A new survey of subcontractors shows tough economic conditions are creating problems not just on companies' bottom lines but with the relationships contractors have with their suppliers.
The 2023 “National Subcontractor Market Report” from Billd surveyed nearly 900 subcontractors and general contractors on the impacts of market conditions and trends on growth, profit margins, and relationship dynamics. These included questions about working with suppliers, which did not paint a rosy picture.
Although most respondents, 61%, said they experienced growth in revenue in 2022, nearly as many of those same respondents, 57%, reported stagnant growth or declines in profitability.
“The overall decline in profitability is not unique to 2022,” the report states. “Not only is this the second consecutive year that subcontractors reported strained profit margins, but the figure also hasn’t changed a single percentage point.”
Part of this is likely from subcontractors paying more in materials and labor. The report said subcontractors paid an extra $97 billion more than expected. Labor costs increased by 15% on average in 2022, and material spending increased by 26% in 2022. Inflation is only partly to blame – the year-over-year rate increase in material and labor spending is 2.5 times greater than year-over-year inflation, the report states.
“Material and labor costs within the construction industry simply rise far faster on their own,” the report says.
Strained Supplier-Subcontractor Relations
Material pricing isn’t as big of a concern as noted in last year’s report, though subcontractors are still reporting their effects. Respondents said material costs increased by 26% on average in 2022, with 66% of subcontractors saying high or volatile prices negatively impacted them in 2022. Eighty percent expect material prices to once more impact business in 2023.
Lead times are also affecting supplier customers, with 81% saying material availability and increases in lead times “negatively impacted their business” in 2022, with 76% saying these will impact their businesses in 2023.
As a result, the relationship between supplier and subcontractor shows signs of strain. Nearly three-fourths of respondents said material price volatility negatively impacted their supplier relationships. Similarly, 53% said lead times negatively affected their relationships with suppliers.
“Subcontractors and their suppliers are having uncomfortable conversations about price hikes, long lead times, and inflexible terms,” the report states. “This forced subcontractors to seek out new supplier relationships in 2022 to diversify their options.”
To put a finer point on it, 65% of respondents sought out new suppliers due to the challenges caused by material procurement.
That said, subcontractors still rely on suppliers more than any other method for purchasing materials. Around 90% of subcontractors have terms with suppliers and 87% use terms with relative frequency. More than half [60%] use terms more than any other option, which includes credit cards, lines of credit, upfront with cash and material financing.
The survey found, however, that most subcontractors view terms as “inadequate” for the time it takes to get paid for work, given the average 74-day payment time. Survey respondents said the most common terms offered are 30 days, reported at 69%, followed by 60 days at 15%.
Of those who responded to the survey, 41% said they felt their suppliers don’t support their business by being flexible with credit terms. Additionally, 32% said suppliers “negatively adjusted their terms” in 2022 due to increased prices or longer lead times.
Discounts offered by suppliers are helpful, but subcontractors can’t take advantage of them. Respondents said they’re offered a 2% discount when paying upfront in cash, but tight cash flow prevents them from taking advantage of these discounts.
“A good solution to this is to leverage material financing,” the report says. “Material financing provides subcontractors significantly more negotiating power by paying upfront and extending longer terms to pay for the materials.”
Not all of the blame is pointed at suppliers. The report reveals subcontractors are paying for materials and labor out of pocket: 87% of subcontractors said they had to pay for labor and materials before they were paid, with an average wait time of 74 days.
To that end, roofing distributors can repair strained relationships by supporting customers in the payment process. Thea Dudley, CEO of Pocket Protectors, told Roofing Supply Pro that resources like pre-lien notifications could help their customers get paid faster.“If I'm a subcontractor and I'm having trouble getting paid, I'm going to reach out to my supplier and say, ‘Listen, did you secure your lien rights on this? Can you help me find out and help me see if they're telling me the truth?’”