How to Start a (Successful) Construction Company: A Step-By-Step Guide
From finance to forklifts – follow our tips on starting a construction business and cut down on the missteps that stall new construction companies along the way.
You’re at home in the construction industry, so you know how to build something from the ground up.
Building a business isn’t exactly the same as building a home, garden shed or patio, but they do share a common thread – the right plan is the secret to success.
Just like you start with a blueprint or project plan to create a new home or roadway, outlining your business goal and plans will help you create a solid foundation to move forward.
And if you need any more incentive to get your new construction business up and running, the construction industry is on track to continue growing despite the obstacles presented by the recent pandemic. There’s an increasing need for new buildings and improved infrastructure, leading to 4% projected growth by 2029. And since construction can encompass many industries and trades, there is a lot of flexibility to take advantage of residential, commercial, and even government-funded projects. Private construction alone exceeded one trillion dollars in 2020.
Once you know what you’re up against you can craft a business plan that considers the logistical aspects such as equipment, employment, and (everyone’s favorite) taxes, plus marketing and your plan to make money.
To make this process easy we’ve put together a step-by-step guide for construction companies of all kinds to get started on the path to successful business ownership.
Is it hard to start a construction company?
Admittedly, no guide will cover every single detail to business creation and ownership.
Setting up a company is a unique experience affected by factors like background, location, finances, and the overall economy. It will be hard work, require planning, and challenge each entrepreneur differently.
Construction companies have requirements that other businesses may not such as specialized permits and licensure. In many cases, you may want to consult a lawyer to ensure that you have set up your new business correctly in line with state laws for employment, insurance, and liability coverage, and an accountant can help you avoid issues with payroll and tax returns.
But none of this should scare you off.
The key is to be aware of what you are getting into before you get into it. Rely on specialized professionals where it makes sense and do your research to cover the rest.
Keep in mind you may also need a minimum amount of experience to get your new company up and running. For example, California requires that anyone starting a contractor business have at least four years of experience as a contractor or in a similar role before applying for a license. So, be sure to check your state license board to confirm you meet their requirements before you move forward.
What does it cost to start a construction company?
The whole point of starting a business is to profit. But what about the upfront costs to get started? They can vary, but they will also be inevitable.
If you are looking for a ballpark, the average startup costs are about $45,000 for a construction company.
Here are some of the contributing factors that can affect this cost:
Business registration and permits
Marketing and branding
Legal and accounting retainers
Office space rental and utilities
Staff payroll and benefits
Software and management systems
Transportation vehicles and fuel
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How to choose a construction business that suits you
Another consideration is the type of construction you want to operate in.
Each construction niche will differ from the next, and affect how you plan, invest, and start out your planning process. Here’s a few construction niches for you to consider.
This is what most people think of when they think of construction. But we can break it down even further. Do you want to create new homes and apartments in a residential capacity? Or do you want to focus on non-residential construction, building corporate facilities, warehouses, and other structures?
If it’s public works, it’s likely infrastructure related. Construction companies are used for a number of projects like roads, railways, and transportation terminals. This industry is closely tied to civil engineering and can be a great fit for professionals with this expertise.
Think big: industrial construction involves large-scale projects including factories, mills, energy installations, and processing plants. You’ll be engaging for long-term builds with a mix of private and government firms to complete jobs that require project and resource management on an epic scale.
What you need to start a construction company
Before you start looking for equipment and placing job ads, let’s consider what it really takes to start a construction business.
You’ll want a solid business plan (more on that later), but the step before is to give some extra careful thought to your goals and what you might be up against.
Understand your local market size
As a local business, how large of a geographic area are you willing to cover with your services? If you are limited in your area, working with a lower population, or starting out where there is too little (or much) development, you might be starting out at a disadvantage.
Review your core skills set
General construction is a great way to service a variety of clients. Take a moment to look at your core skills and evaluate whether it makes sense for you to specialize or focus on a particular area. This can be anything from new construction to eco-friendly approaches to building.
