Starting a Construction Business: What You Need to Know

Last Updated: 

June 26, 2024

When you start a construction business, you'll be responsible for everything from finding clients to hiring employees. You'll need to know how much money to invest, what insurance policies are required by law, and plenty of other details before launching your own company.

Key Takeaways on Starting a Construction Business

  1. Research the Market: Before starting a construction business, thoroughly research the local market to understand demand, competition, and potential clients.
  2. Develop a Solid Business Plan: Create a comprehensive business plan that outlines your goals, target market, services offered, and financial projections.
  3. Obtain the Necessary Licences and Permits: Familiarise yourself with the legal requirements and obtain the required licences, permits, and certifications for operating a construction business in your area.
  4. Build a Reliable Team: Hire skilled and experienced professionals who are dedicated to quality workmanship and share your business values.
  5. Establish Strong Vendor Relationships: Forge partnerships with reliable suppliers and subcontractors to ensure a smooth supply chain and timely project completion.
  6. Implement Effective Project Management: Develop efficient project management systems to track progress, manage resources, and meet deadlines.
  7. Prioritise Safety: Create a strong safety culture within your business, invest in safety training, and comply with all industry regulations to protect your workers and clients.
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Types of construction businesses

When starting a construction business, it is crucial to understand the various types of businesses within the industry. The two most common types are general contractors and subcontractors.

General Contractors

General contractors have the responsibility of overseeing and managing all aspects of a construction project from start to finish. Their duties include hiring subcontractors, procuring materials, and completing the project itself. 

They may also hire and supervise on-site labourers, who are not considered employees of the general contractor but rather independent contractors. One advantage of being a general contractor is that they are typically paid first by their clients, resulting in better cash flow. However, there are potential downsides. If any issues arise during construction or if another company fails to complete their part on time, the entire project could be at risk. 

Therefore, it is crucial for general contractors to have adequate insurance coverage to mitigate any unexpected events and potential financial losses that may occur due to delays or complications.

Subcontractors

Subcontractors are specialised professionals who work in collaboration with general contractors or directly with homeowners. They are hired to perform specific tasks or trades within a construction project. 

For example, subcontractors may be responsible for painting rooms, installing electrical systems, or handling plumbing work. Homeowners often hire subcontractors to undertake specific improvements or repairs around their homes. Subcontractors often work closely with other subcontractors to ensure smooth coordination and completion of the project. Their expertise and specialised skills are valuable in executing specific aspects of the construction process.

It's important to note that while general contractors and subcontractors are the most common types of construction businesses, there are other specialised roles within the industry. These can include architectural firms, engineering consultants, material suppliers, and construction management companies, among others. Each of these entities plays a unique role in the construction ecosystem, contributing to the successful execution of projects.

Laying the groundwork for your company

When embarking on the journey of starting a construction company, it is vital to lay a solid foundation. Here are some essential steps to consider:

Choosing a Memorable Name: The first step is selecting a name for your company. Aim for a name that is memorable and distinct, avoiding generic terms like "Construction Company" or "Building Contractors." Consider using your own name if it holds significance, such as if you were named after skilled builders in your family or have a personal connection to the trade.

Developing a Business Plan: A well-crafted business plan outlines your company's vision and operations. It should include details on the required initial investment, considering factors like equipment and material costs. Specify the services or products your business will offer at launch and provide relevant information about the current state of affairs, such as challenges encountered in hiring employees or finding willing contractors.

Conducting Market Research: Prior to setting pricing structures and devising marketing strategies, conduct thorough market research. This process involves studying potential customers, their preferences, and needs. By collecting customer feedback through surveys and analysing the market, you can make informed decisions and increase the chances of success when implementing new ideas.

It's important to note that laying the groundwork for your construction company extends beyond these initial steps. As you progress, other critical considerations include obtaining necessary licences and permits, establishing a reliable network of suppliers and subcontractors, implementing effective project management practices, and building a strong reputation through quality work and customer satisfaction.

Who you need on your team

When you're starting a construction business, one of the most important things to consider is who you need on your team. You'll want people who are good at their jobs and will be enthusiastic about the business. You'll also want them to work well together, since they'll spend so much time together while working on projects. Finally, it's important that they be honest and reliable, you'll need someone who can be trusted with sensitive information like client contact information or financial details.

Shopping for insurance and financing

Once you have established your business structure and determined the scope of work you aim to undertake, it is crucial to delve into the finer aspects. This involves addressing key considerations such as insurance, financing, taxes, accounting, and legal matters.

