Material and labor costs are rising, rising, rising, and one new report digs into the impact these extra material and labor costs are having on subcontractors, suggesting they bear the brunt of the rising costs to the tune of billions in unplanned expenses.
This is according to the third annual report from Billd titled 2023 National Subcontractor Market Report: $97 Billion in Extra Weight on the Shoulders of America’s Subcontractors. The company surveyed about 900 commercial construction professionals across the country. Most were business owners or executives who have been in business for 10 years or longer.
This issue of rising material costs and price volatility isn’t necessarily a new one. In fact, the company found 81% of those surveyed report a negative effect on their businesses in 2022; with 80% of them expecting that trend to continue in the future. The challenge is material costs continue to rise. In fact, 26% report they see this happening.
Another ongoing challenge for many in the construction industry is the labor shortage—something Peggy Smedley continues to address regularly. This is a big hurdle particularly for skilled trades, something that is compounded by an average 15% increase in labor cost.
The Billd report suggests together those increases amounted to roughly $97 billion in additional expenses for the subs. While some increase their bids to offset these rising costs, a whopping one-third of respondents were unable to do so. This resulted in 57% of businesses reporting a decrease in profitability, despite 61% reporting revenue growth.
The solutions are few and far between. Certainly, technology can step in and fill in some of the gaps left by the labor force—but that doesn’t necessarily solve for the rising material costs. Bidding and estimating technology have long existed to help construction professionals operate on razor thin margins.
Billd points to new financing options for subs. 72% of respondents report having supplier terms of 30 days or less. Compared to a 74-day average wait time for payment, it is no surprise that 51% deem the length of their terms insufficient. Supplier terms also have an unforeseen cost; most suppliers (also surveyed) state they offer discounts for upfront payment.
Despite those disadvantages, 87% of respondents still rely on supplier terms as their predominant means of buying materials. When it comes to funding their increasing labor costs, traditional financing options are even less accessible, leaving 87% of respondents coming out of pocket for labor before getting paid themselves. Luckily, the report highlights financial relief for labor as well as materials.
What are your thoughts? How does the construction industry solve the challenge of the rising costs of, well, everything? How can they still turn a profit in this economy, yet remain competitive?
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