Assess your direct competitors
Are others in your area already doing what you are thinking of doing with your business? Now is the time to take a look at how much competition you might have and rethink your specialty or location. While you’re at it, take a look at how they are advertising and what the reviews say. If you have a lot of competition but it’s all lackluster, you might have new customers at the ready.
Define your ideal customers
Speaking of new customers, how would you describe your ideal clients? Are you looking to connect with larger property development firms in local communities? You might prefer to connect with homeowners for renovation projects and work on a smaller scale. Match your potential customers against your goals for business growth and your skill set to fast track your success.
Evaluate your finances
Ah, money. We already hinted at potential startup costs. But how do you start a construction company with no money? Well, you can’t really. You’ll need some form of initial financing to get off the ground and pay for your business license, insurance, and initial equipment at a minimum. Now is the time to look at how much you have available to invest in your company and how much you may need to finance.
Meet legal and regulatory requirements
These can vary by state and even local municipalities. Research the requirements for starting and registering a new business and make sure to explore any that are particular to construction. An attorney may be able to help you speed this process up and ensure compliance (at a cost, of course).
Choose a physical location
Even if you don’t expect to have customers stopping by, you’ll need a headquarters to base your operations. This will probably require a bit of office space for your administrative staff (and yourself!) as well as ample warehouse or property to store your equipment.
Select starter equipment
Start to list out what you think you will need to cover jobs in your specialty. This can include trucks for getting to job sites, small tools you can throw in the back of your truck, and giant equipment for specialized jobs. Be sure to compare costs for renting vs. buying some of this outright.
Decide whether to partner
Are you looking to go it alone, or does it make sense to partner up? Going into business with a colleague can complicate things with legal paperwork in the beginning, but it can also give you another source of starter financing.
The importance of proper construction licenses
Again, another area that can vary depending on where you work and the industry you are entering.
However, nearly all construction companies are required to apply for a general business license to operate your business legally.
Bonding, licensing, and insurance
Many states require applicants to take a test or demonstrate their understanding prior to receiving their license. They may also require you to obtain insurance and bonding to protect yourself, your employees, and your clients in the event of an issue.
All three of these factors can give your company credibility and your potential customers peace of mind before working with you. Here are how these terms differ from each other:
Licensing: A government-issued permit that lets you actually run your business
Bonding: A guarantee to customers that you will complete projects as agreed
Insurance: A source of financial coverage in the event of property or bodily damage
Safe practices and PPE
You also need to make sure to accommodate for the safety of all your workers. This includes making sure everyone is trained on current safety protocols and provided with appropriate equipment. Explore the Occupational Safety and Health Administration (and consult an attorney) to make sure you are aware of all requirements.
These requirements have evolved swiftly in light of the COVID-19 pandemic. You may also be required to provide personal protection equipment (PPE) such as masks and sanitation supplies.
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How to avoid failure as a new construction company
You might be an exceptional trade professional and 100% ready to branch off on your own. But watch out: small business survival rates have remained fairly consistent with 20% failing after just one year.
To keep you from contributing to this negative number, here are some common challenges you may run into and how to (hopefully) avoid or work through them.
High insurance costs
Draining costs on a start up can be difficult to overcome
Shop around and look for ways to save by paying premiums in advance rather than monthly
Poor safety training
Insufficient training can put workers and clients at risk.
Review OSHA guidelines to create safer workspaces.
The rush to get to work can create gaps in skills you don’t have.
Research and hire to make sure you have every aspect of your business accounted for.
Taking on jobs without the ability to complete them with proper staff.
Hire team members or create a network of reliable (and legal) temporary workers.
Overlooking software and web solutions can slow your growth and bog you down with administrative tasks.
Be open to learning new systems designed for small businesses like project management and accounting software.
Updated laws and regulations
Requirements rarely stay the same and can slow progress on projects if not adhered to.
Join industry associations and participate in events or continuing education to stay current.
Spending outside your means can cut into profits and reduce growth.
Track cash flow and consider invoicing software that can help you stay on top of customer payments.
