According to the 2022 Construction Business Report from Foundation Software, 37% of respondents said they hope to see an addition of skilled labor for their businesses in the next 12 months. This is up from 24% last year who had the same concern. Due to lack of qualified help, the contractor may not be able to bid on the same type of jobs or complete the work on time and on budget. This might not sound like something that immediately impacts the credit department, but a lack of skilled labor on the front end can eventually delay payment on the back end of the order to cash process.
"As a material supplier selling to a subcontractor, one of the concerns is, are my materials being installed correctly?" said Chris Ring of NACM's Secured Transaction Services. The subcontractor may be forced to utilize inexperienced labor which may lead to payment delays and disputes.
"For example, if an electrician retires and they can't backfill that person, they may not have the expertise to do certain types of jobs anymore," explained Sam Smith, sr. corporate credit & collections manager at Crescent Electric Supply Company (East Dubuque, IL). Without those larger jobs, the overall revenue of the subcontractor could be hurt. If the subcontractor is bidding and taking on less work, the suppliers' sales may also be reduced.
Another problem that arises from a lack of skilled labor is the subcontractor is unable to complete contracts in a timely manner. This may result in damages such as liquidated damages and retainage issues. "Some subcontractors are forced to pivot from a company that does the bidding and labor to an organization that now obtains the contracts to only subcontract out the labor portion to another subcontractor," Smith said. Thus, the supplier may not be too many tiers away from the contract and no longer have lien or bond rights.
Labor shortages leave the subcontract owners doing more work in the field rather than taking care of the business side, like billing, paying suppliers and bidding new work. This also could impact the flow of funds to the supplier.
In order to increase productivity with their customers, Smith and other suppliers have been using the kitting method. In this process, the supplier and subcontractor will group the products together in a kit by job or location instead of sending a large shipment of materials where the subcontractor needs to break it apart and ship it to the individual job site.
"For example, if the project is a renovation of an entire building, we may kit the material by floor, by apartment or in the case of a residential development, by home and deliver the material accordingly," Smith explained. "It also helps us with retaining lien and bond rights as we now know where the product was installed." This saves time and money for subcontractors as well.
Material suppliers should recognize that a lack of skilled labor is a risk that should be taken seriously, Smith added. He makes use of joint-check agreements to ensure payments to them, as well as assessing the general contractor's payment history. He also makes sure to focus more on secured jobs and less on unsecured ones. "As our risk goes up, we as a supplier need to be more creative with finding ways to secure our receivables."
Another value-added service Smith's company provides is product training with customers. If subcontractors have a lot of new or lesser experienced employees, they'll have vendors come to their location and hold training seminars about the products that they offer. Smith considers the subcontractors and suppliers as partners. "As a supplier, part of our role is to make sure that our customers, the subcontractors can be successful in what they do. We both need to work together in order to be successful."
Despite these useful tips, construction labor shortages do not appear to get better anytime soon. "High school students still tend to move toward college and steer clear of the trades. As people retire from the trades, there is not enough backfill to keep the business running smoothly," Smith shared.
-Jamilex Gotay, editorial associate