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7 Steps to Start a Construction Business
Determine Your Niche
Breaking ground on a new business is a complicated process, one that involves plenty of planning. First of which includes research into your market and niche. To help your new business reach great heights, you’ll first need to determine where your business’ focus will lie.
Residental vs. Commercial
First, decide if your construction company will operate in the residential or commercial space — or both!
- Residential projects are smaller and less competitive, however, they can get tricky when you’re dealing with picky homeowners who have a lot of preferences and feelings about the final building, so make sure you’re clear on expectations from the onset.
- Commercial construction typically requires more permits, licenses and stricter building codes. It’s usually larger-scale than home construction and therefore more costly and competitive. However, the construction time is typically a quicker turnaround — and they can be quite lucrative.
Draft Your Construction Business Plan
A business plan is crucial for a construction business. It maps out how you will generate sales, provide services and make money. Think about your construction business model now, because it’s better to have that in place so you can start acquiring clients and generating revenue from day one.
You will also need to look at financial projections for your construction company. What are your expected sales and revenues? What is your profitability? How much money will you keep in the business to grow it? How much will you pay yourself and your workers? Try to plan your revenue for the next month, three months, year and two years.
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Business plans vary slightly, but they should include:
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An executive summary with the most important points from your business plan
A list of goals and what you hope to achieve with your construction business
A description of your construction business, background information and context
A market analysis and likely demand for your construction services
An overview of how your construction business is structured
A business model
A description of how you will market and sell your offerings
A breakdown of financial projections, revenue and profitability
Appendices
Register Your Business Entity
Now that you have all the background information for your construction business, it’s time to make it into a reality. That starts by choosing the right structure or “legal entity” for your business, setting up taxes and registering with local agencies.
- Decide on a Business Structure
In the U.S., there are five main business structures. They are:
- Sole Proprietorship: If you don’t choose to form a legal business entity for your construction business, you will be a sole proprietor by default. This won’t give you the legal protections you need, so we don’t typically recommend this.
- Partnership Similar to a sole proprietorship, if you go into business with someone else without forming a legal business entity, you will be treated as a partnership. This doesn’t give you limited liability protections, so we wouldn’t recommend it for your construction business.
- Limited Liability Company or LLC: The most common type of business entity, an LLC is fast, simple and inexpensive to set up and maintain. It protects your personal finances and assets and is a great way to start your construction business.
- S Corporation: Short for small business corporation, this structure offers many tax advantages, legal protections and easy transfer of ownership. Form your S Corp with us here.
- C Corporation: This is a more complex type of business and isn't generally recommended for smaller organizations, but a C Corporation could be a good fit for your construction business depending on your goals.
- Get an EIN
All businesses (with the exception of sole proprietorships with no employees) need an Employer Identification Number (EIN) for taxes. This is like a Social Security number for your business, and it’s a must-have to open a bank account, do payroll and more.
- Register with Federal, State and Local Agencies
You can use the U.S. Small Business Administration’s (SBA) business guide to figure out where you’ll need to register. Remember that if your construction company operates in multiple states, you’ll need to register with all of them. Our state guide can help you with that.
Acquire Licenses, Permits and Insurance
Having the proper licenses for your business is crucial, as they protect your business from liability, fees and other consequences by proving that you’re up to code and operating in accordance with laws and regulations.
Below we breakdown all the licenses and permits you may need to keep your business in compliance.
- Licenses and Permits
Construction companies should research what licenses and permits are required by federal, state and local governments. Typically, you’ll need the following license:
- General Contractors’ License: Most states will require you to submit an application for a general contractors’ license through the state’s board of contractors. The application typically involves showing proof of a surety bond and workers compensation insurance (more on that below). You’ll also need to submit a fee, pass an exam and agree to a background check.
- Bonds
In order to obtain the licensing your business needs, you’ll need to show proof that your business is bonded. Most often, construction companies opt for a surety bond. The bond is similar to insurance in that it involves a third-party entity backing the project in case the contractor breaches the contract. Surety bonds offer financial assurance to the client that you, as the contractor, will finish the job and pay employees and suppliers.
