During the pandemic, supply chain challenges have dominated the news. Materials costs have skyrocketed, forcing contractors to pay significantly more out of pocket to procure materials, seriously depleting cash flow. Over the last 18 months, lumber costs increased 122%, steel mill products 123%, copper and wire cable 101% and diesel fuel 201%, while demand continues to rise with little relief in sight. While rising materials costs are clearly a major challenge for commercial contractors, another equally daunting dilemma is battering the construction industry: the worsening labor shortage.
As with materials costs, the post-COVID-19 labor crisis is impacting nearly every industry from retail, restaurant and service sectors to even Wall Street, but few have been hit harder than construction. Staffing shortages are a long-standing construction issue. In fact, the unfilled construction jobs nationwide is near its highest level in 20 years. Overall, the industry will need to hire 1 million workers over the next two years to keep up with residential and commercial demand.
Meanwhile, the labor crisis is a serious challenge for commercial construction. The recent U.S. Chamber of Commerce Commercial Construction Index (CCI) showed over 90% of commercial contractors reported some level of difficulty finding skilled workers, while 55% indicated high levels of difficulty—a 10% jump from Spring. The worker shortage is crushing contractor’s bottom lines, with 73% reporting difficulty meeting project deadlines and 61% reporting significant project delays. Furthermore, contractors have increased bids by only 5% while their costs have risen almost 30%.
Unlike restaurants, retail or hospitality, pay increases are not a silver bullet for construction. First, the average hourly construction wage is nearly 50% higher than the average $11.26 hourly U.S. wage, and 73% of contractors have already increased base pay rates during the past year, with scant results. Finally, pent-up demand, long lead time for materials and rising costs have caused overall housing and commercial costs to soar. Simply adding in higher wages into the mix will further raise those costs, decimate small contractors, and ultimately lead to significantly higher costs for consumers.
The burden of dealing with these twin challenges falls on subcontractors, who must pay for rising material and labor costs upfront, all before they are paid for their work. With narrow and declining margins, inconsistent or unavailable cash flow and limited financing options, subcontractors are struggling to keep up and have little options.
Subcontractors sit at the bottom of the payment stream and are typically the last to get paid on a construction project, often waiting 60-90 days to be paid for completed work. Relying on cash-on-hand to pay upfront for labor or materials has become untenable, and near impossible to reliably finance the expenses to keep projects running on time, let alone scale their business. In fact, the lack of reliable funds significantly increases a subcontractors’ risk of losing a project, and ultimately increases project risk for property owners and general contractors. Thankfully, new, reliable labor advance financing is now available to subcontractors to ensure they have the liquidity to pay their crew on time and to deliver timely and successful results.
When contractors are not paid on time, which happens frequently, they must dig into their pockets to pay for labor, putting significant, undue stress on their businesses. As labor costs have spiked, pay advance options can stabilize cash flow and help subcontractors continue to grow their business. These effective solutions provide subcontractors same-day financing on completed work with approved pay apps, eliminating the responsibility of the subcontractor to float their own capital to fund projects and pay their workers. The most complete solutions on the market give commercial subcontractors access to financing for the two largest expenses on a project—materials and labor—and ensure they have the resources and purchasing power they need to not only remain liquid throughout the entire project, but also to take control of their cash flow and grow their businesses.
Subcontractors are being hammered by skyrocketing material financing costs and the pernicious construction labor shortage. With demand increasing and limited options to quickly increase the number of workers, subcontractors need new, reliable financing options to balance their outgoing funding responsibilities and incoming cash flow. Pay advance options are a critical new tool that guarantees subcontractors secure the workers they need to ensure projects are completed and to lay the foundation for future growth and success.