Zaid Rahman is the founder and CEO of Flexbase, an automated payment platform for the construction industry. Opinions are those of the author.
While the construction industry may have weathered the COVID-19 pandemic better than others like retail and hospitality, 2020 was not yet an easy year – with millions of lost construction jobs, disrupted supply chains, and stalled projects.
The good news is that there are some positive economic indicators on the horizon. The US Federal Reserve expects the US economy to grow 7% in 2021, and historically, construction has been a huge contributor to that economic growth. The industry currently has several strong tailwinds in its back, including a booming housing market with an increase in housing starts; a bipartisan $ 1.2 trillion infrastructure plan passed by the Senate; and overseas companies rapidly expanding into the US, which should give commercial construction a boost.
Just don’t expect any of this to be easy, especially for small and medium-sized construction companies (SMBs). While the recovery from the pandemic creates a wealth of new opportunities, these companies also face major challenges:
- Hyperinflation: Economists are gearing up for what may be the strongest period of inflation in decades as the combination of a swift reopening and trillion dollar incentives is expected to raise prices faster than ever in recent history. As a rule of thumb, an increase in the standard inflation rate of around 2% per year leads to a significantly greater increase in building material costs.
- Material and labor Bottlenecks: According to recent statistics, the rise in timber prices this spring resulted in a $ 36,000 increase in the price of a new house to be built. The prices of many types of materials have skyrocketed due to shortages over the past year, including PVC pipe, steel, plywood, and more. Construction labor costs also rise faster in times of high inflation. Taken together, this has the potential to drive many medium-sized construction companies out of business.
- Public projects: Many midsize construction companies have turned their gaze to the bipartisan infrastructure plan that is being heralded as a “one-time investment in America”. But these companies have to be careful; public projects do not offer the same level of financial protection as private projects, such as the ability to post a lien if an invoice is late or not paid. In addition, many public projects do not include cost increase clauses in their contracts, which means that they do not help to absorb unexpected increases in material costs. This can put a construction company in a hurry to find suitable replacement materials, which of course delays projects and slows cash flow. In general, government agencies are aware of the financial uncertainties of medium-sized construction companies, which is why larger companies are often given the first go-ahead for an offer for public projects, while medium-sized companies often don’t get a chance.
So what can be done? A look back at the 2008 recession provides some answers. Construction companies, who were furthest ahead after this crisis, invested heavily in digital technologies and cleaned up their balance sheets, according to McKinsey & Company. It’s about getting your finance house in order.
At a time after the pandemic, medium-sized construction companies will have to follow suit. First, they have to face digitization and automation and get rid of time-consuming, manual, paper-based invoice processes. This is key to getting paid on time and keeping cash flow positive, which means not only will you have cash on hand to bid for more projects, but also more timely outflows – including paying workers and employees on time Assisting these SMEs in negotiating more advantageous contracts with suppliers.
Second, medium-sized construction companies urgently need easier and faster access to capital. Banks want to expand their construction portfolios as a high asset class. As a category, construction companies with annual sales of $ 10 million to $ 12 million are severely underfunded. There is an excellent opportunity to bring these two together while creating a level playing field for medium-sized construction companies. However, banks need reliable insights into SMB financials – beyond the owner’s loans – to act with confidence, and that means having access to digitally accessible, well-maintained books.
The construction industry is highly segmented and specialized, which means payments often have to go through a crazy maze before reaching their intended recipients. This is a major reason this industry has long struggled with slow cash flows and continues to do so today. While the nature of the industry cannot necessarily be changed, it can certainly be managed better.
In combination with better bank access, this will be the key to enabling medium-sized construction companies to master financial challenges and better manage risks in order to enable them to benefit from the current upswing.