How to Start a Construction Company: Requirements, Tips & Techniques
Starting a construction company can be one of the most exciting ideas. Maybe you’ve dreamt about it since childhood, imagining how you would build the most notorious buildings in your city and manage the construction crew. Or maybe you got inspired by your friend who’s started his construction business and had a pretty huge success.
Whatever your motivation is, you’ve indeed chosen a pretty impressive career endeavor. However, it comes with its challenges.
Although the construction industry is one of the most popular choices among startups, it also has one of the highest failure rates. As of 2018, 53% of construction startups failed, making them the second industry with the highest failure rate.
The reasons can be diverse. Maybe there were not enough financial resources, or the team lacked experience and business knowledge. Whatever it is, the fact remains that starting a construction company can be pretty challenging.
That’s why, to help you reach success easier, we have collected a couple of tips and tricks that can come in handy! So, without further adieu, let’s get straight into the:
How to start a construction company in 6 steps
First things first:
1) Do industry research
Everything good starts with an idea. But to get that idea, you need to spend hours researching. Research is the first step not only for the construction business but pretty much anything else. It serves as a strong foundation for your entire project and helps you understand what expectations are set in the market.
Also, don’t forget that keeping up with the industry trends is essential. If you truly want to be in the game and understand all the ins and outs of it, you need to follow the industry news, understand the latest technology that is being used, and try to catch up.
When you begin your market research, first of all, start thinking locally. Is the construction business a feasible option in your region or area?
Your local market may be already full of existing companies whom their customers love. So stepping in as a complete newbie and offering your services while having less experience might not work out well. After all, your competitors have years of expertise in the industry, so playing against them can be tough.
That’s why market research is so crucial. It helps you discover the answers to these questions in advance and avoid failures. The next question you should ask during the research process is who your competitors are?
- What do they specialize in?
- How much do they charge?
- What is their reputation?
Don’t forget to research your potential customers. Who do you want your target to be?
Try to find out their interest, median age, and hobbies. It can help a lot during the marketing phase. Overall, good research will help you get the work done way more efficiently and help you stay on the right track right from the beginning.
2) Have a business plan
Now that you’ve finished your research, it’s time to write your business plan. But what is a business plan, and why do you need one?
For those completely new to the industry, here’s a small definition:
A business plan is a document that contains the goals of aconstruction company, the means and ways of achieving those goals, and an approximate time period for the company to do that.
Not only does it help your company in starting a new business, but it also makes it easier to raise investments, grants, get loans, and more. It consists of the following sections:
- executive summary
- the overview of the company
- analysis of the market
- the business structure
- products and services offered
- marketing and sales
- financial plan
Let’s go briefly through each section to understand how to write an efficient business plan that would help your construction company move forward.
Starting with the:
This is more of an introduction to your document. It is a brief, usually 1-2 pages section that contains a comprehensive analysis of your business.
According to the recommendations, it should have your mission statement, some biographical information, a summary of the products or services you offer, insight into your finances and fundings, some of your past achievements, and your plans for the future.
In other words, it is a quick summary of the entire document to let your readers know what to expect.
The overview of the company
In this section, you get to give a general overview of your company, explaining who the leaders are, when it was founded, and what it does. Don’t also forget to mention how your company differs from its competitors.
Here, you could also talk about your business structure and how you decide to divide the ownership if there is more than one founder.
Analysis of the market
This section is probably the most extensive one as you need to write down the entire research of your market and target audience, explaining how you will satisfy their needs.
Here’s what you should cover:
- the state of the industry
- the market segment you are targeting
- the opportunity to grow
- the research of your competitors
- your market share along with the pricing of your services or products.
It will surely take you a while to figure out everything, so make sure you allocate enough time to your research.
The business structure
If you needed a place to describe your business structure in more detail, here you have it!
This is where you should tell who owns the construction business, how it is shared among the investors, your legal structure, the organizational layout, the number of your current employees and future hires.
The key here is to explain how each of these elements contributes to your business’s final goal and future success.
Products and services offered
It’s time to tell your readers about the products and services that your business offers. Because you’re in the construction industry, your services will rely heavily on material sourcing, so it would also be good if you mentioned some of your building suppliers, partners, and so on.
To make it even more detailed, you could also mention the type of contracts you plan to use with your customers.
Marketing and sales
Now that you have explained all about your company and services, it is time to tell how you will market it all to your potential customers. In other words, you should start talking about your marketing strategy and sales.
Here are the two main points to highlight in this section:
- The sales strategy: how will you convert your prospects into actual clients? How are you planning to reach out to them?
- Your company positioning: what is the strategy you plan to use for your marketing and advertising? How will you position yourself as a construction company?
