Are you looking to break into the construction world but don’t know where to start?
Good – you’ve come to the right place!
Construction is one of the fastest-growing industries around, and a quick survey of the terrain tells us why: The housing market is hot, commercial real estate is on an upward swing, and interest rates are relatively low.
In other words, it’s an opportune time to build the construction company you’ve been envisioning until now. The question is, how do you start a business with the best odds of success?
We’re glad you asked.
While there will always be a certain amount of risk involved in entrepreneurship, that risk gets increasingly smaller the more informed you are about your industry – and that’s where we come in.
Here is all the information you need to start and run a successful construction company!
There are a wide range of businesses that can fall under the construction umbrella, and you’ll want to have a good idea of the specific niche that interests you so you can plan appropriately.
Where are you planning on building? Are you leaning toward home renovations, or are you itching to sink your tools into a skyscraper? Would you prefer to work for the government, or for private owners? Finding your niche is a key component of starting any business, and construction is no exception.
Your initial investigation should include proper market research. This means evaluating your competitors, determining what the needs are in your neighborhood or the neighborhoods in which you’re interested in working, and imagining your ideal customer (or in this case, project) that your services will help most.
What does each niche entail? What are the differences between them?
To start with, let’s look at the main types of construction companies:
Small renovation contractors – If you’re interested in managing low-budget projects, this may be the business you want to break into. The main benefit of starting this type of company is that you don’t need an office, as the small scale of work allows you to take care of your paperwork at home. The projects you’d take on can include office alterations, home renovations and scaled-down commercial work.
General contractors – Would you consider yourself a construction expert? If yes, this may be more up your alley. General contracting companies have a number of trades and sectors under their belt, with the know-how to tackle larger commercial and/or private projects (i.e. with high-budget contracts).
Owner-builders – Unlike contractors, owner-builders (or self-builders) only develop buildings for their own possession, whether the purpose is to rent or sell. Usually, this includes assuming the role of construction manager or general contractor for the duration of construction, such as setting timetables and taking on liability for the project.
If you fall into one of the contractor categories, you’ll want to further determine which sector you’re interested in: Private or public. While you can always bid on a government project as opposed to a private one, there are some key differences between the two sectors to be aware of.
Before considering delving into the public sector, you’ll have to take the following into account:
Guidelines. Each government contract will have its own guidelines to which you’ll have to adhere, which could mean anything from providing records of your previous contracts to using a closed, secure network for the duration of the project.
Local government contracts vs. federal. Bear in mind that the scope of work can largely differ between a federal contract and a state/local one (although you can still land state contracts that are pretty involved, like construction of a bridge or highway). Also, if your business is US-based, the laws of the particular district or state in which you work may differ from others; therefore, make sure to review the necessary certifications or past experience you may need before bidding on a contract.
Hiring legal help. As there can often be heaps of red tape to cut through with each project, you may want to hire a lawyer to boost your chances of landing the bid, by ensuring all legal requirements are met, etc.
The private sector is quite broad, as it encompasses any project that isn’t funded by the government. To hone in on your niche, you can break the private sector into 3 main categories:
Commercial construction – Anything used for commercial purposes; can include restaurants, skyscrapers, grocery stores, hospitals, office buildings, private schools, etc.
Residential construction – Usually fewer than 3 or 4 units.
Industrial construction – The less common projects in the construction industry; includes things like power plants, refineries, solar wind farms, etc.
Once you understand which type of construction appeals to you, you can move forward with laying the foundations of your business.
Writing a business plan is a new-business must, if you want to be successful the first time around.
In your business plan, you’ll put your goals, values and vision on paper. This will help you chart the course of your construction venture and understand how your business will create revenue in concrete terms.
Once you get this down, you should know why you’re starting a construction business, how you’re going about it, and what needs to be done to bring it to fruition. Later, your business plan will come in handy if you need to deal with lenders or apply for funding.
Begin by assessing your needs; what will it take for you to start your construction business and keep it going throughout the year? Make sure to take into account:
Equipment – List the tools your construction business will need; determine what will be leased, purchased or rented, and write the cost of every item.
Personnel – There are generally four ways of hiring labor: Through subcontractors, hired employees, independent contractors or labor brokers. Identify how many crew members you will need, the means of hiring them, and what the salary will be for each worker.
Of course, these decisions will depend on your niche. For example, you may hire a new crew for each project if you’re jumping straight into a general contractor role, but owner-builders often have their own, consistent team that they know they can rely on to get the job done.
Other things to include in your business plan:
Executive summary. Summarize and describe the main points of the business. Introduce the company, list ownership experience, discuss the business’s strengths, and review your marketing strategies.
Business description. What is your specialty or niche, as mentioned above? Write down a brief history of your experience (and your partner’s, if you have one).
