Boom or Bust – How the Construction Industry Can Protect Subcontractors
By 4 minute read• Published June 29, 2022 •
The construction industry – like many – is starting to see signs of a slowdown on the horizon as economic headwinds gain speed. Among those most susceptible to these headwinds are subcontractors.
It’s important to point out that subcontractors are no stranger to headwinds – they’re often the first to feel disruptive forces and there have been plenty in recent years. Fissures in the supply chain existed before the pandemic thrust them into the spotlight. Once exposed, the pain became more acute as lead times for materials surged and labor shortages persisted.
To some extent, these challenges have abated – but only to be replaced with new ones. Economic conditions are applying downward pressure on demand in some markets. Labor shortages are still a concern. Inflation is driving up the cost of materials. These factors, among others, are slowing down the movement of cash between builders and their subcontractors. And that spells serious concern for both parties.
Cash Flow Stabilization a Top Priority as Economic Volatility Persists
To help stabilize cash flow, many builders are inspecting subcontractor payment terms for optimization opportunities. How can we standardize payment terms across our entire base of subcontractors? Are we paying our subcontractors sooner or later than we should? How can we reduce liquidity costs? These are a few of the financial questions keeping building and construction industry executives up at night.
At the other end of the supply chain, subcontractors are asking their own tough questions – especially those that fall into the small business category. How can I ensure I have enough liquidity on hand to make sure I have the materials and labor available to do the job? Will my invoices be paid on time?
The Benefits of Supply Chain Finance to Subcontractors in the Building and Construction Industry
Over the economic cycles of the last two decades, leaders in the building and construction industry have turned to supply chain finance to alleviate cash flow and payment visibility concerns for their own operations. Today, we’re seeing a new wave of interest as businesses try to protect their subcontractors from financial disruption. Our clients in the industry are realizing the benefits to subcontractors is just as great as what they’re experiencing within their own operations.
One example is Project Masters, a specialty construction management services firm located in the Midwestern U.S. For years, one of the company’s largest customers paid twice a month on 45-day payment terms. When those terms were doubled to 90 days, the company decided to take action. Another challenge in the mix was forecasting cash flow. It was a manual process and there were significant payment delays when invoices weren’t processed correctly.
“At the beginning of the month, I would pull down all receivables and estimate how much I thought we would get paid on those two days per month. If there was an issue, like when the customer accidentally changed our subcontractor classification, I would have to factor that in and wait another week or two for them to figure it out and pay,” said co-founder Randy Breckenkamp.
Project Masters was approached to participate in their customer’s supply chain finance program, which was offered to help suppliers and subcontractors track and accelerate invoice payments through a PrimeRevenue-led supply chain finance program. In less than three weeks, Project Masters had been successfully onboarded had received its first payment. The company now had visibility into payment status, the option to accelerate payment when needed, and a fully transparent and accurate view into cash flow with its largest customer.
“We were able to increase bank cash by $200,000 just by moving to PrimeRevenue,” said Breckenkamp. “I tell other subcontractors all the time that you’re crazy not to participate in the program. There’s no better way to get cash up front when you’re a second, third or fourth-tier subcontractor.”
If you want to learn more about how PrimeRevenue is helping companies in the building and construction industry improve cash flow, contact us.