Cash Flow Issues: calculator illustration

Multiple recent industry surveys have indicated that subcontractors around the US are looking positively to the future in terms of business growth — but must content with looming pandemic effects, cash flow, and financing issues.

According to a May 2021 report from construction finance company Billd, commercial subcontractors nationwide are hoping to expand operations in 2021, even with the obstacles caused by the COVID-19 pandemic. However, as the report notes, issues with cash flow and financing could severely hamper these goals and continue to hold back this growth.

As per a press release from Billd, after surveying 572 general contractors and subcontractors, the survey’s responses “call attention to persistent construction industry challenges that prevent business growth, including a lack of access to capital, inconsistent payment cycles and the insufficient length of supplier terms.”

Nearly 75% of the subcontractors surveyed noted that they were planning to expand business operations during 2021 — a desire threatened by the fact that 46% of the respondents also noted that they have had problems with maintaining proper cash flow.

Many subcontractors are struggling with outside financing, as well. 30% of respondents noted that they find it challenging to get new sources of financing.

“Subcontractors have an incredible entrepreneurial spirit,” said Billd CEO Chris Doyle of the survey’s results. “Unfortunately, traditional banks and lending institutions are hesitant to do business with construction companies due to their perceived risk, which means subcontractors are often undercapitalized and left trying to finance growth with limited free cash flow.”

Additionally, 63% of the survey’s respondents reported having to pay for materials before getting paid for work done — less than 4% have supplier terms longer than 60 days, a significant hindrance as it often takes between 60 and 90 days for contractors to get paid.

“We don’t view construction companies as having higher risk than other industries — we just understand the nature of their business and how the payment cycles work,” Doyle added. “If contractors truly want to conquer their cash-flow issues and grow their businesses, they need better terms that align with their payment cycles.”

Overall, the survey suggests a high number of subcontractors are concerned about the remaining year for the industry — 39% expect access to funding to have a significant impact on their businesses during 2021.

Levelset’s 2021 Construction Cash Flow & Payment Report points to similar significant issues for subcontractors

Levelset’s 2021 Construction Cash Flow & Payment Report — based on a survey of 764 construction professionals and exploring the challenges faced by those in the US building industry — offered strikingly similar responses to other recent studies, displaying that subcontractor concern is widespread.

According to many respondents, cash flow and payment problems are causing mental health issues, as 97% of respondents to the overall survey said that they are stressed over payment problems.

General contractors are often delayed in paying subcontractors until they have been paid by the owner, leading one respondent to note that “lack of prompt payment is putting subcontractors out of business.”

Respondents to the survey noted a number of problems with their treatment by general contractors, with some expressing concern over the lack of penalties for general contractors who hold on to payments owed to subcontractors.

Some respondents noted that general contractors’ priorities are not in line with that of subcontractors; some said that it seems “like they are paying other bills instead of their subcontractors” and worry that some general contractors use the cover of the industry’s payment problems as a way to actually avoid payment.

Compared to general contractors, subcontractors are also more often forced to put up money at the start of a project. According to the Levelset survey’s respondents, general contractors are over twice as likely to receive an upfront deposit than subcontractors: 60% of general contractors say they always or often receive a deposit, compared to just 27% of responding subcontractors.

On top of this, the issue of retainage — an aspect of many construction contracts that can hold back a substantial amount of a contract’s value until after project completion — has impacted subcontractors much more significantly than general contractors.

According to the Levelset survey, 35% of subcontractors say that retainage is always withheld from their contract — an issue that affects only 17% of general contractors. Additionally, 40% of subcontractors who responded to the survey said that they have to wait more than 90 days to collect retainage on a project.

Subcontractors have also reported that they are more likely to be paid later than general contractors: Shockingly, fewer than 1 in 10 subcontractors say they always get paid in full. Though 17% of general contractors say they always get paid on time according to their contract, only about 6% of subcontractors say the same.

Prior studies have shown that construction cash flow is a significant issue — even outside of the pandemic

Even though the pandemic has had a huge impact on cash flow, the issue isn’t new to the industry.

A 2019 study from construction finance platform Rabbet found that slow payments were costing general contractors and subcontractors $64 billion a year. The 2018 edition of the company’s study found that subcontractors specifically were losing $40 billion yearly.

The 2019 study noted that respondents had a 51-day average turnaround on payment, a number that is particularly difficult for subcontractors who have to pay for labor or materials in a much shorter time span. 

More than 60% of subcontractor respondents noted that they had chosen not to bid on certain projects if the owner or general contractor has a reputation for paying late, with 72% adding they “would offer a 1% to 5% discount for quicker payments” if given the option.

Similarly to Billd’s 2021 report, only 39% of subcontractor respondents to the 2019 Rabbet study said that they could cover late payments with existing funds. Respondents noted that this caused them to have to use lines of credit, personal savings, and retirement savings in order to cover the costs.

According to Levelset’s 2021 Construction Cash Flow & Payment Report, the average DSO (Day Sales Outstanding) for payment in the construction industry in 2018 was 83 days after completion of a contract, and the ongoing COVID-19 pandemic has made this even more pronounced in the following years as projects and funding continue to be disrupted and delayed.

As contractors of all types attempt to rebound from the effects of the pandemic — the construction industry is projected to grow by 15% in 2021 — subcontractors will hope to see positive changes in the ways that cash flow affects their business operations and hopeful expansions.