How to Start a Construction Company
Hi, I’m Matthew Speiser from Fundera.
Today I’m going to talk to you about a popular topic on our blog: How to start a construction
company.
While running a construction business isn’t exactly recession-proof, people are always
going to need things built, and that requires the expertise of skilled construction workers.
Working in construction also affords you the opportunity to be outside all day.
And when the job is done, you get to see the product of all your hard work.
Who wouldn’t want that?
More importantly, there is money to be made in the construction business.
Non-residential construction is on track to grow by 4% in 2019, which could open the door
for new construction firms to help meet demand.
The economy has also added 239,000 construction jobs over the past year, which represents
the fourth largest source of job growth in the United States.
Now, keep in mind that the profit you can make on an individual construction project
depends on a wide variety of factors, including the materials needed, the location of the
construction job, and the nature of the job, such as whether it is a commercial job or
a residential job.
But in general, the arrow is pointing up for construction businesses, so you might as well
strike while the iron is hot.
Here are the steps you’ll need to take to get your construction company off the ground.
The first step in launching a construction company is to create a business plan.
To be honest, you’ll need to do this first regardless of the type of business you launch.
That’s because you need to know exactly when, how, and why you’re starting your
business.
While you may have all this information in your head, it helps to put it down on paper
to make sure your ideas can actually work as a business.
You also need a business plan so that outside parties can understand your business.
This is especially important if you are applying for any kind of business financing.
Your business plan should include a business description, including your business’ speciality,
such as home renovations or remodeling.
Within your specialty you should also list a specific set of construction services you
will provide, as well as what you will charge for each service.
Since construction companies typically bid on contracts in order to get jobs, you should
include the bidding process your company will use.
You should also identify the bonding company your business will use.
Other considerations include your marketing plan, top competitors, production schedule,
tools needed, accounting method, and background information on each business owner.
Once you have this all written down, show it to construction company business owners
you trust and other experts in the industry.
You could also seek out a mentor via SCORE.
Then refine your plan based on their recommendations.
While this seems like a lot of information, writing a business plan actually isn’t that
complicated.
You can even find construction business plan templates to use with a simple Google search.
The second step is to register your construction company with your state’s regulatory agency.
To do this, you’ll need to look into the rules, licenses, and registrations required
within your business’ location.
Your county or town may also have specific laws in place.
The Department of Labor website has some useful resources to help you get a better idea of
how to meet your requirements.
Now, before you can get a license, you need to register your business.
The most common registration for a construction company is a limited liability company, or
LLC.
LLCs provide you with easy options for paying business taxes, while also covering your personal
assets in case your business goes into debt or faces legal issues.
If you’re starting very small, you may also want to consider a sole proprietorship, as
these cost nothing to register.
Just keep in mind though that with sole proprietorships, the company is not a separate entity and the
owner has no protection against personal liability.
Once your business is registered, apply for the licenses you will need to operate.
In some localities, this may be as simple as being a recognized contractor within the
town, county, or state.
Others may be more specific, such as licenses to install HVAC equipment or do other subcontracting
work.
You may also need licenses and permits to bid on government contracts, which vary based
on where you operate.
Next Insurance has a helpful guide to what you will need to acquire a construction license
in every state.
Step three is to insure your business.
Insuring your business is just as important as registering it, because construction is
an inherently dangerous business.
You’re working with heavy machinery, electricity, and all sorts of other equipment that could
do a fair bit of damage, so you need to be protected in case the worst happens.
Your insurance needs will depend on the specific nature of your business, so meet with an insurance
agent to discuss what kind of coverage you require.
At a minimum, you’ll need general liability insurance.
This protects you against worksite injuries, accidents, and other mishaps that could otherwise
leave you with hefty bills and legal issues.
You might also want to look into vehicle and property insurance to make sure your equipment
is covered.
If you plan to hire workers, you’ll also need workers’ compensation, unemployment,
and state disability insurance.
Workers’ compensation helps your employees cover bills and expenses if they’re hurt
on the job, and provides them with coverage for medical costs and lost wages.
Unemployment insurance helps cover employees who lose their jobs due to reasons beyond
their control—such as layoffs or the disbandment of a company.
And state disability insurance provides employees with coverage in case they are no longer able
to work but still need assistance paying bills and cost of living expenses.
Step four is to secure the necessary construction bonds, also called surety bonds.
Surety bonds protect your clients by paying them in the event that you do not complete
your work as agreed upon.
Surety bonds are legally required for construction companies, but the specific requirements differ
in each state.
Look up your state's requirements online or meet with a reputable surety bond agent to
find out what kind of coverage you need.
Keep in mind that to get a surety bond, you need to be able to prove to the provider that
you are experienced, capable, and financially secure.
Surety bonds can cost anywhere between 0.5-2% of the total cost of a project.
If you can't get approved by a third party surety bond provider, the Small Business Administration
may also be able to provide you with a bond.
Step five is to buy equipment and hire workers.
The required equipment you need will vary greatly depending on the types of projects
you plan on accepting.
When just starting out, buying used equipment is a great way to keep costs down.
You can also look into equipment financing, which allows you to purchase machinery and
use the cost of that machinery as collateral.
This means the lender will take your machinery if you can’t make payments.
If you plan on taking on larger projects, you will also need to hire a team of skilled
workers.
Some construction companies wait until they get a job and then hire contractors to work
it.
This offers you more flexibility because you don't have to keep paying staff during a quiet
period.
You can also hire workers with specific specializations for each job.
On the other hand, if you have lots of steady work, hiring your own team of full-time employees
might save you money in the long run.
Step six is market your business.
This is another one of those steps that is the same regardless of the type of business
you operate.
For construction companies, marketing means a couple of things.
1.
Is to have a professional looking website and strong social media presence.
This will allow potential customers to see pictures of your work and read reviews from
other customers.
2.
Is to network in your local community.
Try joining community organizations to make connections with people who will be able to
help you grow your business.
The more connected you are in your community, the easier it will be to spread the word about
your business.
3.
Is to make relationships with suppliers, subcontractors, building inspectors, and developers.These
people will be instrumental in helping you complete your projects, and they may be able
to refer new business to you as well.
The last step is to start bidding on projects.
Construction project bidding is an art in and of itself.
Generally, you will need to be able to provide accurate price quotes and deadlines to potential
customers.
A good construction management software can help you manage this process.
Popular options include Procore and CoConstruct.
There are a few things to keep in mind when bidding on construction projects:
One is that you shouldn’t make promises you can’t keep.
This means not setting ambitious deadlines that you’re not sure you can make.
The second is to factor in all costs associated with taking on the job, including buying materials
and hiring workers.
This will also help you determine your profit margin.
If you’re very new to the construction game, it also might be helpful to hire a construction
administrator.
Administrators are specialists in bidding on projects.
They can quote prices for jobs, submit invoices, and collect payment on time.
Now, if you’ve just listened to all this and thought to yourself: “Wow, starting
a construction business seems expensive,” you’re not wrong.
Between supplies, equipment, maintenance, and labor, you’re looking at a lot of overhead.
Thankfully, there are many different forms of financing out there that can help you as
you launch your business.
Some offer tons of flexibility, such as a business line of credit.
Others are designed to provide you with a bigger sum of cash at once, like an SBA loan.
You can learn more about the best types of construction business loans, as well as what
you’re eligible for, by visiting fundera.com/business-loans.
That wraps up our guide to how to start a construction company.
We hope you learned a thing or two, and now feel confident about building your own business.
For more entrepreneurship advice, head over to fundera.com/blog, and subscribe to our
YouTube channel for more videos.
Thanks for watching!