How To Open a Construction Business
Table of Contents
- Research the Business
- Network With Suppliers, Other Contractors, and Subcontractors
- Create the Business
- Pick a Business Name and Trademark It
- Become a Legal Entity
- Write a Business Plan
- Choose Your Subcontractors
- Learn About Construction Finance
- Utilize Construction Software
- Plan For Longevity From the Beginning
- Use Written Contracts Only
- Understand the Laws, Rules, and Regulations of the Business
- Educate Yourself on Contracting With the U.S. Government
- Understand Hiring, Employment Law, and Taxation
- Obtain Business Insurance
If you have a passion for building and want to earn a living constructing offices or beautiful homes in your city, opening a construction business might be for you. But you should know that it takes a lot of time, money, and effort to start your own construction business.
Use this guide to help launch what can potentially become a very profitable business and career for you.
The first step in opening any business is to understand that business as fully as possible. Market research is critical in something as complex as creating a new construction company.
The best way to understand the construction business is from the ground up. And people who already have construction experience have an advantage when starting. Experienced individuals in the local construction industry know the lay of the land, speak the terminology, and have connections in the business. The larger the variety of that experience—from skilled trades to bidding, banking, and accounting—the better off you will be. Not that you can't make a successful business venture without experience, it will just be that much harder.
Even with experience, running your own business is challenging. It would be best to seek mentors who have been successful in the construction business to help you along. And there are numerous resources for you to read over before you get started.
Seek Out the Best Resources
The Small Business Administration (SBA) has numerous resources and tools for the construction and facilities industry. These tools include Energy Efficient Standards, Federal Contracting guides, Hazardous Materials regulations, Hud Rules, and Stormwater Regulations. The SBA also has every tool a startup needs in understanding financing.
Your business plan will need to have a few statistics to justify your requests for financing. National construction business statistics can be found on the U.S. Bureau of Labor Statistics page. The construction industry itself has several statistical publications, including Fails Management Institute and the Construction Marketing Association, which has a wealth of information about the construction business and is worth seeking out.
There may also be local resources like a small business development center or the development department in your city or county.
Gain an understanding of who is in the business in your area. Learn their building designs, reputations, and general business practices. Start by following these steps:
- Survey the area and see how local construction is done. See who is in the business, what kind of buildings are going up, and in which locations. Use that information for your business plan. While you are out there, talk to other builders and learn the business in your area.
- Open accounts with several local suppliers. You should have a business credit card but also establish a credit account with each supplier.
- Familiarize yourself with all local zoning and building ordinances. That will give you an idea of what you can build and where.
- Create a list of good subcontractors, organized by specialty. Update your list constantly, and use it to hire both subs as well as people to cover for you if you're running late on a job.
- Establish good working relationships with local building inspectors. Contact them before you open for business. Tell them that you are going into the construction business, let them know that you will comply with all of the local ordinances and regulations, and ask for their help in doing that.
You and a lawyer of your choosing will need to create a legal business entity after making some early decisions. Your first decision will be to decide what kind of buildings you want to construct.
Will you build residential housing, commercial buildings in the suburbs or the city? New construction or refurbishments? You are wise here to start with what you already know how to do.
Next, decide if you will be a general contractor who hires people to do various jobs, a subcontractor specializing in one kind of work, or a general contractor with a permanent staff who hires subcontractors as needed. Each of these business structures requires slightly different bookkeeping, software, and employment and taxation paperwork.
This is where you'll come up with the perfect name for your business. Here, you can use your own name. You could also use a trade name that signifies that customers can trust you. In that case, you will need to own that name so no one in your area can use it.
- Conduct a preliminary search on Google to make sure no one else is using the name.
- Check to see if the internet domain name is available. If it is available, you can proceed in purchasing the name for a nominal fee.
- Visit the website of your state's secretary of state to ensure the name is available there. Register your chosen business name on that site and it will belong to you in that state.
- Next, trademark the name with the United States Patent and Trademark Office (USPTO) if you expect to use it in other states. This process takes time and money, but your name is still protected as a common law trademark.
- Once you receive your federal trademark, also register that trademark with your state. Note that not all states offer this service.
You are now the legal owner of that name and can enforce your rights in the name if others use it improperly.
You will have to incorporate your business. The type of legal business structure you create will be a joint decision among you and your legal and financial counsel.
Most small startup businesses are limited liability corporations (LLCs). However, a small, one-person operation could be a sole proprietorship, particularly in the skilled trades. Or your business could be a partnership or a limited liability partnership. Again, there are tax and other considerations at work here, so do not make this decision without consulting your team of experts.
Every new company needs a business plan, particularly one in construction, which can cost millions of dollars to start up. You will need to present a sophisticated business plan to any lender to obtain financing. In addition, you will need one if you are starting a franchise. A good business plan will include:
- An executive summary
- Your objectives and mission statement
- Keys to success
- A company summary
- A list of inventory needed
- An analysis of the market and competition
- A web strategy
- A summary of the management structure
- Your financial plan
A significant part of your business plan and ongoing budget will be a marketing plan. Your marketing strategy will be based on your research of the local building environment and will be specific to your earliest projects. Decide who your potential customers will be and determine the best way to market to them. Apartment buildings are marketed differently than single-family dwellings—the same with potential business tenants. Be specific about your market, and then find publications that cater to those markets—both in print and online.
A part of your budget should be for advertising and marketing. If you have the funds to market on television, radio, or social media platforms, it not only brings in business, but it makes you look like a solid business.
You want to set yourself apart as “best in class" in a highly competitive market. You should strongly consider hiring a marketing company for this all-important task.
