How To Open a Construction Business

The first step in opening any business is to understand the industry. Market research is critical in a business venture as complex as launching a new construction company.

Understanding the construction business from the ground up is the best approach. Entrepreneurs with industry experience have an advantage. Knowing the terminology and having connections in the business is extremely valuable. Understanding the intricacies of construction projects can help deliver quality work and manage operations effectively.

However, business savvy and entrepreneurial expertise are also important. Ideally, your experience is diverse — from skilled trades to bidding, hiring, and accounting.

You can still launch a successful business venture without this background — but it will be more challenging and require more support.

Running your own business takes grit, even with experience. Working with successful mentors in the construction business can help.

Seek Out Resources and Support

Federal government agencies provide tools and resources for the construction and facilities industry. Some of these include:

• Energy efficiency standards and rebates from the Small Business Administration (SBA)
• Federal contracting guides from the Small Business Administration (SBA)
• Managing hazardous waste from the Environmental Protection Agency (EPA)
• Minimum property standards from the Department of Housing and Urban Development (HUD)
• Manufactured housing programs from the Department of Housing and Urban Development (HUD)
• Protecting homes and businesses from natural disasters from the Small Business Administration (SBA)

The SBA also has several tools to help you understand startup financing.

Your business plan will need a few statistics to justify your financing requests. Find national construction business statistics on the U.S. Bureau of Labor Statistics page.

The construction industry has several statistical industry publications, including the Center for Construction Research and Training and the Construction Marketing Association.

Local resources, such as a Small Business Development Center (SBDC), may also be available. These offices can help with business planning, funding resources, and more.

Find out who is providing construction services in your area. Learn their building designs, reputations, and general business practices. Start with these steps:

• Survey the area and observe local construction. Find out who is in the business, what type of buildings are going up, and where. Use that information for your business plan. While researching, talk to other builders and learn about 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 reliable subcontractors organized by specialty. Update your list consistently.
• Establish good working relationships with local building inspectors. Contact them before you open for business. Tell them you are opening a construction business, and let them know you will comply with all local ordinances and regulations.

Ask for help and partnership in your local community.

One of your first decisions will be what kind of buildings you want to construct. Consider the following:

• Will you build residential housing or commercial buildings?
• Will you work primarily in the suburbs or the city?
• Will you specialize in new construction or refurbishments?

Next, determine which type of contractor you will be:

• General contractor who hires others to do various jobs
• Subcontractor specializing in one kind of work
• General contractor with a permanent staff who hires subcontractors as needed

Each business choice requires slightly different bookkeeping, software, and employment and taxation paperwork.

Some small-business owners get help from an attorney for these key decisions.

The next step is to choose a business name for your construction business. Your business name should be professional, memorable, and concisely communicate the nature of your business.

Think about how the name looks and sounds when abbreviated. Also, imagine how it will look on your website, vehicles, and other facets of your branding. Once you have selected and registered your name, you may want to work with a graphic designer for a logo.

You cannot choose a business name that is already registered in your state. Search for your desired business name on your state's corporations website, usually a secretary of state. Most states' sites have a searchable database of registered business names.

Also, confirm your selected name isn't protected under a federal trademark. You can use the U.S. Patent and Trademark Office's (USPTO) trademark database to check for federal trademarks.

Your name also can't be confusingly similar to a registered trademark. This means you cannot use your selected name if the average consumer could mistake your business name for someone else's trademark.

Once you have confirmed that your name is available in your state and not protected under a trademark, check to see if the internet domain name is available. If it is available, purchase it immediately. This typically doesn't cost more than $15. Don't forget to snag social media handles, too.

Next, register your business name with your state.

Trademarking Your Business Name

Registering your business name with your state does not automatically afford you trademark rights. You must apply for a federal trademark with the USPTO separately. This process takes time (typically around 18 months), but your name is protected as a common law trademark during the process.

Once you receive your federal trademark, you can register that trademark with your state. Not all states offer this, and it may not be necessary for your business.

After trademark approval, you are officially the legal owner of your business name. This means you can enforce trademark rights in the event of infringement.

