Subcontractor Strength Will Drive Industry’s Ability to Meet Demand, Overcome Challenges

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Options are few for this group, which is held responsible for meeting schedules and budgets while often being the last to get paid.

So what’s the answer? Subcontractors are a bellwether of industry success—it’s time to take better care of these essential partners.

Contractual Adjustments

One of the first areas of adjustment has been in the contractual terms between the general contractor and trade partners. The days of pay-when-paid, pay-if-paid, and similar contingency provisions are not going to cut it if the industry wants to maintain and strengthen the subcontractor supply chain.

Smart general contractors are having intense conversations with favored subcontractors to incorporate contractual terms that are agreeable for both parties. For instance, mobilization fees are working their way back into many contract terms. These fees help cover a wide net of provisions, including transportation, fuel, equipment rental, initial materials, tools as well as site prep activities. When provided in advance of a project start, mobilization advances can help maintain a subcontractor’s cash flow.

Now is also a good time for subcontractors to review retainage policies contracts. Reducing retainage is a great way to speed up cash flow.

For general contractors, assuring cash flow is often a balance between state regulations and availability. For example, contractor and supplier diversity requirements, especially on public projects, are expanding. In many states, payment terms for small-, minority-, women-, veteran- and LGBTQ+-owned businesses are set by law and can require weekly payments. This can cause general contractors to prioritize one group of subcontractors over another, exacerbating subcontractors’ risk of cash flow challenges.

Relationship Focused

The December session hosted by DPR Construction focused on ABC and mental health. Guest speakers included a past board chair and a current board director talking about the history of the association, its philosophy, and its role as the voice of merit shop construction. Students heard from Ashley Grimes, president of the National Alliance on Mental Illness, and Amber Addario, program director, Project Opioid, about real-life experiences about addiction and mental illness, ways to notice signs of distress, and how to use Narcan on the jobsite or in an emergency. Future sessions of the program will include meeting at Gray|Robinson, P.A. in Orlando to discuss public policy, law, and political advocacy where they will be joined by a panel of representatives from Shutts & Bowen, LLP; Kirwin Norris, P.A.; Dean Mead Attorneys at Law; as well as Carol Bowen, ABC of Florida’s chief lobbyist.

If you are interested in learning more about the NEXGEN Leadership Program, please contact Corey Schoenfelder at training@abccentralflorida.org. For more information on Project Opioid and Mental Illness please visit these websites: careersourcecentralflorida.com/forte projectopioid.org namiflorida.org

When it comes to paying for materials, subcontractors can work closely with suppliers for longer payment terms. They can also borrow money from credit lines, which works, but will also put additional strain on the businesses if there’s a lull in project start times. Beware of rising interest rates, though. Investigating credit card cashback programs might be an option.

Receivables financing is another strong option. This method leverages an owner or general contractor’s credit position to pay subcontractors in days instead of weeks and months. It’s not a loan and, therefore, it’s not a debt. One of the biggest benefits is that it allows for much greater predictability around cash flow with no interest accumulation and fees that are much lower than conventional bank loans.

Some general contractors are even enrolling their favored subcontractors in a receivables financing program, and paying the associated fees, to strengthen subcontractor relationships and build trust.

Inflation, continued supply chain issues and even workforce shortages are real challenges—and contractors of all types and sizes are buckling up for a couple of tough years.

As the bellwethers of all trends, good and bad, subcontractors are essentially the heart of the construction industry. Their cash flow problems affect every facet of the industry, from the suppliers to the general contractors, owners and developers. The owners and general contractors that find a way to support and strengthen those project partners will see the greatest success in the next few years and beyond.

Reprinted from Construction Executive, September 2022, a publication of Associated Builders and Contractors. Copyright 2022. All rights reserved.