Along with these two, do not forget to cover your value proposition, promotion, and overall promotion strategy.
As the name suggests, this section should cover the financial aspects of your business. It should be a comprehensive overview of your current financial state as well as your plans.
Don’t worry if you do not have much data from the past to display; you can also use this part of the document to discuss your financial projections and forecasts.
Here is what you can consider to include in this section:
- Your income statement or your projected income
- Your current cash flow or your planned cash flow
- Some of your balance sheets, or again, some of your forecasted balance statements
Don’t forget that this is also the place for mentioning your debt obligations, be that investments, loans, or mortgages.
Finally, the last section of your document is the appendix where you get to include everything that you thought could be relevant to your business plan. You can attach some charts, graphs or tables. You could also go deep into your market analysis and reveal some details that you haven’t covered initially because you didn’t want to make it all too long.
Here, you can also talk about some relevant past projects, your current insurance, the licenses acquired, the organizational charts, media coverages, and pretty much everything that gives more insights into your business.
Now that your business plan is ready, we can proceed with the business registration and other legal formalities. So, our next step is:
3) Register your construction company
We know that business registration might seem like a long and exhausting process, but in fact, it is pretty simple. You should only follow a few easy steps, and your business will be registered!
What are those steps? We’ll list them right now:
1) Choose your business entity
Decide on your business name and determine whether you want to register it as a corporation, sole proprietor, or LLC.
2) Obtain your EIN
The EIN stands for Employer Identification Number, and it is your federal tax ID. You need it to pay business taxes, hire employees, open bank accounts, and so on.
3) File Form 2553, if you’re registering as an S-Corp
If you decide to register as an S-corp, you are not handled by the state, so you must file the corresponding form with the federal government. If you’re confused with the term S-Corp, you can read all about it here.
4) Register with your state agencies
Depending on the state, you might be required to either follow a paper registration or an online one. Remember that if you are operating in more than one state, you will need to register with each of them.
5) Register with the local agencies
Finally, visit your local government websites and find out whether you need to register with them too, and what is required to do so.
In the registration stage, one of your difficulties might be deciding on what your company structure is. There are four main business structures to choose from: the sole partnership, general partnership, limited liability company, and C or S corporations. Make sure you understand all of them thoroughly before you choose the structure for your business.
4) Get your license
Once your business is registered, you need to take care of your licensing and legal requirements. There are some specific licenses and permits which ensure that your company operates in the market legally. These permits can be required by states or by municipalities.
The permissions might differ from state to state, so consult the official Contractors’ Board or your local Department of Labor to find out what exactly is required.
Overall, here are the two main licenses you’ll need to conduct your construction work:
5) Don’t forget the insurance
Trust us; you’re almost there!
If you own a construction business you need to also get it insured!
After getting your license, it’s time to take care of your insurance. This is a critical step because you want to make sure that your company is insured if any emergencies or accidents occur.
Again there are various business insurance types, so take a look at each and understand which one you need. The main insurance types for business include:
- General liability insurance
- Property Insurance
- Pollution liability insurance
- Professional liability insurance
- Commercial Auto insurance
- Cyber insurance
- Workers Compensation Insurance
6) Take care of fundings
Finally, you made it to the last step. Once you’re registered, licensed, and insured, you can start taking care of your fundings.
As with any other startup, a new construction company also needs to find enough secure funding to rent or purchase equipment necessary for their work. Before you start applying for investments, equipment loans, grants, or government funding programs, try to understand what equipment or supplies you need. After that, you can consider the following funding formats:
- Small business loans
You can consult the SBA, which has different low-interest loans to help small businesses grow. However, SBA loans are only available to companies with a long credit history and a good credit score.
- Working Capital Loans
Working capital loans are designated to the day-to-day operational expenses. They are especially prevalent among the seasonal industries.
- Vendor Financing Agreement
Finally, you could go with vendor financing that allows your construction company to discuss long-term payments. This format is helpful if you want to use a contract that does not force your client to pay upfront.
Final thoughts and next steps
Yes, it will take you some time and effort to start your construction company, but in the end, it will be worth it. However, keep in mind that building your company is only the beginning: you should constantly take care of your business and think twice before making an important decision.
And we get it, a new businesell who owns the cs is a lot to process. There are so many things you need to take care of that you might feel too intimidated. The first couple of years might be a little challenging, but once you start grasping it, everything will fall into place. Some construction entrepreneurs choose to use business software, even if they are only starting their journey as it helps with the management and keeps them on track.
Just have enough patience and be committed to your idea, and you’ll be surprised how easy it all will get with time!
Don’t forget to mention in the comment section how your journey went, and if you have any questions, let us know. We’ll be happy to assist you in all the possible ways.