You must decide which type of structure to use for your business. Each type of structure has tax and liability implications, so it is important to research and choose the best one for your business. You may want to consult with your attorney about this decision.

LLCs and Corporations

Most small startup businesses are limited liability companies (LLCs). LLCs offer tax flexibility and personal liability protection, meaning your personal assets are not at risk if your business incurs debt or is sued.

LLCs also require less paperwork and are more cost-effective to set up than corporations. Corporations also protect personal assets but have a more formal structure and are subject to double taxation. Larger companies or those who plan to go public tend to structure as corporations.

As your business grows and evolves, you can convert your business from an LLC to a corporation if necessary.

Sole Proprietorships and Partnerships

With either a sole proprietorship or partnership, the law does not treat the business owner as separate from the business entity.

If you are the only owner, you could also structure it as a sole proprietorship. This is the most straightforward type of business structure. If you do not choose another structure, the state will recognize your business as a sole proprietorship by default.

However, operating as a sole proprietorship comes with risks. Sole proprietorships do not offer personal liability protection. If someone sues your business or it goes into debt, your assets, like your personal accounts, home, and cars, are all at risk.

A partnership is like a sole proprietorship but for businesses with more than one owner. A general partnership has tax flexibility but no personal liability protection. However, you could consider a limited liability partnership (LLP), which provides limited liability for all partners.

Every new company needs a solid business plan, particularly one in construction, which can cost millions of dollars to start up. In addition, you will need one if you are starting a franchise. A good business plan will include:

• Executive summary
• Objectives and mission statement
• List of inventory needed
• Market analysis and competition
• Marketing and promotional strategy
• Management structure
• Financial projections and startup costs

You will need to present a sophisticated business plan to any lender to obtain financing.

The Importance of Your Marketing Plan

A significant part of your business plan and ongoing budget is your marketing plan. Your market research and target audience information should inform your marketing strategy.

First, identify your target market. Your efforts should aim to market to these specific potential customers. For example, you would market apartment buildings differently than single-family dwellings — the same with potential business tenants.

Be specific about your market, and then use the channels that reach that market — both digital and traditional. Consider the following:

• A user-friendly, accessible website and a Google Business Profile
• Social media platforms
• Search engine optimization (SEO) strategies
• Direct mail, print advertisements, and television and radio placements
• Local news coverage and publicity
• Getting involved with community events
• Word-of-mouth and referral programs

If your budget allows, consider hiring a web developer to build your website. Most developers can also train you to manage and update your website yourself.

A primary contractor hires subcontractors to perform specific tasks as part of a larger project. Subcontractors typically specialize in a particular trade, such as:

• Electrical work
• Plumbing
• Heating, Ventilation, and Air Conditioning (HVAC)
• Carpentry
• Roofing

If you are starting small and want to bid on large jobs, you'll need a network of subcontractors ready to work. Ensure they are professional, bondable, and reliable — you will ultimately be responsible for their construction work.

Starting a construction business requires several startup expenses. You'll also need to finance your projects before generating a profit.

Pay Upfront Expenses

Before you start, you will need working capital to pay for some or all of the following:

• Licenses and permits
• Insurance premiums
• Marketing and promotional materials (like advertising costs, branding, and business cards)
• Construction equipment and tools
• Labor costs
• Vehicle expenses
• Office space rent

Some construction owners have enough personal assets and capital to fund your first project. If not, you will need financing. There are several methods to secure outside financing, most commonly a small business loan through a bank or credit union. You can also try:

• Borrowing from family and friends
• Attracting investors
• Qualifying for an SBA 7(a) loan
• Taking out a line of credit or credit card (carefully research terms, fees, and interest rates)

Also, check if there are local or neighborhood grants available. Some municipalities offer subsidized lending opportunities for specific industries, areas, or business owner demographics.

Learn About Business Banking

No matter how you raise your startup capital, you will need an ongoing relationship with local financial institutions.

There are two financing streams in the construction industry:

• Money to run the business
• Money to fund the construction projects

Start by opening a business bank account and obtaining a credit card.

