How To Start A Construction Company: A Beginner’s Guide

Key Takeaways


The thought of starting a construction company may simultaneously elicit fear and overwhelming excitement. The prospect of becoming an entrepreneur within the construction industry may open several new doors for savvy business owners, but the task that lies ahead is anything but easy. Therefore, prospective entrepreneurs will need to learn how to start a construction company the right way. Starting a construction company is not unlike any other type of investment in your portfolio: due diligence, education, and preparation will be met with a higher likelihood of success. As a result, anyone interested in starting their own construction company should heed the following advice.

How To Start A Construction Company In 5 Steps

Understanding how to start a construction business requires the unique convergence of several fundamental factors. Everything from developing an in-depth knowledge of the industry to understanding the demand and competition will be needed to build a solid foundation. The sheer volume of prerequisites can get overwhelming rather quickly. Fortunately, the process can be broken down into five, easy-to-digest steps:

  1. Research The Construction Industry

  2. Build A Business Plan

  3. Register Your Business

  4. Get Licenses, Certifications, Permits & Insurance

  5. Acquire Funding

1. Research The Construction Industry

Conducting the appropriate research on the construction industry is anything but optional; it’s necessary for any aspiring business owners. In fact, before taking any actionable steps, prospective business owners need to research the construction industry—all of it. Research will not only tell business owners how to conduct themselves moving forward, but it will also serve as an important indicator as to whether or not the impending endeavor is a good idea.

Research should begin on a broad level and include everything from national trends and laws to tax implications and legal requirements. The amount of information new construction company owners will be inundated with will be overwhelming, but here’s a list of resources to get started:

  • U.S. Small Business Administration (SBA): The SBA’s website is a good place to start looking to acquire basic business knowledge. While it may not contain information specifically relegated to the construction industry, it will give future owners the foundational knowledge they need to start a business. The site will provide information for every stage of growth and point you in the direction of helpful business tools.

  • U.S. Bureau Of Labor Statistics (BLS): As its name suggests, the Bureau of Labor Statistics will provide information about existing construction companies and their current status concerning employment. The site will reference specific labor indicators like employment, job openings, new hires, earnings, hours worked, and more. These indicators can give aspiring owners an idea of what to expect from their own labor force.

  • Construction Industry Publications & Statistics: Valuable market insights may be gleaned from one of many construction industry publications. The Fails Management Institute, the Construction Marketing Association, and Data USA all contain valuable information business owners in the construction industry covet.

  • Local Industry Publications: For extra credit, future business owners may want to dig into local publications to learn more about their area on a more microeconomic level. Local publications will provide specific insight reserved for a particular area, which can oftentimes prove more valuable than national publications.

  • The Securities & Exchange Commission (SEC): The SEC contains the financial information of public companies. It can even give insight into what proper bookkeeping looks like (or even poor bookkeeping). Either way, new business owners will have something to aim for if they can see the financials of companies that have already been where they want to be.

These resources are not meant to serve as a comprehensive list of today’s most valuable insights. In fact, they only represent a fraction of the information people will need to know when learning how to start a construction company. Instead, these resources should serve as a starting point and will hopefully lead to additional insights elsewhere.


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Construction company how to start

2. Build A Business Plan

Success in the construction industry won’t be realized overnight; it’ll take countless hours of preparation and an inherent degree of determination. Of the countless hours spent devising a strategy, many should be dedicated to building a business plan. If for nothing else, a good business plan will serve as a compass for the duration of the entire company’s existence. More importantly, a truly great business plan will serve as an essential road map for carrying out a successful construction business. With that in mind, let’s take a look at how aspiring entrepreneurs can make their own business plans.

Executive Summary

The first step when drafting any good business plan is to include an executive summary. As its name suggests, this portion of the business plan will provide a ” 1,000-foot view” of the business as a whole. More specifically, this part of the business plan is dedicated to providing a brief “snapshot” of the respective company. In doing so, the executive summary will contain the mission statement, company description, growth data, products and services, financial strategy, and future aspirations. On a more subjective level, it’s here where business owners will want to include their own reasoning for why they want to break into the construction industry.

Company Overview

Otherwise known as the company description, the company overview will detail the various aspects of the business, including its goals and how they intend to be reached. At this point in the business plan, prospective owners will want to describe the nature of their business, starting with what it does, the needs it meets, and who it serves. Go in-depth on the products and services the business will provide to meet the market’s needs. Additionally, the overview will address specific customers, organizations, or businesses the company will serve. To be clear, it’s not enough to define a target audience; owners will need to define the competitive advantage they bring to the table to secure said audience.

Market Analysis

Learning how to start a construction company won’t do business owners any good if they aren’t equipped with a proper market analysis. Including a comprehensive market analysis in the business plan is of the utmost importance, which begs the question: What’s included in the market analysis? Not surprisingly, a comprehensive market analysis will start with information regarding the specific market the business will operate in. Indicators to add to a market analysis include but are not limited to distinguishing characteristics, size, market shares, and pricing and gross margin targets. Include a SWOT analysis, which breaks down individual strengths, weaknesses, opportunities, and threats related to business competition.

Business Structure

Include a detailed outline of the company’s projected business structure and clearly define organizational roles and management. In other words, it’s in this section which individual roles will be defined and who will carry them out. It is important to be as specific and granular as possible to avoid any future discrepancies. The business structure will clearly define the rank and file and solidify the chain of command. This section should include your company’s organizational structure, details of the ownership, profiles on the management team, and qualifications. 

