Subcontractors in the construction industry often struggle with consistent cash flow due to delayed payments from general contractors (GCs). This financial strain can hamper growth and limit their ability to pursue new project opportunities. To address this issue, Tough Leaf hosted a webinar featuring Courtney Reiman and Derek Knutty,  EPP Specialists from Constrafor, to focus on how Early Pay Programs (EPPs) can transform subcontractors' financial management and support business growth. 

The Need for EPPs in Construction

Subcontractors typically wait an average of 57 days to receive payment, while covering upfront costs for materials, labor, and overhead. This cash crunch is particularly challenging for specialty trades with high labor costs. Constrafor's EPP solution can help by accelerating payments from GCs, mitigating cash flow issues, and providing a vital solution for subcontractors.

An Overview of Early Pay Financing Options

Courtney and Derek moved on to discuss various financing options for subcontractors, emphasizing the importance of strategic use. First, an important warning: Watch out for merchant cash advances. They’re predatory in nature, with APRs up to 350% and hidden fees, and can devastate businesses. While credit cards and lines of credit can be useful, their high costs require careful management. They both highlighted the value of supplier terms and EPPs, noting that strong supplier relationships can lead to better terms, and EPPs provide cash flow without damaging contractor relationships, unlike traditional factoring. They stressed the importance of understanding financial strengths and weaknesses to choose the best financing option for growth.

Benefits of Using EPPs to Grow Your Construction Business

Derek discussed the challenges subcontractors face with delayed payments from general contractors (GCs), affecting their growth schedules and forcing them to manage cash flow creatively. Subcontractors often cover costs upfront for two months, impacting their ability to take on new projects, especially when retention payments can take 9-12 months. Courtney added that using all available cash to cover these delays hinders the ability to pursue more or larger projects. By freeing up capital, subcontractors can invest in better-margin projects and maintain schedules, ultimately fostering relationships with preferred GCs. Both emphasized the importance of leveraging external funding sources to support growth, akin to large corporations.

How EPP Can Grow Your Business

The team moved on to discuss the advantages of Early Pay Programs for subcontractors including providing the opportunity to:

Bid on More Projects

EPP allows businesses to bid on more and larger projects without worrying about upfront costs, especially during the slower initial payment phase of a project.

Invest in New Equipment and Resources

This approach frees up funds for reinvestment into the business, such as buying new equipment or expanding facilities, rather than using those funds to float the job.

Strengthen Relationships with General Contractors

Using EPP can also help solidify relationships with GCs. Good performance and timely completion foster stronger partnerships. GCs appreciate subcontractors using EPPs to ensure projects stay on time and within budget, often leading to referrals and stronger collaborative relationships.

Accounting for EPP Cost

The Constrafor team also provided valuable insights on how subcontractors can effectively use EPPs to grow their businesses. They emphasized the importance of understanding costs, planning, and building strong relationships with GCs. Here are the key points they discussed:

Understanding Costs:

1. EPPs are not free. Costs vary between programs.
2. Know all costs before committing (e.g., origination costs, financing rates).
3. Successful contractors plan for EPP costs and include them in their bids.

Planning and Flexibility:

1. Plan for EPP use, but be ready for unexpected issues.
2. Consult with EPP experts to find workable solutions when challenges arise.

Incorporating Costs into Bids:

1. Offset costs through supplier financing, achieving discounts.
2. Utilize change orders, which often have higher profit margins.
3. Effective planning ensures costs are covered, improving financial stability.

Building Relationships with General Contractors:

1. Strong GC relationships are crucial.
2. GCs appreciate clear communication and timely completion of quality work.
3. Some GCs offer their own EPPs to support subcontractors.

Bid Strategies:

1. Focus on quality over quantity when bidding.
2. Develop a bid strategy aligned with business strengths and goals.
3. Avoid lowballing; it damages brand value and profitability.
4. Raise bids confidently when aligned with strategic goals.

How can EPP Help WMBEs and Other Certified Diverse Subcontractors

Finally, Courtney and Derek highlighted the significant advantages Minority and Women-Owned Business Enterprises (MWBE) have in the construction industry, particularly with public and federal projects. These projects require a certain percentage of MWBE participation, giving these businesses leverage. While MWBEs may face longer payment cycles, incorporating Early Pay Programs into bids can mitigate this issue. EPPs provide upfront funds, allowing MWBEs to focus on their work without financial stress. By planning ahead and leveraging their MWBE status, these businesses can secure better terms and higher profit margins, ultimately strengthening their position in the industry.

If you’d like to discuss how EPP can help grow your business, get in touch with the team at Constrafor.