Construction financing works on a unique business model. As a general contractor, you will likely handle substantial financial transactions. You are responsible for keeping diligent records so you know how much money is in your accounts and how much should 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 periods during construction. One job of a general contractor is to connect the client with a bank for a loan for their project. This is another reason a positive relationship with a local financial institution is essential.

The construction business is unique in how it:

• Procures materials
• Employs various categories of professionals
• Handles accounting and bookkeeping

Because of these intricacies, you'll want various industry-specific software.

Construction management software tracks your projects from start to finish. There are several to choose from. Most are tailored to a specific size of business or project.

Construction accounting software tracks project-specific income and 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 complicated for construction owners.

Construction bidding software saves time, reduces errors, and increases your chances of submitting winning bids. Project bidding can be challenging, especially on public or highly complex buildings. But even on small projects, this software can help you prepare, submit, and win bids. 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. Complete every job so that it encourages future business and positive referrals. Be aware that social media, Yelp, and other online review platforms allow feedback (both good and bad) to reach the public before you have a chance to react or respond.

Try to be transparent and informative in every customer conversation. Delays are an unfortunate reality in this business — be sincere and upfront when this happens, and don't shirk responsibility. Keep your focus on finding solutions and providing good service. Also, only take jobs you are equipped to perform.

Follow up with every lead and every bid. Construction software will track this for you, but it will be up to you to make final decisions. Conform to the necessary laws, rules, and regulations, and don't take 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 (like weather or labor difficulties).

Your contracts should also discuss:

• Terms of payment
• Claims for extra work clause
• Estimates on the scope of work
• Explicit provisions on the use of subcontractors

You may need to include other information depending on the project's scope.

Properly drafted contracts can reduce the risk of misunderstandings and legal disputes. A business attorney can advise you on how to draft an effective contract and what to include.

Every construction company is subject to federal, state, and local laws and regulations. These include:

• Federal OSHA regulations
• Your state's OSHA regulations
• Federal HUD regulations
• The U.S. Environmental Protection Agency (EPA) regulations
• And other regulations

In addition, you may want to build to EPA green building standards.

The construction industry also has several rules that vary by local municipality. Each state also has precise contractor licensing requirements for construction professionals.

Every construction job requires numerous local construction permits for each phase. The more complex the job, the more permits you may need.

You will also need the usual business permits, including a local business license. You may also need the following:

• If you are occupying a building, you must pass fire inspections and receive a certificate of occupancy (CO).
• If you are making changes to the structure, you will need the normal construction permits.
• Depending on the jurisdiction, you may need a sales and use tax permit or a sign permit.

Contact your local Chamber of Commerce or equivalent agency to see what your business needs.

The federal government encourages construction companies to take on government work. The U.S. government is a major customer for construction businesses and constantly contracts with local builders nationwide.

To win a government contract, you must complete a formal registration process and qualify as a small business.

Beyond that, each department that bids out jobs will have specific rules. Use the SBA website's Become a Federal Contractor section to learn more about qualifying as a minority-owned or similar business.

As a small-business owner, you must adhere to applicable employment and tax laws.

First, get an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This is sometimes called a federal tax ID number. You will need this before paying federal taxes, hiring employees, or opening a business bank account. You can get your EIN instantly and for free on the IRS website.

Ensure that all new hires can legally work in the U.S., and fill out the proper paperwork (Form I-9) to prove this. The same is true for subcontractors.

You should also perform background checks on your new hires and subcontractors.

You are responsible for adequately completing and filing your employment taxes and business taxes. However, you can delegate this job to your accountant.

You are responsible for complying with all state and federal employment laws.

You will need comprehensive business insurance for your construction business. An insurance agent can make recommendations, but a few insurance policies to consider include:

• General liability insurance
• Workers' compensation insurance (this is mandatory in most states)
• Commercial umbrella insurance
• Automobile insurance for each of your vehicles
• Construction surety bonds that guarantee you will finish the job you started (these tend to cost between 0.5% and 2% of the total project cost)

Your state may also require you to pay into unemployment insurance and disability insurance programs.