If you are starting small and you want to bid on big jobs, you need to have a network of subcontractors ready to go. Work on that network from the start. Make sure that they are all professional, bondable, and reliable because you will ultimately be responsible for their construction work (or lack of it).
You will need to make several purchases to get your business off the ground. Then, after that, you will need to finance your projects before you can see any profit.
Pay Upfront Expenses
Before you start, you will need working capital to pay for licenses, permits, business cards, and insurance. You will also probably have to rent office space and purchase or lease construction equipment appropriate to your first project. There is no real way to determine what these expenses will total. The main thing here is to create a budget and stick with it.
Hopefully, you will have enough personal assets to get started. If you do not have enough capital to build your first project from scratch, you will need financing. You can do this through several methods, but a local bank is the first place to start. It will be essential to establish a working relationship with at least one local bank and banker as early on in the process as possible.
You may also want to look at an SBA loan or various neighborhood grants as they may be available, especially if you are a minority businessperson.
Educate Yourself on Business Banking
No matter how you raise your startup capital, you will need an ongoing relationship with local banks.
There are two financing streams in the construction industry—the money to run the business and the money to construct the buildings. So two essential parts of connecting with a local bank will be establishing a business bank account and obtaining a credit card.
Construction financing works on a unique business model. As a general contractor, you will have a lot of money running through your business. It will be your responsibility to keep diligent records so you know how much is in the bank and how much needs to go to your subcontractors.
Either the general contractor or the homeowner will arrange for a construction loan for the actual construction. This loan is paid in percentage chunks at specific contractual intervals during construction. One function of a general contractor is to connect the buyer with a bank for a loan for that buyer's project, so a good relationship with a local bank is essential.
The construction business is really like no other in how it procures materials, employs various people, and handles accounting. Because of that, you need to acquire want various industry-integral software:
- Construction management software tracks your entire project. There are a number of these to choose from. Most are skewed to a specific size of business or project.
- Construction accounting software tracks income and expenses, like all accounting software. These programs also track project-specific finances. They can tell you what percentage of the job is complete, monitor equipment usage, and collaborate with subcontractors' accounting programs. Construction accounting programs can also do payroll, which can be a complicated area for this business.
- It would be best if you also learned how to bid on jobs. Like accounting and project management, construction bidding software is also available. Project bidding can be a challenging process, especially on public or highly complex buildings. But even on small projects, this software can help get you jobs. You may also want to consider hiring an administrator to assist in bidding on complex projects.
Creating trust in your brand should be a fundamental part of any startup construction company. You want to do whatever it takes to finish a job in such a way that you are trusted with future jobs and worthy of positive referrals. Especially with social media, the good and the bad will get out to the public before you can have a chance to react or respond. Do great work ahead of time and, hopefully, all the feedback will be positive.
To do that, you'll want to be honest, upfront, and informative in every conversation you have. Everyone makes mistakes, and delays are a part of the business. If you are completely honest and don't try to hide from problems, that's a good start. It is also wise to refuse jobs you are not equipped to perform.
Make sure you follow up with every lead and every bid. Construction software will track all of this for you, but it will be up to you to make the final decisions. You will be fine so long as you conform to the necessary laws, rules, and regulations, and don't take any shortcuts.
Only do business by written contract. Do not make handshake deals, even with friends or family. Your contracts should have clear timelines with contingencies for unexpected delays (weather, labor difficulties, etc.). They should discuss terms of payment, claims for extra work clause, estimates on the scope of work, and explicit provisions on the use of subcontractors.
Every construction company is subject to federal, state, and local laws, rules and regulations. This includes federal OSHA regulations, your state's OSHA regulations, HUD regulations, the EPA, and other regulations. In addition, you may want to build to EPA green building standards.
In addition to those, the construction industry has numerous rules that vary from state to state and city to city. Each state also has precise licensing requirements for construction contractors.
Every construction job requires numerous local construction permits for each phase of the job. The more complex the job, the more permits may be required.
Then you will need all the usual business permits. You might also need a local business license. If you are occupying a building, you will be required to pass fire inspections and receive a certificate of occupancy. If you are making changes to the structure, you will need the normal construction permits. Depending on the jurisdiction, you may need a sales/use tax license or a sign permit.
The federal government encourages construction companies to take on government work. The government is the "world's largest customer" and is constantly contracting with local builders all over the country.
Beyond that, each department that bids out jobs will have specific rules. The SBA has an explainer page for processes and the procedures for qualifying as a minority-owned and other like businesses.
Follow these steps in hiring and taxation:
- Obtain a federal (and state) Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
- Ensure that all new hires are legally able to work in the United States, and fill out the proper paperwork (i9) to prove this. The same will be true of subcontractors.
- Run background checks on your new hires and subcontractors.
- You will be responsible for adequately completing and filing your employment taxes and business taxes, though you can delegate this job to your accountant.
- You will be responsible for conforming to all state and federal employment laws. Consider hiring an attorney that can advise you how to stay on the law's good side.
You will need several kinds of business insurance. Not that you'll be required to prove that you possess this insurance in order to bid on projects:
You will need several kinds of insurance policies for your construction business. A local insurance agent should supply all of your needs in this area, but here are a few to consider:
- Business liability insurance
- Worker's compensation insurance
- Commercial umbrella insurance
- Automobile insurance for each of your vehicles
- Construction surety bonds that guarantee that you will finish the construction job that you started (these tend to cost between 0.5% and 2% of the total project cost)
Speak With a Construction Attorney Today
The construction business is highly complex and, while it can be enriching financially, there are numerous pitfalls on the way to success. The best course is to put a construction lawyer on your team as soon as possible.
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