How to start a construction business: 7 things to consider
The construction business is experiencing a rebound. Following the pandemic-driven recession, all indicators suggest that new construction is forecast to reach $1.53 trillion by 2022 as pent-up demand and infrastructure projects take center stage. Even pandemic habits are driving growth. As many Americans continue to work from home, residential remodeling is booming. Houzz reported a 58% increase in projects in 2020 — a huge business opportunity for smaller contractors.
If you’re interested in starting a construction or general contracting business, here are seven things to consider.
1. Have a plan
A well-thought business plan can guide you through the launch process and ensure that every aspect of your construction company is budgeted for. Your business plan can be as extensive or simple as you feel is needed, but consider all the areas of a complete business plan as you begin to craft it, including the following:
- Business objectives and personal goals
- Products and/or services
- Market opportunities
- Sales and marketing
- Competitive analysis
- Operations and management
- Financial analysis
Some of these plans are several pages long, but you can use an online tool as a starting point to map out your business. The SBA offers a useful business plan template, plus tips for writing a winning plan.
2. Choose your legal business entity
There are multiple business entities that you can operate as when establishing your construction business. The four most common are:
- Sole proprietorship: This means that the business is owned and run by one person with no legal distinction between the owner and the business.
- General Partnership: A general partnership is the simplest variety of partnerships and created automatically when two or more persons engage in a business enterprise for profit. No state filing is required.
- Limited liability company (LLC): This is one of the most popular forms of a business entity among construction trades. An LLC offers limited liability protection (shielding your personal assets by protecting them from debts and liabilities associated with the company) and pass-through taxation.
- Corporation: A corporation is a separate legal entity owned by its shareholders, thereby protecting owners from personal liability for corporate debts and obligations.
Depending on which business entity type you choose to operate under, you may need to register your business with the IRS and secure an employee identification number (EIN). With your EIN, you can then open a business bank account to separate your professional and personal assets.
3. Obtain business licenses, permits, bonds, and insurance
You need to be licensed to become a construction business. In addition to a general business license, you may need to obtain industry-specific licenses, too. For example, a tradesman license is required for specific construction trades. Evaluate the licensing requirements in your region and start studying for any tests or industry exams to earn your certification.
Unlicensed contractors or those found to be in non-compliance can face big consequences. Government officials regularly conduct sweeps and crackdowns so it’s important to stay on top of requirements, including new ones. Create a list of all your business’s compliance requirements and develop a system to track your licenses and ensure they are renewed on time.
Your construction business may also require a surety bond to operate legally. This is arranged through a third party who agrees to pay your customer if you fail to fulfill your contract. The Surety and Fidelity Association of America has more information about surety bonds for contractors and subcontractors. Be sure to check bond requirements within your state as they can vary.
You will also need business insurance for office space, vehicles and equipment, business liability, and any employees you bring on. Insurance needs vary by state and business type, so working with an agent is the best way to ensure you are fully covered.
4. Understand construction industry regulations
The construction industry is highly regulated. Things to consider include hazardous materials, energy efficiency standards, and more. Make sure you’re fully aware of federal, state, and local regulations. One of the most important of these is the Occupational Safety and Health Act (OSHA), which requires that construction workers be provided a safe workplace. OSHA provides health and safety resources specifically designed for small businesses that can help you understand your obligations.
5. Create an operating budget for your firm
Now you can start to focus on setting up your firm. Draft a budget for your expected costs associated with operating your business. These can include rent for office space, monthly utilities, insurance, lead generation, marketing expenses, staff, and relevant technology and software subscriptions.
The cost of starting your construction business will vary depending on your goals and needs. For example, you may be able to save money by operating out of your home.
However, as you grow you may need to buy your own space.
To develop your operating budget, consider a few key questions:
- Will you need a business loan to become operational?
- How much income will you need monthly to cover expenses?
- What will our prices or income models be?
6. Find and hire labor
Your construction business will typically secure labor from subcontractors, full- or part-time employees, labor brokers, or independent contractors. Each of these has different tax, legal, and regulatory implications on your business and budget. To help guide you through this process, the SBA has developed a useful guide to hiring and managing employees. Don’t forget that as you take on employees, you need to train them on your brand and the level of professionalism you expect. They represent you and their actions reflect your business.
7. Stand out with targeted marketing
The construction industry is fiercely competitive, and contract awards rarely come down to price alone.
As you think about marketing your business, conduct a SWOT analysis. Where are your business strengths, weaknesses, opportunities, and threats? This exercise can help you define your value proposition, target the right client, and focus your marketing messages and tactics. Once you have this in place, you can develop a plan for combining digital and print strategies to reach your audience.
Word of mouth and referrals are a powerful tool for small construction firms so be sure you have a plan to manage and monitor your business presence on Google My Business, Yelp, and Bing.
Marketing a business can seem overwhelming, but there are many resources that can help. Your local Chamber of Commerce, Small Business Development Center, and other community organizations often offer free seminars and resources on marketing your business. You can also get help from SCORE, which offers free business advice from experienced mentors in all sorts of fields.
Take steps to build a good foundation for your business
With the right planning, you can build a successful construction business. There are several options to choose from within this industry, and the potential for growth is evident. Ready to form a corporation or LLC? Learn about BizFilings incorporation and LLC formation services.