Insurance

Securing the appropriate insurance coverage is vital for your construction business. General liability insurance for contractors provides protection against accidents and injuries that may occur on the job site, such as falls or collisions. Additionally, workers' compensation insurance is necessary to cover any injuries sustained by your employees while working. Depending on the nature and scale of your projects, you may require additional policies to safeguard equipment and materials involved, such as heavy machinery, which may necessitate specific coverage.

Financing

There are various avenues to consider when financing your construction business. Bootstrapping with personal savings or obtaining loans from family members can be viable options. Alternatively, you may explore business loans from banks or seek investors willing to contribute capital in exchange for equity shares in your company. Cash advances from credit cards or lines of credit based on future earnings potential are also potential sources of financing to explore.

Taxes

Tax obligations for construction businesses differ by state, but generally fall into two categories. Income taxes are typically paid annually, based on the profits earned during the fiscal year (e.g., January through December). To accurately calculate these taxes, it is advisable to maintain monthly profit/loss statements throughout the year. Additionally, payroll taxes, including Social Security contributions, are typically paid quarterly, based on employee wages paid during each three-month period.

Accounting and Legal Considerations

Sound accounting practices are crucial for managing the financial aspects of your construction business. It is advisable to maintain detailed records of income, expenses, and invoices, and consider engaging professional accountants or accounting software to ensure accurate financial management. Furthermore, consult with legal experts to understand and comply with local regulations, licensing requirements, and any legal considerations specific to the construction industry.

By addressing these operational details diligently, you can establish a solid foundation for your construction business, mitigating risks and ensuring compliance with legal and financial obligations.

Finding clients and growing your business

You can find new clients by networking and referrals. Networking is important because it's the most effective way to grow your business and get referrals. You should also consider hiring a marketing agency or consultant who can help you get more leads for your construction company.

It's important that you make sure that any prospective customers know what they're getting into before they hire you as their contractor. It's also important not only that you give them all of the information about the project but also show them what kind of work will be done on the property so they can see if it matches their vision for their home or building project. 

Starting a company is a challenge, but there are strategies that can help

Starting a business is challenging, but there are strategies to help. Start small, build on success, and stick to your plan. Don't hesitate to seek guidance and support when needed. Consider funding options and evaluate your motivations. If financial gain is your main goal, explore other investment avenues. With careful planning and perseverance, you can increase your chances of success.

FAQs on starting a construction business

Are you considering starting a construction business? We understand that you may have several questions about the process, requirements, and best practices. Below, we have compiled a list of frequently asked questions to help address your concerns and provide valuable insights for aspiring construction business owners.

What are the initial steps to start a construction business?

Steps to Start a Construction Business

  1. Define the Problem: Understand what people want and need in the construction industry. Identifying their pain points and requirements is crucial for offering the right solutions.
  2. Set Personal and Professional Goals: Define clear objectives for yourself and your company. Establish goals that align with both your personal aspirations and the growth of your business.
  3. Focus on Your Goals: Stay committed to your own goals and priorities, rather than worrying excessively about others' objectives. If their goals don't align or conflict with yours, it may create challenges in working together.
  4. Establish Tangible Fitness Goals: When setting personal goals, consider what specific achievements you can attain within a 3-6 month timeframe. For instance, running 5 miles without stopping or losing 15 pounds through healthier eating habits.

How much capital do I need to start a construction business?

This is a very important question, and one that many people overlook. The amount of money you'll need depends on the size of your company and how quickly it grows. The more employees or subcontractors you have working for you, the more payroll costs will be. If any major projects come in right away, and these are often unpredictable, then those costs could skyrocket as well.

If possible, try not to borrow too much from other people or institutions until after at least six months when they can see how things are going (or even longer). That said: don't be afraid of borrowing if necessary; just make sure it's done responsibly!

What licences and permits are required for a construction business?

The specific licences and permits required for a construction business vary depending on the location. To ensure compliance, it is recommended to consult with the local government or relevant authorities. In general, licences and permits are necessary for different types of construction work. Here are a few examples:

  • Plumbing or Electrical Work
  • Building Permits
  • Contractor's Licence

Remember, this is a general overview, and it is essential to research and comply with the specific licensing and permit requirements in your locality to operate your construction business legally.

How do I find and hire skilled construction workers?

In order to find and hire skilled construction workers, you need to have a good idea of what they're looking for. As a general rule, most people want:

  • A stable job that pays well. The average construction worker earns between $15 and $20 per hour, more than double the national average hourly wage of $7.25!
  • A chance to learn new skills on the job and advance their career in the industry over time. If you can offer this kind of opportunity, then chances are good that your business will attract some great talent who want nothing more than to work with you and grow together as an organisation.

Conclusion

There's no doubt that starting a construction business is a challenge, but it can be done. With the right preparation and planning, you can open your doors and start building your future.

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