difficulty. There have been improvements on the labor front in 2021 but, overall the industry is still losing more people than it is bringing in.

The second major challenge is a critical shortage of building materials. The pandemic devastated supply chains across the globe, and the torrid U.S. homebuilding boom is swallowing up lumber, concrete and other essential materials. Nearly half of commercial construction contractors say that lack of available materials is a top concern, and 71% say they face at least one major material shortage.

These supply chain issues are increasing project delays and raising prices. In two years, the price of lumber has jumped as much as 73%, and iron and steel by over 50%. Even if building supply production stabilizes, the ongoing pandemic can force sudden, major disruptions in the supply chain. Of course, these issues certainly affect every sector of the economy, but the price of potatoes and cooking oil hasn’t skyrocketed over the last year. How can contractors and subcontractors adapt to meet these challenges? Predictable, reliable finance options are necessary.

Cash Flow & Growth

Today, it is commonplace for contractors and subcontractors to lack financing to bid on projects and grow. The truth is supply chain finance in the construction industry has been broken for decades, as traditional lending services typically leave contractors and subcontractors behind.

With so many projects already waiting at the starting gate, the skyrocketing home building industry and now potentially hundreds of major infrastructure projects joining the pipeline, contractors and subcontractors face even greater competition for resources and workers.

Every subcontractor faces the same dilemma: needing to pay for materials, labor and general and administrative expenses each month. Project payment is contingent upon multiple factors, with the potential for delays in the payment chain. Subcontractors and suppliers are typically the last to get paid, often waiting 60 to 90 days for completed work. Cash flow alone is too unpredictable to pay on time for labor or materials, let alone finance
the expenses that come with scaling a business.

Cash flow issues simply do not discriminate in the construction industry. Today, subcontractors sit at the bottom of the payment stream. More established subcontractors have a variety of options at their disposal, but young business have a tough time getting the financing needed to succeed. For any up-and-coming construction entrepreneur, the question is how do you access the construction financing options available to the major players and utilize them to scale your business?

Flexible financing options have become integral to conducting business in this turbulent market. Without a landscape of supportive and flexible financing options it will become increasingly difficult to do business at all in our industry. Subcontractors are business owners for whom access to capital isn’t a “nice to have,” but a necessity.

Lack of reliable funds significantly increases subcontractors’ risk of losing a project because poor cash flow can delay on-time payment to suppliers, put critically needed materials at risk, create delays and cost overruns. If you fail to do the work on time, you won’t keep the job, and won’t get new ones. When a GC replaces a subcontractor, they face expensive rework, change orders and further delays. Reliable, consistent financing ensures subcontractors deliver successful results every time, helping the GCs avoid extra work, stress and potential delays.

Taking advantage of material finance options ensures suppliers are paid cash up front and guarantees materials will be delivered reliably. Not only do material deliveries flow in, but subcontractors have more time to pay for them. What supplier doesn’t want to work with a sub who pays cash in full on every purchase? Material financing ensures immediate payment to your supplier, essentially eliminating any credit risk they otherwise would have taken on. In addition, with cash payments come cash discounts — making material financing one of the smartest ways for contractors to get a better deal on their project materials.

In this current market — when the supply chain and prices are terribly unpredictable, finding workers is more difficult than ever and opportunity and competition is set to skyrocket — relying only on cash flow to win and complete projects on schedule is a risky bet. Contractors and subcontractors will need adapt and take advantage of new tools if they want to succeed and grow.