How to start a construction business: A step-by-step guide
Alright, enough planning and homework, let’s get into the good stuff because you are now ready to start your business!
The path may be a little long, but the destination will be worth the work.
Remember, these tips are designed to walk you through the process, but your approach and what’s best for you may vary.
#1 – Write a business plan
We’re starting off with some writing. While a business plan may sound dull, it will be the foundation for your company. A solid plan outlines your approach to the core areas of managing a company and is often used by banks to decide whether to grant you financing to get started. Here’s a rundown of the general areas a plan should address.
This goes back to your thought process at the start. What need is there for a construction company with your focus in your local area? Define the exact needs you are looking to fill and where the market can support your business for the long term. This can include:
Defining your business goals
Outlining your idea customer
Identifying the competition
Proving a need for your services
Deciding how you can stand out
There is more than one way to format your business in a legal sense. Each one offers different advantages when it comes to liability and taxes.
Sole proprietorship: The business is just you – the owner, making you accountable for everything legally.
Limited liability company: The company is an entity of its own, protecting the owner’s personal assets.
C Corp: The company can take on investors but are considered separately taxable entities.
S Corp: The company is restricted to shareholders and are considered pass-through taxation entities.
This should be a breakdown of all anticipated operating expenses and cash flow. List out initial equipment purchases and one-time costs and calculate recurring costs like insurance, rent, and payroll. You can compare this to projected profits for specific project types to help determine what you’ll need to get started and how much you can expect to make.
Outline the different roles you will need to hire for and whether those should be full-time, part-time, or temporary workers. Break out office and administrative staff from field workers and create job descriptions for each to explain their anticipated role in your company. You will also want to estimate how much it will cost to employ everyone including extras like benefits.
You’ll probably have to spend a little to make a little in the beginning. Detail different marketing approaches you can take to spread the word about your new business. This can take many forms, from creating a website to running a digital advertising campaign. Be sure to consider the following when it comes to your target customers:
Who they are in terms of buying habits
Where they are online and locally
What search terms might they use
What can make your company stand out
How the competition attracts customers
Strategies for advertising and exposure
Budget needed to engage new customers
Finally – the moment you are waiting for. This is where you share exactly the types of work and projects your company will offer. Get as detailed as possible, and estimate the sales or revenue that each of these should typically generate. Don’t forget to account for any pass-through costs or expenses that could detract from your bottom line.
#2 – Choose a home base
You have likely narrowed down your local market and have an idea where to settle down. Now is the time to choose a physical location to station your business.
Watch the commercial real estate market and make sure the property you choose can accommodate your office operations and house your equipment. Confirm that there are no restrictions on noise, future buildings, or permit requirements for you to use the space you buy.
#3 – Register your business
Once you have settled on a business structure, you’ll need to register your business with the government. This usually requires at least an application and a nominal fee. Check the rules for your specific area since there may be exams, additional payments, or ongoing renewals that apply.
Registering will grant you the right to operate a business legally. It will also give you an Employer Identification Number (EIN) that you’ll use when it comes time to manage payroll and submit your taxes.
#4 – Open a business bank account
With your shiny new EIN, you can choose a brick-and-mortar or online bank to open an account with. You’ll need this to accept and make payments.
Brick-and-mortar banks give you an opportunity to have face-to-face interactions and a bit more customer service. If you have questions or need frequent assistance, this might be the option for you. The drawback here is that online banks tend to offer better high-yield savings options. A possible best-case scenario might be to use a local bank for your checking and cash flow needs while opening an online bank account that you can transfer funds to for longer term savings and returns.
#5 – Review tax requirements
Depending on your business entity, you may be required to pay either annual or estimated taxes. Be sure you are aware of the rules that apply based on how you established your company. You may also have to pay local taxes to operate a business, and there will certainly be taxes on your real estate and equipment purchases.
#6 – Secure insurance and liabilities
Insurance is something everyone is tempted to spend as little as possible on.
After all, if nothing bad happens, you never really need it, right? That’s a costly gamble for small business owners to take. And depending on your business structure, you could be personally liable (i.e. held accountable) for paying damages and racking up massive legal bills.