List of construction services. Make a list of services that you’re planning to provide your target audience. If your focus is home renovations, for example, include things like bathroom remodeling, home restoration, re-tiling and roof repair. Then, identify the expected price you will charge for each service. (If you need help determining pricing, you can look at competitors’ prices and then adjust your own accordingly.)
Marketing strategy. How will you advertise? How will you keep clients? Outline the strategies you will use to attract and retain customers, whether that’s competitive prices or through top-notch customer service.
Suppliers and vendors. List the ones you will use for inventory, including cost and method of delivery for every item.
Means of financing. This may include SBA (small business administration) loans, credit unions, a business line of credit, or community banks.
Costs of permits, licenses for contracts, and bonds. (More on this below.)
Production schedule. Include how you will plan production for each contract.
Personal financial statements, for you and any other owners of the business. Include a balance sheet, income statement and cash flow statement for the business, and flesh out (realistic) projections.
Appendix. Include any supporting documents like supplier agreements, insurance policies, license approvals and tax returns.
Once you’ve completed your business plan, it’s time to set up your construction company!
To avoid any potential headaches later, you’ll want to get all of your licenses and permits in order, including business insurance and surety bonds. The first step: Register your business.
The most straightforward way to register your business is to set up an LLC, or Limited Liability Corporation. There are several types of LLCs, and they vary in terms of how you pay business taxes and how salaries are paid to owners and employees. In general, LLCs protect owners’ personal assets in case the business goes into debt or runs into legal issues.
You can also opt for a sole proprietorship or partnership as your business structure. Keep in mind that, while these do offer tax benefits, they don’t include personal liability protection. That said, many first-time construction company owners take this route, as they don’t have many (if any) employees, and sole proprietorships are generally less expensive to set up than LLCs.
Then, you’ll need to register with your tax authority, whether that’s the IRS in the US or the HMRC in the UK. (We will discuss US-based businesses for the purpose of this guide.) Apply for an EIN (Employee Identification Number) by answering a few questions on the IRS website or over the phone. Once that’s done, it’s time to move on to getting licensed by your state.
In addition to a general business license, you’ll likely need more specific licenses depending on the type of construction you’re doing and how you plan to operate your business. (For example, if you plan on using your home as your office, you’ll need to attain a home business permit.)
In some states, new-build residential construction requires a license, while in others, you’ll only need a license for remodeling jobs. Most states require a General Contractor License in order to work legally, although a few only require licenses for jobs worth a certain amount of money.
A tradesman license is required for HVAC, electrical or plumbing work, gas fitting and other construction trades. “Specialty Contract” licenses may be necessary if you’re an expert in a particular field. The list goes on!
Check with your state business license office for the requirements specific to you and your company. As mentioned above, you may want to hire a lawyer to help you through the process and ensure you have all the appropriate documentation.
Surety bonds are essentially promises from a third party to pay your client if you don’t fulfill your contractual obligations, such as failing to complete your work on time. In general, you will need surety bonds in order to legally operate your business.
The main types of surety bonds are:
Bid bond – This act as a guarantee to a project owner that a contractor can properly complete the job for which he/she is bidding. It protects the project owner by allowing the owner to sue both the contractor and the bond insurer in the event that the terms of the contract aren’t met.
Performance bond – After a bid is accepted, performance bonds protect the project owner from financial loss if the contractor’s work doesn’t meet the standards and conditions of the original contract.
Payment bond – Also known as a labor and material payment bond, this provides a guarantee that the contractor has the financial means to pay their employees, subcontractors and suppliers.
Like with licenses, bond regulations vary by state, and they are usually a legal requirement of bidding on and securing contracts. If you want more information or assistance with the process, there are resources that help emerging construction companies with bonding.
In addition to the above, construction companies are (usually) legally required to have at least one type of insurance.
For instance, general liability insurance protects you against worksite accidents, injuries, property damage, and other mishaps that could otherwise cost you large sums to pay off. Vehicle and property insurance may be necessary to ensure your company’s machinery and equipment is protected.
Aside from that, you’ll need employee-related insurance if you hire employees as part of your business. This includes workers’ compensation insurance, unemployment, and state disability insurance, and they provide coverage to employees if they get laid off for reasons beyond their control, if they’re hurt on the job, or if they’re no longer able to work.
As you can see, starting a construction business involves a lot of bureaucracy, and it’s best to check in with your state laws to make sure you have proper coverage on all accounts.
The field of construction is a highly regulated one, and the more familiar you are with regulations early on, the easier it will be to avoid error.
Make sure to check the following steps off of your list:
Create an OSHA plan – The Occupational Safety and Health Act mandates that construction workers must have a hazard-free, safe workplace. Therefore, put a workplace safety plan on paper that covers everything from proper work procedures, potential hazards, and policies on maintaining safety best practices.
