12 key things to know before starting a construction or contractor business
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12 key things to know before starting a construction or contractor business

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Over the past few years, the construction in- dustry has boomed. Many cities in the United States are experiencing rapid growth. This growth also brings a demand for highly-skilled construction workers. The time is right to start your own construction business.

Here are our top tips on how to start a company in the construction industry.

1. Understanding your market

Construction is experiencing wage and job growth. This is good news for anyone who's considering starting a business in the construc- tion industry. The construction industry isn't one-size-fits all.

Not all niches have the same needs. Your city might be lacking electrical engineers. The demand for electricians is high. This allows electricians to charge higher prices for their services.

The demographics of your area can be determined by looking at the local market: marital status and income levels, as well as types of industries, all indicate what type of construction a particular region might need. This can be done by visiting the Small Business Association site.

You can also check out businesses in your locality to see what they charge, and who their clients are. They are happy to talk about starting up a construction business.

2. Select a niche or construction speciality

You can choose to specialize in a particular construction niche or specialty.

Specialization allows businesses to focus on their niche and more effectively target their marketing. Here are some ways that a construction company can select a niche.

  • The pros and cons of general vs. specialist contractors. General contractors make smaller profits, but they take on larger jobs. Specialized contractors are the opposite.
  • Commercial vs. residential You will need a larger credit limit and financing for commercial construction. Although the projects are usually more important, the payoff comes at completion.

You can also obtain specific construction certifications such as LEED or CCM to distinguish yourself from your competitors.

3. Understand your costs

What will your construction business bring you? It can be difficult to provide estimates, price your services and maintain a profit margin. Understanding your costs and the scope of a project is crucial to make more money. Here's a guide on how to calculate overhead and profit margin.

Inflation also has a significant impact on the construction sector. Here's some advice on how you can handle inflation-related costs.

Most lenders will require that you forecast your business's profits in order to receive funding.

4. How to write a business plan

Your business plan will detail your financial goals and how you intend to achieve them. This is a great way to show financial viability, which can be especially useful when seeking investors or funding.

A business plan allows you to formalize your goals and make them more tangible so that you can achieve them. Here are some of the components that make up a typical small business plan.

  • The structure and management of a company
  • You can offer services
  • Customer Type
  • Market target
  • Number of employees
  • Marketing plan
  • Estimated costs
  • Funding sources
  • What are your expectations?

The SBA provides resources to help small business owners write a business plan.

5. Register your construction business

You should register your small business, even if it is part-time. You will choose a structure when you register your company. These are some of the most common options for construction startups.

  • LLC: Limited Liability Company. The majority of LLCs fall under the sole proprietorship and partnership categories. The LLC protects your assets but allows you to pass on income into your personal account.
  • Corporation: There are several versions of corporations. This option should only be considered after consulting with an accountant, as the payroll and taxes for a corporation are more complicated.

You must provide a business name when you register your construction firm.

It is also a great opportunity to register for an Employment Identification Number, or EIN, with the federal government. EINs, which are similar to Social Security numbers for businesses, help you with your taxes and complete forms relating to your business.

6. Licenses and permits

Each state has its own license and permit requirements. Check with your local agency if you require a license.

In Alabama, for example, general contractors are required to have a license if the job exceeds $50,000. Other states, however, require a license to be obtained for any job.

Many states require specialty contractors to be licensed as well. Our guides to state licensing requirements for major construction trades are below:

7. Insure your construction business to protect it

You will be asked by prospective clients if you have insurance for your business. A Certificate of Insurance (COI) can be vital to booking clients, and give them peace of mind that they will complete the job successfully.

Insurance is more than just a COI. The insurance is meant to protect both you and your company. You want to protect yourself and your business from harm and injury. Below are a few types of insurance that construction contractors may use:

  • General liability insurance: Protects against typical workplace accidents. This covers damage to property, injury to non-employees, and advertising injury. It is usually the first insurance that a business owner buys.
  • Workers' Compensation: General liability only covers bodily injury to third parties and non-employees. Workers' compensation covers employees injured at work, including medical costs and lost wages. Check your local laws to see if you are required to carry workers' compensation coverage.
  • professional liability insurance: Also known as error and omissions insurance - Protects you from negligence claims, civil suits, and professional errors. If you're a Painter, and accused of using the wrong type or color of paint in a client's home.

These are the types of insurance that our clients in construction most commonly purchase. Every business is unique, so make sure you evaluate your specific needs.

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There is no one-size-fits-all insurance for contractors. Find additional information about carpenter liability cover.

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8. Get funding for your construction company

The funding of construction jobs is one of the most difficult challenges for companies. Construction companies often have cash flow problems. They must purchase expensive materials and equipment before they are paid.

There are a few different options available to you when it comes to funding your business.

  • You can get a loan for your construction company. There are many options (both SBA and traditional).
  • Credit
  • Investors
  • Grants

9. Promote your new construction business

Marketing allows you to find new clients organically. A steady stream of clients means that you are always on the job. Your marketing efforts need to start early in order to reap the rewards later.

Create a website first to prove your legitimacy to potential clients. Your website should include all the services you offer, your contact information, as well as photos and testimonials.

Set up a Google Business Listing. You can easily collect reviews and appear in local searches. Early reviews will help you build your reputation and book larger jobs.

Local social media sites such as Facebook and Nextdoor can also be used to collect reviews. People are often happy to recommend local businesses.

10. Find projects and bid on them

Contractors have a difficult time with estimates. Underbidding could lead to lower profits if you are not accurate. While managing the job site, it's difficult to keep up with all of the bid and estimation requests. Your estimator must be competent if you are going to hire someone else to do estimates.

It is important to create a system for generating leads so that your employees and company can have steady work. It is not difficult to create a system that will allow you to replicate a scope of construction work.

As you win larger government and commercial contracts, this area can be continually refined. The projects are more expensive, but you will earn more.

11. Keep relationships to ensure repeat business

Working with a new client is a risky proposition for both parties. Your client may not know you or your work, and they might not trust your process. You are also placing a great deal of trust in the client, because they usually pay the entire bill or the majority of it at the end of the work.

Pre-vetted clients are much easier to work with. You can continue to work with clients if you have a good relationship. You've built trust. You can get repeat business by:

  • Demonstrating knowledge and experience
  • Estimates and bids that are accurate
  • Communication timelines
  • Listening to clients
  • Requesting feedback
  • Being Honest
  • Doing a good job and completing tasks
  • Focus on customer service and making customers feel special

These steps will show that you are willing to go the extra distance. You will build a good reputation in your town and continue to receive referrals.

12. Hire subcontractors to grow your business

As your business expands, it might make sense to outsource work. You may need to subcontract electrical works to an electrician if you are a general contractor. It is common for construction companies to grow in this way over time. You can manage your client better by outsourcing some work.

How do you find the best subcontractors? You must rely on relationships, reputation, and referrals just like your clients. As your business grows you will start to branch out and network with subs who fit your business the best.

You must manage your subcontractors effectively once you have them in place. This will allow them to do the best possible work for your client. Communication is key.

Start by establishing an independent contractor contract with clear expectations. You should communicate with subs at every step, and make sure to check their work carefully. Also, show them the client's requirements.

Over time, develop your subcontractors so they can improve their skills. You can all work together to improve your business. It will make the job site safer, more efficient, and everyone more successful.

You may also be a contractor -- which is great. Subcontractors have steady work, and they don't need to deal directly with clients. It may fit your goals. Before you accept your next contract, make sure to understand your rights as a subcontractor.

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