How To Start Your Own Construction Company

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There is no question real estate is booming. It has come a long way since the 2008 financial crisis. And the sector has held extremely resilient through a tumultuous 2020. With contractors in short supply and demand for construction services in high demand, it is an extremely good time to start a construction company. In this article, we will go through the steps you need to start your own successful construction company and how to avoid many of the common pitfalls.

Table of Contents

 

Market Research and Industry Analysis

The construction industry is booming, literally. The industry averages a seven percent job growth each year. The construction market is expected to expand by 2022. At this point, the market will account for eighteen percent of the world GDP. This growth is estimated at 18.8 trillion dollars.

The construction industry in the United States is currently a 2 trillion dollar market. There are just over 3.2 million construction businesses in the United States. These businesses employ over 8.7 million people. Construction is an enormous market in the United States, and it’s only expected to continue growing.

Planning Out Your Construction Business

When crafting your business plan, plan what type of construction you want to go into—residential or commercial? Many companies do both but they will eventually find out that their business will mostly do one or the other. In addition, there are niches within those two categories. For instance, for residential, you can do new builds, rebuilds, remodels, luxury homes, etc. But no matter what you choose, the ultimate goal for most thriving construction businesses is to have as many big jobs as possible and take on a few small jobs to fill in the 1-2 week gaps between big jobs. 
 

Filling Your Business Pipeline

When planning your business, you need to develop a pipeline for obtaining business. What is your customer acquisition strategy? Construction is a business that relies heavily on referrals via word-of-mouth. But when you are new, referrals are hard to come by. Therefore, you should strategize on how to fill up your pipeline with regular work the first few years. Here are a few ideas to fill up your pipeline with business:

-Paid online advertising on Google/Facebook

-Paying for leads via Homeadvisor, Houzz, Angie’s List, Porch, etc

-Referral deals with customers or others in the real estate business, etc.

-Ads on Craigslist and FB Marketplace

To read more about marketing your construction business, read the section of this article on Marketing.

Bid Success Rates of Construction Companies

The plan is to get out there and submit as many bids as possible. You will not win every bid. As a matter of fact, 1stSource collected some information on the bid-hit ratio of various construction projects. We converted the bid-hit ratio to convert into a bid success rate. The success rate is calculated by taking the number of successful bids divided by total bids. So if you submit 4 bids and get one contract, that’s a 25% success rate. The rates are as follows:

General Contractor Bid Success Rate

Type of Project High End Low End
Public Works
16.6%
10%
Private Bid Work
25%
16.6%
Negotiated Work
50%
25%
Design Build
50%
25%

Subcontractor Bid Success Rate

Type of Project High End Low End
Public Works
14%
9%
Private Bid Work
25%
16.6%
Negotiated Work
33.3%
25%
Design Build
33.3%
25%

When starting out, your success rate may start pretty low, even lower than the chart above. But as you gain more experience bidding for projects, you can analyze your bids and see what works and what doesn’t in order to obtain a higher success rate. So keep close watch of your bids and analyze them!

For more information on winning more bids, read the following:

Sage: Improve Your Bid-Hit Ratio

Plangrid: Bid Less, Win More: How to Master the Construction Bidding Process

Margins and Rates

Part of your business plan also involves figuring out your margins and your T&M (time and materials) rate. Construction is a young man’s game. So while you may heavily discount yourself at first to get into business, you will need to mark your prices up enough so that you can take yourself out of doing the physical labor eventually. 

According to Next Insurance, the gross margins can be as high as 42 percent for remodelling, 34 percent for specialty work ,and 25 percent for new home construction. Your T&M rate will vary according to the market you are in. In hot markets in the West Coast of the United States (like Seattle), it is not unusual to charge $80 to $120 for T&M.

 

Putting In The Work And Building Connections

Construction is one of those niches where you need to have a lot of extensive experience in the field before going out on your own. It is not one of those businesses where you can just take a course and then start (like internet marketing). This reason is two-fold. 