Avoid this risk by taking on the proper insurance for your business. If you shop around, you may be able to reduce costs by purchasing several different policies from the same provider or by paying premiums in advance rather than in increments.
General Liability Insurance
Protects against common issues with customers such as property damage or misleading advertising
Protects your real estate and valuables housed there in the event of theft or catastrophic damage
Protects your commercial vehicles and drivers in case of injury or damage involving a business car including any related court fees or settlements
Worker’s Compensation Insurance
Protects against the cost of medical bills and wages if an employee is injured or becomes ill as a result of their job
Protects former employees and is regulated by both federal and state law
State Disability Insurance
Protects employees who suffer an illness that prevents them from being able to perform their job
#7 – Acquire funding
The big question: how are you going to be able to afford all of this?
Well, since you (hopefully) evaluated your finances ahead of time, you’ll have an idea of how much of your own capital you can invest in your new company. The business plan you wrote up should outline the general expectations for startup and operating costs.
It’s possible that you’ll need a small business loan to cover the rest of your initial expenses. Many banks and lenders will want to see your business plan when you apply. Shop around to see what interest rates you qualify for, and you can use the U.S. Small Business Administration to find lenders near you.
#8 – Buy tools and equipment
With the funding in place or on its way, you can buy the rest of what you need to start taking on actual clients and projects. Of course, the core of this will be equipment.
What you need for this will completely depend on the type of construction work you plan to do or provide. Trucks and transportation will fall in this bucket. So will everything from power tools to bulldozers. Don’t forget to weigh the benefits of renting the largest machinery and factor those costs into whatever project quotes you provide to your new customers.
#9 – Make a construction website
And how do you get those new customers? You’ll need to start marketing your brand-new business. The first step for this should be to create a website showing off everything you offer and how you’re better than the competition.
You should have this information from the business plan you wrote up. You also don’t have to be a web genius to put a professional site together. Website builders like Pedestal include ready-to-go templates designed just for construction companies. And you can create one in less than an hour.
The key here is to make sure you are being targeted in your marketing efforts. Focus on your local area and keep your information and keywords consistent. If you specialize in a certain kind of construction work, make that clear and keep it the same in everything you advertise.
As people start searching for companies that meet their needs, they will start to see you in their local search. And the more marketing you do and more effort you put into your search engine optimization (SEO), the more reach you’ll have.
As your business builds momentum, you’ll want to make sure to use the relationships you have in place to keep expanding. Tap into existing clients and ask for referrals and reviews. Don’t forget to add their testimonials to your website, too.
If you know other pros in the biz, ask them to name drop you to their own colleagues or clients where it makes sense. A lot of contractors and subcontractors will work together and recommend each other to satisfy customer needs and keep their business flowing.
Quick recap: You’re ready to start a construction business
Like with anything new, a new business can be a bit overwhelming at first.
The trick is to break it down into smaller parts, and then even smaller parts, so you can tackle one thing at a time. From there, creating a business isn’t so bad, is it?
Of course, you have to make sure you approach things in the proper order. Do your research before you finalize your service area. Make sure you have the funds (or can get funding) before you start spending beyond your means.
At the core of it all is a clear vision of what you want to accomplish and a business plan that maps it all out. At first, writing up a plan can seem like a hassle (especially if you don’t fancy yourself to be a writer). But you’ll find yourself – and others – coming back to it time and time again to stay on budget and on brand. You’ll be happy you wrote it in the end.
There’s no need to rush anything about the process, either. You want to create a strong foundation for yourself, even if that means slowing down to get attorney feedback, waiting for a loan to come through, or reviewing all of the registration requirements in your state. Starting a construction company should, in the end, be a rewarding and empowering experience. You’re an entrepreneur! And with a bit of planning, you can keep your business building for the long term.
With so many things to consider, it can help to call in experts along the way to help out. Just like lawyers and accountants can help you offload specialized tasks, a digital marketing team to boost your brand.