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Subcontracting

June 22, 2009

 

This construction business would be a lot easier if we could just make products and not have to worry about getting them installed. However, whether you are contractually responsible for the installation or not, you and your products are inextricably tied to subcontracting.

 

How so? Follow the money.

 

Construction in the United States is not financed (short term) by banks, owners or anyone else. When it comes to short term financing for non-residential construction, that burden is carried by the subcontractor. In most cases, subcontractors are required to pay for materials and labor far in advance of getting paid by owners through general contractors.

If you are not a subcontractor, the burden that the subcontractor bears may be news to you. Let us look at a typical cash flow for a subcontractor, backing up from the time the subcontractor is paid:

  1. Subcontractor receives payment – Day 0
  2. Subcontractor submits pay request – 60 Days – On Average
  3. Payment to Field Forces – 90 Days
  4. Payment of Shop Labor – 120 Days
  5. Payment of Raw Materials – 150 Days

 

So, in this simplistic example, the subcontractor has been spending money at least 150 days in advance of receiving payment.

 

You may be thinking, “too bad;” I am glad that does not affect me. If so, you would be wrong and here is how:

  • If you are an owner, the subcontractor must price into the proposal markup that will allow him to be able to finance this extended length of time. Unfortunately, the rates that the subcontractor can obtain through a bank line of credit are limiting and very expensive when compared to project based financing to which the owner has access.
  • If you are a general contractor, the number and diversity of subcontractors is extremely limited because of the need to furnish the required short term financing and the bonding requirements of many projects. Just think about how many very talented tradesmen and business owners could participate in subcontracting if the terms of payment fostered the development of young companies.
  • If you are a material supplier, your payment assurance and timing would be greatly enhanced if the subcontractor could receive payment earlier.

 

Bottom line: The cost of construction could be reduced substantially if the payment terms to subcontractors were enhanced.

  • The owner could save on the cost of financing if the subcontractor did not have to carry the billing so long.
  • If the amount of time that a subcontractor had to “carry the billing” was substantially reduced, then more subcontractors could be formed and we all know that additional qualified competition is a benefit to a project in particular and the industry in general.
  • Material suppliers could reduce pricing if they did not have to place contingencies on payment and these contingencies could be reduced if subcontractors received their payments earlier.

 

So, as you can see, everyone in the industry is tied in one way or the other to subcontracting. Therefore, this Blog will become more focused in coming posts on the health of subcontracting.

 

Please add to the discussion and let us work together to make our industry better.

 

Thanks,
Ted S. Miller