Why recovery will not come easily to small and medium-sized construction companies


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Zaid Rahman is the founder and CEO of Flexbase, an automated payment platform for the construction industry. Opinions are for the author. Although the construction industry has weathered the COVID-19 pandemic better than others such as retail and hospitality, 2020 was still far from an easy year – with millions of construction jobs lost, supply chains disrupted and projects grounded. Zaid Rahman Permission granted by Flexbase The good news is that there are some positive economic indicators on the horizon. The Federal Reserve expects the US economy to grow by 7% in 2021, and construction has historically been a major contributor to this economic growth. The industry currently has several strong tailwinds behind, including a booming housing market with a sudden increase in housing construction; Bipartisan, $1.2 trillion infrastructure plan passes Senate; And offshore companies are expanding rapidly in the US, which is likely to give commercial construction a boost. Just don’t expect any of it to come easily, especially for Small and Medium Contracting (SMB) companies. While recovering from the pandemic creates a wealth of new opportunities, these companies also face significant challenges: Hyperinflation: Economists are preparing for what could be the strongest period of inflation in decades, as a combination of rapid reopening and trillions. Dollar stimulus is expected to raise prices at their fastest rate in recent history. As a rule, a record increase in inflation of about 2% per year leads to a much larger increase in the costs of building materials. Material and Labor Shortages: According to recent statistics, a spike in sawn lumber prices this spring has led to a $36,000 increase in the cost of building a new home. The prices of many types of materials have skyrocketed due to shortages over the past year, including plastic pipes, steel, plywood, and more. Construction labor costs also rise faster during periods of high inflation. Taken together, this has the potential to put many small and medium construction companies out of business. Public Enterprises: Many small and medium construction companies have their eyes set on a bipartisan infrastructure plan, referred to as a “once in a generation investment in America.” But these companies should be careful. Public projects do not offer the same financial protection as private projects, such as the ability to place a lien when a bill is late or not paid. Also, many public projects do not introduce cost increase clauses in their contracts – which means they won’t help absorb unexpected increases in material costs. This may leave a construction company scrambling to find suitable alternative materials, which, of course, delay projects and slow cash flow. In general, government agencies are aware of the financial insecurity that small and medium construction companies face, which is why large companies often get the first opportunity to bid on public projects, while small and medium companies often do not get the opportunity . So what can be done? A look back at the 2008 recession offers some answers. According to McKinsey & Company, the builders that went far after that crisis invested heavily in digital technologies and cleaned up their balance sheets. It’s all about getting one’s financial home in order. In the post-pandemic era, small and medium-sized construction companies will need to follow suit. First, they must embrace digitization and automation, eliminating time-consuming manual paper invoicing processes. This is key to getting paid on time and keeping cash flow positive, which means not only having cash on hand to bid on more projects, but also making timely outflows – including paying workers on time and helping These SMEs negotiate more advantageous contracts with suppliers. Secondly, small and medium-sized construction companies badly need easier and faster access to capital. Banks are looking to expand their construction portfolios as a top asset class. As a category, construction companies with annual revenues of $10 million to $12 million are severely underbanked. There is an excellent opportunity to combine these two together, while creating a more equal playing field for SMEs. But banks will need reliable insight into SME financials – beyond just owner credit – in order to move forward with confidence, and that means access to digitally accessible and well-maintained books. The construction industry is highly fragmented and specialized, which means that payments often have to pass through a crazy maze before reaching their intended recipients. This is the main reason the industry has long suffered from slow cash flows and continues to do so today. While the nature of the industry cannot necessarily be changed, it certainly can be better managed. This, along with access to better banking services, will be keys for small and medium contracting companies to overcome financial challenges and better manage risks, thus enabling them to benefit from the current recovery.


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