Secure building permits – As there are so many regulations to keep track of, it can be easy to overlook this step. However, you MUST have building permits in order to start your first project! Of course, the process to apply for building permits varies depending on your location, as do the building codes with which you will need to comply.
(For example, the IBC (International Building Code) details minimal safety requirements for one- and two-family residences of three stories or less.)
Learn up on HUD standards – The Housing and Urban Development guidelines cover all aspects of construction, such as energy efficiency standards, durability, fire resistance, and design and construction strength.
Once you are better acquainted with industry regulations, you are ready to move on to the fun part of creating a construction company: Branding!
While it’s important to dot your bureaucratic ‘i’s and cross your technical ‘t’s, a successful construction business owner also knows how to brand.
Branding is how you tell the story of your company to your audience, through a series of visual and written cues. A thought-out brand identity will not only help to differentiate you from competitors, but also establish an emotional connection between your business and your potential customers.
To build a brand identity, think back to the values underlying your business, and the ideal customer that you imagined in your market research phase whose needs your construction company fulfills. Then:
As the “person-like” element of your brand, your brand personality determines how you communicate with your audience – both through the visual cues you use and the messages you send.
What kind of person do you think your audience would most connect with? Your personality will have a “voice,” and this voice is the one that should consistently communicate with your potential customers.
As a construction brand, it can’t hurt to err on the side of safety and reliability. If you renovate apartments in upscale areas, aim for sophistication and elegance. Or, maybe your customer base will be more drawn to a down-to-earth, relatable brand, to reassure them that you can preserve the character of their neighborhood.
Your logo will be your customers’ first interaction with your brand, so you’ll want to make sure it’s eye-catching, memorable, and captures everything you want your audience to believe about your business.
It is also the starting point for determining the rest of your brand identity, such as the fonts and color palette you’ll use later on. So, when designing your construction logo, consider:
Layout – Picture your logo everywhere; it’s likely going to appear most on signage and business cards, so make sure the logo can be resized without ruining the look of the design.
Typography – Make sure to use a clear, legible font.
Color palette – Try not to use more than three colors.
It’s crucial for you to establish an online presence early on, both so you can appear in search engines like Google and to provide potential customers with a place to find more information about your business. Websites provide businesses credibility, and they provide the perfect forum to brand with your logo.
As a construction company, your website needs probably won’t be too sophisticated; in the beginning, you’ll just need a few pages to provide information about what you offer and showcase images of your work. So, rather than paying a developer to create a site for you, you can use a cost-efficient website builder and do it yourself in record time.
This can’t be stressed enough. Social media gives you free, easy access to your customer base and provides endless opportunities for branding. Facebook, for example, will help you reach middle-aged customers, where LinkedIn gives you an outlet to connect with professionals in your industry.
Set up a Facebook business page. Then, focus on creating posts that are branded with your construction logo. Post content you think your customers will find valuable, whether that’s an external article about how to find an honest contractor or updates from your own company blog.
Like with your website, this is where your brand voice comes into play. Consistency is key; make sure the content you post is “on-brand”, meaning true to the brand personality you’ve been cultivating. Your posting schedule should be consistent as well, so your audience will know when they can expect content from you and learn to rely on your brand.
Most small business owners believe that having a mentor is a crucial component of their business growth. And, in the construction industry, taking advice from a mentor can be the difference between setting up your business the right way or cutting corners and getting into legal trouble later.
Choose an expert in your field who is willing to show you the ropes; this will make it easier to avoid mistakes, and give you someone to consult with when you run into questions or hiccups along the way.
There are a number of organizations that support new builders, like Associated General Contractors or Associated Builders and Contractors, Inc. They are more than willing to give contractors guidance or assistance, and they will even send work your way when relevant.
On that note, networking within your community is also important; get involved in local organizations to help build relationships with the people that could very well become your customers.
Don’t underestimate the power of referrals; word-of-mouth is a HUGE factor in becoming successful as a contractor, and it can bring you the majority of your business.
Ask customers to leave you reviews on your Facebook page and Google, and see if you can feature testimonials on your website. Treat customers with respect, even if they are difficult to work with. Commit to your deadlines. Do everything you can to make sure your reputation precedes you, and your clients will be eager to recommend you to others!
Bidding is an art form, and there are strategies to help you secure the bids you want. Start by knowing your strengths, weaknesses, and limits when it comes to executing on a project, and get familiar with the costs of labor and material. This will help you give realistic deadlines to potential customers – deadlines you can keep to – and offer competitive prices from the get-go.
Although setting up your construction company may take time, it’s an investment that’s worth the wait. Remember that branding is just as important as getting licensed and insured; without the paperwork, you won’t have a business, but without branding, you won’t have customers. Not to worry, though; like any diligent construction worker, you have all of your tools assembled – and now you’re ready to start building your business!