Why Trade Contractors Must Include Working Capital Costs in Project Bids

A majority of trade contractors make one simple mistake that keeps them from reaching their full potential in revenue, profit, and growth: They don’t account for the cost of working capital in their bids. 

That’s the key conclusion of Billd’s 2024 National Subcontractor Market Report. Of the nearly 700 construction executives surveyed for the report, only 48 percent say they account for the costs of working capital in their bids even though 46 percent report cash flow as a significant challenge for their business.

Such an oversight is both surprising and concerning considering the economic challenges and highly-competitive market conditions facing trade contractors today. Fortunately, the solution is relatively simple. 

The Costs of Working Capital Matter in Project Bidding

Trade contractors need working capital to operate. It allows you to run your business in the short term by covering the costs of project-based expenses so you can continue to work while waiting to be paid by the general contractor. 

That said, trade contractors face a two-fold problem with working capital. 

You need to have enough of it to cover expenses over a long term because of the persistent problem of late payment in the construction industry. “It’s never ending and it seems to be getting worse,” says Will Pauga, president of Southwest Contracting. Those payment delays have serious consequences for trade contractors. 

Most successful subcontractors use multiple forms of working capital, including cash, lines of credit, supplier terms, and financing, to cover their expenses. However, these options typically come with additional costs. Working capital costs are real expenses that directly affect your bottom line, similar to labor and material costs. 

If you don’t account for those costs in your project bids, you put your business at risk.

Trade Contractors Who Include Costs of Working Capital in Their Bids Perform Better

Every dollar matters in construction. In an industry with extremely tight profit margins, each dollar impacts whether a business succeeds or fails. Billd’s report demonstrates how those that recognize this fact and build working capital costs into their project bids experience greater success than those who do not. 

They Have Wider Profit Margins

“Construction profit margins are a crucial factor in the success of any construction business,” writes Blackridge Research & Consulting. The wider your profit margins, the more successful your business. By accounting for working capital costs in your project bids, you create those bigger profit margins that help your company prosper. 

According to Billd’s survey respondents, those who included those costs in their bids had average profit margins of 14.1 percent while those who did not account for them had profit margins of only 12.7 percent. Those “higher levels of profitability encourage continuous growth and sustainable expansion,” explains the team at accounting and consulting firm Smith Schafer. 

They Have More Revenue Growth

When you create more accurate project bids that take all expenses into account, you put your company in a stronger position for revenue growth. The Billd study shows 66 percent of those whose bids include working capital costs report revenue growth while only 63 percent of respondents who did not account for those costs experienced higher revenues. 

This happens because better project bids enable trade contractors to take on more work and larger projects. As a result, they experience more revenue growth than those who submit less accurate project bids. 

They Have Higher Growth Rates

Their companies experience higher growth rates as well, according to the Billd study. Twenty-nine percent of respondents who raised their bids to account for working capital costs saw a growth rate of 20 percent or higher, while only 23 percent of those who did not raise their bids to include those costs had the same rate of growth. Taking on more work with higher profit margins allows businesses to expand at a faster pace.

All of these benefits result from one simple step in the bidding process — including the costs associated with working capital. As Billd CEO Chris Doyle notes, “Accounting for costs matters in an industry where staying in the black is an uphill battle. Reflecting that cost in bids ensures the sub can financially thrive, but most importantly, that they can grow.”

A construction project management platform like eSUB also supports that growth. The tool centralizes project data so you can reference historical information on jobs costs such as labor and materials. By combining that data with working capital costs, trade contractors create more accurate project bids that not only help them win more projects but also build more profitable, sustainable businesses.

Schedule a demo of eSUB Cloud today to learn more about how this tool provides deeper insights into critical project costs that inform better project bids.

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