Product & Services

It is impossible to describe a business without detailing the goods and services it provides. Therefore, no business plan is complete without an entire section devoted to the service or product the business owner intends to provide. As an aspiring construction company owner, what is it you intend to provide your customer base? Take the time to outline your specific service and how it’s different from your competitors. Do not hesitate to get as detailed as possible. This section should offer no less than a description of what you offer, details on its duration for the customer, information on intellectual property, as well as research and development. This is where you’ll make a case for why your services are better than the competitions’.

Marketing & Sales

Marketing and sales strategies are instrumental in running a sound construction company, and a respective business plan needs to reflect as much. Take the time to put every marketing strategy on paper, and devise a comprehensive approach to reaching your target audience. This section should include, but isn’t limited to, a market penetration strategy, a plan for future growth, distribution channels, and a comprehensive communication strategy. Additional points to consider:

  • Why your target audience needs the service and how it represents a value

  • How you intend to find and reach out to prospective customers

  • The advertising medium you feel will generate the most responses

  • How you plan on converting customers into brand advocates

Financial Plan

The aptly described financial plan will identify the current state of your finances, and where you plan to be in the future. Some of the most important documents include:

  • Income Statements

  • Cash Flow Statements

  • Balance Sheets

  • Debt Obligations

  • Funding From Private Investors

The financial plan serves a very specific purpose: it identifies your current financial state and where you hope to be in the future. With the proper budgeting and adherence to the plan, a financial plan can keep new business on track to realize profits sooner rather than later.

Appendix

The more detailed a business plan is, the better. Therefore, prospective business owners should do their best to include every bit of information that will help them down the road. That said, not all information fits cleanly in the previously mentioned sections; that’s where the appendix comes in. Include an appendix so that you may add additional information without convoluting every other section. While the appendix is reserved for necessary information, some things you’ll want to add include:

  • Visual components like charts and graphs

  • More detailed information on your particular market

  • Information on previous projects you completed

  • Necessary permits and licenses

  • Proof of insurance

  • Resumes

  • Detailed information on the company’s organization

  • Notable news coverage

3. Register Your Business

With everything in place, it is time to register the construction company as a business. Fortunately, the actual registration process is straightforward, and can be taken care of in a few simple steps:

  1. Come up with a name: Prior to registering, the construction company should already have a name. If not, come up with a simple name that answers more questions than it asks. A company name should be easy to understand, and free of any controversy.

  2. Choose a business entity: Determine whether you want to register your construction company as a LLC or a corporation.

  3. Obtain an Employer Identification Number (EIN): Otherwise known as a federal tax ID, the EIN is what the business will use to identify itself when it pays taxes, hires employees, opens bank accounts, and applies for licenses. You can get your EIN by applying on the IRS website.

  4. Those filing as an S-Corp will need to file Form 2553 with the IRS: Corporations need to file at the federal level, unlike LLCs who do it at the state level.

  5. Register with the state agencies you intend to work in: Aspiring construction companies will need to register in each state they intend to do business in.

  6. Register with local agencies: Businesses will need to register through local governments in each state.

4. Get Licenses, Certifications, Permits & Insurance

Understanding how to start a construction company requires many steps, but none may be more important than obtaining the proper credentials, of which there are a lot. For a construction company to even operate, it needs the appropriate licenses, certifications, permits, and insurance for each state it operates in. Let’s take a closer look at what credentials today’s construction companies need to operate below.

State & Federal Licenses

Again, each state will differ, but there are generally three licenses required to run a construction company:

  • General Contractors’ License: Most states require a construction company (and its workers) to have a general contractors’ license to conduct work. Licenses prove competency when completing construction projects and ensure customers their contractors can get the job done.

  • Specialty Contractors’ License: Some states require more in-depth licensing procedures. Specialty contractors (those who specialize in a particular field), for example, may be required to get a particular license for their industry. Contractors who specialize in carpentry, painting, electrical, roofing, and HVAC units may need a specific license to identify their competency in a given field.

There is, of course, one exception: Contractors who want to work with government contracts will need to register as a government contractor.

Insurance

In addition to the proper licenses, construction companies will also need to make sure they have the insurance coverage they need to operate in each state. While insurance will vary from location to location, here are the six types of insurance no construction company can do without:

  • General Liability Insurance

  • Property Insurance

  • Vehicle Insurance

  • Workers Compensation Insurance

  • Unemployment Insurance

  • Disability Insurance

5. Acquire Funding

Unless you are fortunate enough to be able to fund the entire endeavor yourself, there’s a good chance you’ll need funding to get operations up and running. If for nothing else, understanding how to start a construction company will reveal just how expensive the process can be. Business owners will need money for everything from operations and payroll to supplies and insurance. That said, there are a number of ways to fund a construction company, not the least of which include:

  • Small Business Loans

  • Working Capital Loans

  • Purchase Order Financing

  • Vendor Financing

  • Equipment Loans

How Much Money Do You Make Owning A Construction Company?

According to ZipRecruiter, the average annual pay for a construction company owner in the United States is $80,700 a year. For those of you keeping track, that salary translates to about $38.80 an hour (the equivalent of $1,552/week or $6,725/month). It is worth noting, however, that this is an average. ZipRecruiter also identified salaries as low as $20,000 a year and as high as $284,000 a year. The difference is substantial and the result of a diversified industry. Government contractors, for example, tend to land higher-paying jobs with more profit potential. On the other hand, smaller companies may struggle to make ends meet, especially in a market that was recently stagnated by the Coronavirus.

Summary

In learning how to start a construction company, prospective business owners will quickly find out the process can be difficult and complicated. However, a truly great contractor’s profit potential is relative to their skill and business acumen. Fortunately, both skill and business acumen can be honed and improved over time. With the right foundation, there’s no reason you can’t build a successful construction company from the ground up, and this guide should help get you started.


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