Subcontractors are reportedly spending billions more on supplies and labor while simultaneously experiencing a decline in profits, according to an annual survey.

Billd released the results of its “2023 National Subcontractor Market Report” that asked subcontractors around the country what challenges they faced in 2022 and what they’re forecasting for the coming year. The results, which contain bright spots, ultimately show subcontractors are struggling to remain profitable.

The report, which surveyed nearly 900 subcontractors, shows that 61% of them grew revenues in 2022 and plan on doubling down in 2023. However, despite these gains, 57% say they saw stagnant growth or decreases in profitability.

“A combination of inflation, higher expenses, and hard bid scenarios are to blame,” the report states.

The report indicates this is the second consecutive year subcontractors reported strained profits. When digging into the data further, multiple pain points emerge.

The labor shortage is among the main contributors of higher spending. Labor costs went up by 15%, according to survey respondents, with 87% saying they’re paying out of pocket for labor before receiving payments from jobs.

The data tells a similar story on the material side. Respondents said material costs increased by 26% on average in 2022. A majority (78%) increased their bids to offset the rise in material prices. Coupled with material delays, which 81% reported had a negative impact on their business in 2022, subcontractors are having to pay more overall to do business.

To put a finer point on it, Billd’s report shows subcontractors paid an extra $97 billion out of their bank accounts for labor and materials.

Inflation is partly to blame, but not entirely. According to the report, subcontractor spending outpaced inflation – the year-over-year rate increase in material and labor spending is 2.5 times greater than year-over-year inflation.

“It represents 97 billion instances of subcontractors financing the entire industry, all while navigating uncertainty in their payment cycles and subpar access to capital,” the report states.

Supplier Strains

These lingering effects from the pandemic are not only hurting bottom lines, they’re impacting contractor-supplier relationships. Around three-fourths of respondents said material price volatility negatively affected their relationships with suppliers, while 53% said lead times negatively impacted those same relationships. This caused 63% of respondents to seek out new suppliers in 2022.

Further straining these relationships are delayed payments. The survey found that the average number of days subcontractors had to wait before receiving payment for a job was 74 days. Some even reported having to wait up to 120 days. Due to the delays, 73% of respondents said they had to pay for materials before receiving payment from the general contractor or property owner in 2022, up from 66% in 2021.

“The pain of slow payment cycles is not readily apparent to many [general contractors]. As a result, [general contractors] casually throw out payment timelines to the tune of ‘30’ or ‘60’ days, as if those aren’t starkly different timelines with starkly different consequences for the subcontractor’s cash flow,” the report states.

As the saying goes, “cash is king,” which is why subcontractors are depending on it in order to fund business growth in 2023. A total of 63% said they plan on using cash on hand to fund their growth, followed by 51% using lines of credit. Only 23% plan to use credit cards, while 16% are using material financing.

“When it comes to obtaining working capital, subs aren’t in an ideal position,” said Chris Doyle, CEO of Billd, in the report. “They generally carry low cash balances, are owner operated, have unpredictable AR, and are not well understood by the traditional institutions that could fill their working capital gaps. These factors contribute to the fact that nearly a quarter of subs find it difficult to obtain new sources of financing.”

Despite all these challenges, subcontractors are hopeful about the future. According to the report, 72% plan to grow their business this year, and 58% are interested in going after larger projects, up from 50% in 2022.

“Those who do not plan to grow are focused on conserving cash and obtaining financing to help them in that endeavor,” the report said.