- Insurance for Construction Companies
The nature of construction-related work involves risk. It’s virtually unavoidable. Heavy machinery, towering heights and long days of manual labor mean you and your business need to be ready for anything. That’s why solid business insurance coverage is so important. Consider the following, at the bare minimum:
- General Liability Insurance: Perhaps the most important card in your insurance deck, general liability insurance protects you in case there are any accidents or injuries on the job.
- Workers’ Compensation Insurance: While general liability insurance covers the immediate costs of a worker getting hurt, their injury may result in longer-term financial needs. This could include lost wages or ongoing medical treatment. This is what workers’ compensation insurance is for.
- Property Insurance: If you have a physical office, you’ll want property insurance to protect your grounds in case of property damage, theft or if a client is injured while on the premises.
- Contractor’s Tools and Equipment Insurance: As the owner of a new construction company, you’ll want to make sure the tools and equipment you invest in are protected from damage or theft. Contractor’s tools and equipment insurance typically covers anything less than five years old.
- Builder’s Risk Insurance: Many clients may require your business to have builder’s risk insurance before working together. Also called “course of construction insurance,” It covers the building from damage while it’s under construction so projects stay on track.
Secure Financing
You have the vision, the plan, the permits and the insurance. Now you need the money. Consider the following options for financing your construction company:
- Equipment Financing
Whether you rent or buy your construction equipment, this will be one of your largest expenses, so it’s important to plan ahead. Make sure you do research into the best business loans for your situation, or look into unconventional ways to finance your business if you don’t want to take out a loan to get the equipment you need.
- Business Line of Credit
A business line of credit may be preferable to a lump sum business loan, since you’ll only pay interest on the money you use. Many lenders require you to have been in business for 6 months to a year before you’re eligible, so this may not be the best option for a brand-new construction company.
- SBA Loans
The SBA offers some low-interest loans designed for small businesses. Their Lender Match tool will help you find the best fit. Typically, you’ll need to have a solid credit score and borrowing history to be eligible. Below are the most common types of SBA loans:
- SBA 7(a) Loan: This loan offers up to $5 million to be used for increasing your working capital, refinancing existing loans or renovating your offices. The payoff term is typically seven years.
- SBA Microloan: This is ideal if you need less than $50,000. You’ll have up to six years to pay it off.
- SBA CDC/504 Loan: This loan offers up to $5.5 million to be used for the purchase of large assets such as heavy machinery. They can be paid off over a 10- to 20-year period.
Maintain and Grow Your Construction Company
Once you have the bare bones in place, you’ll need to focus on maintaining and growing your company. Add the following things to your to-do list to ensure a thriving business.
File an Annual Report
Most states require all businesses to file a report once a year. This report has details of any major changes to who owns a business and other major impacts on a business’s legal status. We can file your annual report on your behalf.
Renew Permits and Licenses
Your business may need to renew its licenses, permits and other regulations every year.
Search for Potential Projects
Begin searching for potential projects by using lead generation tools like Home Advisor, Dodge or Building Connected. You’ll want a steady stream of leads coming in so you’ll always have projects to bid on.
You can also sign up for government construction projects by registering as a government contractor.
Send Estimates and Bids
Once you have a steady stream of leads in the pipeline, it’s time to send estimates and bids. The more bids you send, the more chances you have of winning new business.Since many new contractors have trouble creating estimates, consider hiring an in-house estimator to run the numbers while you focus on meeting new clients and winning future business.
Follow Up with Clients
Building trust and solid relationships with your clients will be key to building a construction business that stands the test of time. Follow up on your bids to ensure you’re staying competitive, and check in with your project managers and estimators regularly.
Market Your Construction Company
While maintaining your current client relationships is important, you’ll also want to put effort into growing your client base. Here are just a few marketing strategies new construction companies should consider:
- Run ads on Facebook (for residential)
- Run ads on Linkedin (for commercial)
- Ask for referrals and positive Google reviews
- Create an authoritative website and focus on local SEO
- Create a lead magnet like an ebook or video course to collect email addresses
- Send sales pitches via email and set up sequencing
Additional Resources for Starting a Construction Company
Continue leveling up your construction game by connecting with networks and associations and staying on top of the latest industry news. Here’s a list of vital resources to get you started.
Federal Resources
Networks and Associations
Publications
Education
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