Leveraging Working Capital for Government & Public Works Projects
As we venture further into 2023, the construction industry in the United States is experiencing a remarkable upswing. With a projected growth rate of 6.1%, construction markets are buzzing with opportunities for companies to flourish. The increased government investments in infrastructure development and the resurgence of commercial and public works projects have all contributed to the current upsurge.
According to Research and Markets “The United States Construction Industry Databook Series – Market Size and Forecast by Value and Volume, Q1 2023 Update, the Construction industry as a whole is poised to grow by 6.1% in 2023 despite the hurdles that it faces ahead. 2022 saw inflation surge in the U.S. as supply chain and labor issues pressed on. Despite these issues, construction costs and materials have seen declines, however, the Federal Reserve’s continued rate hikes continue to put pressure on the residential housing industry, dampening the housing market. Housing affordability remains a top concern with the highest mortgage interest rates we have seen in ages combined with surging home prices. GlobalData expects the US residential construction sector to remain weak throughout 2023. With a slow housing market, many contractors are looking to commercial and government contracts to capture more business and focus on long-term growth strategies.
According to Dodge, public works construction will increase by 18% in 2023 to $225 billion. The Infrastructure Investment and Jobs Act (IIJA) provided $1.2 trillion to invest in US roads, bridges, transit systems, airports, waterways, drinking water, and wastewater systems. This amount of investment in America’s infrastructure creates a lot of opportunity for contractors, however rising costs and labor shortages continue to plague contractors. These headwinds could mean that construction businesses need additional capital on hand to have purchasing and bidding power for these lucrative contracts.
According to data from the Bureau of Labor Statistics, construction firms have dealt with a 60% increase in diesel fuel, and a 19.8% increase in asphalt paving mixtures and blocks last year and have continued to remain high in 2023. However, June 2023 Producer Price Indexes, released by the Bureau of Labor Statistics, noted that the indexes for diesel fuel and residual fuels have decreased from those previous levels, but nonetheless are not cheap. Conversely, the report shows some positive news, within the index for final demand goods in June, prices for iron and steel scrap dropped around 10.8 percent.
With various strains facing the construction industry, it is paramount that companies can strategize, and use working capital to take advantage of these opportunities and stay agile in a shifting market. Working capital is the difference between a company’s current assets and current liabilities. It represents the funds readily available to not only meet short-term operational expenses and execute daily business activities but also help to finance the acquisition of raw materials and hire skilled labor.
Meeting Commercial Projects Demands
Commercial projects often require substantial upfront investments to initiate construction. From securing permits and licensing to procuring high-quality materials, the financial burden can be overwhelming, especially with the rising costs. Adequate working capital provides construction companies with the necessary financial flexibility to respond to these demands efficiently.
Working capital can help with:
- Resource Acquisition: Working capital enables companies to purchase materials and equipment promptly, preventing delays in project timelines and ensuring they can meet deadlines. This is particularly important when dealing with rising costs or large amounts of materials for larger projects.
- Cash Flow Management: With longer payment cycles from commercial clients, construction companies may face cash flow challenges. Working capital helps bridge these gaps, ensuring smooth operations and uninterrupted project progress.
- Competitive Edge: By having sufficient working capital, construction firms can capitalize on opportunities that arise, allowing them to bid on lucrative projects and outperform competitors.
Government Contracts and Working Capital
Government contracts often present significant opportunities for construction companies. However, these projects can be complex, with intricate regulations and compliance requirements. Working capital becomes essential to navigate the challenges that come with government contracts.
- Bonding Requirements: Many government projects demand bid or performance bonds. These require construction companies to have ample working capital to meet bonding criteria and secure contracts.
- Meeting Stringent Standards: Government jobs may have strict quality and safety standards, requiring investments in specialized equipment and training. Adequate working capital allows companies to meet these standards efficiently.
- Project Scale: Government projects often involve substantial budgets and extended durations. Working capital ensures companies can handle the magnitude of such projects and avoid disruptions in execution.
Empowering Public Works Projects
Public works projects, like infrastructure development, are great opportunities for construction companies. These undertakings necessitate robust financial capabilities to be carried out effectively.
- Long-Term Financing: Public projects might require investment in long-term assets, such as heavy machinery and vehicles. Working capital ensures that construction companies can continue their operations while making such investments.
- Cash Flow Stability: Public projects may involve delayed payments from government entities. Working capital safeguards against potential cash flow issues and helps maintain steady progress on projects.
- Community Engagement: Construction companies with strong working capital can actively participate in public works projects, contributing to the development of local communities and fostering positive reputations leading to more business down the line.
In a changing market that is seeing down markets for residential, retail, and office, working capital stands as a critical enabler for companies seeking to excel in commercial, government, and public works projects. Its importance cannot be understated, as it allows firms to embrace opportunities, mitigate risks, and uphold the highest standards in their projects. By proactively managing their working capital, construction companies can position themselves as reliable and competitive players in the industry, ensuring sustainable growth and success in an ever-changing landscape.
If you have any questions on how Working Capital can help your cash flow or to learn more, please give us a call at 888-513-9937.