First, construction is a very general term. It encompasses a lot of the building process. Thus, you will have to get a bit of experience doing a little bit of everything so the ropes. 

Second, working construction for someone allows you to network. The people you network with are co-workers, homeowners, and general contractors. They can all feed into your business once you start it. Build good relationships with them and they can provide you with business, referrals, expertise, and labor. 

Aside from the main people you employ, you should also build connections with people that are outside your realm of expertise and scope-of-work, such as structural engineers, electricians, architects, and roofers, etc. Additionally, you need to establish relationships with multiple suppliers so you can get your materials cheaply and quickly.

 

Start-Up Cost

There are five major expenses in starting your own construction company. These fees are related to registration, licensing, obtaining insurance, hiring employees, and purchasing equipment. Equipment by far is the largest startup cost. If you already own a lot of equipment from your prior work in construction then you’re good to go. Then there are other small miscellaneous costs such as billing software and such.

As far as labor goes, most construction companies starting out use contract labor so you don’t have payroll worries until you start a contract.

If you already have a truck, rely on contract labor, and have most of the equipment, you can probably start your own construction company for as little as $5,000.  

 

Business Formation

The following five steps explain how to start your own construction company. These steps will assist you in getting your company on its feet and earning money.

#1 Business Structure

Determining the structure of your business is an important step. There are three main structures. The first is a Limited Liability Company or LLC. You also have the option of starting a sole proprietorship or corporation. The difference between these business structures is your level of responsibility and accountability.

In a limited liability company, your personal assets are protected. This structure allows you to classify your company as a separate entity. This allows your corporation to hire employees, open a bank account, and obtain licenses and permits.

An LLC is similar to a corporation in a few ways. Both protect your personal assets and allow the business to operate separately. The main difference is the company’s organization and structure. A corporation must have some kind of board that assists in running the company.

A sole proprietorship essentially makes your company an extension of you. If something were to go wrong, your personal property could be put at risk. Basically, you will be personally responsible for the debts of the company.

When making this critical decision, it is best to get help from a professional. Companies such as Legal Zoom will assist you in building the structure of your company.

#2 Employer Identification Number

An employer identification number is essential for tax reasons. This identification number is extremely important for licensing. The use of an employer identification number is required for most corporations and LLC’s. Even sole proprietorships benefit from having an EIN.

To apply for an employer identification number, you must first check your eligibility. After determining that you are eligible, you will need to find the time to fill out the application. The entire application must be completed at once. You can not save it and come back to it later.

Once the application is complete, you simply submit it. There are certain companies that will complete the employer identification number application for you. One of these companies is Legal Zoom.

#3 Business Licenses and Permits

Beyond your business license, construction contractors will also need to be registered with the state as a contractor. In most states, contractors are required to take examinations in order to obtain a license. Washington state is the only state that doesn’t require construction contractors to take an examination in order to get a license. States will dictate what kind of license you need based on the scope of work you are performing. 

#4 Insurance and Surety Bond

The best thing you can do to protect yourself against unexpected expenses is to ensure that you are insured. There are a variety of insurance options available to help you in managing large, unexpected expenses.

Businesses, in general, require additional insurance. A construction company is no different. When your company is adequately insured, clients are more likely to utilize your services. This is because the insurance minimizes risk.

General Liability Insurance is essential. Construction is an incredibly risky business, and this insurance minimizes the risk dramatically. It covers the risk of visitor’s injuries and the clients’ property.

Professional Liability Insurance protects your company from lawsuits. Sometimes errors happen; these errors could cause a defect. These defects could encourage a client to file a lawsuit.

Most construction companies could benefit from Builder’s Risk Insurance. This insurance protects the property in case of fire, vandalism, or natural disaster.

An obvious insurance aspect that many companies overlook is auto insurance. It is important to ensure the company vehicles in case of an accident. It may also be a good idea to ensure your company’s expensive equipment.

In addition, construction companies are required to have surety bonds in nearly all localities. The bond is a financial security that guarantees contracts signed for projects and can be used in the event of non-completion or shoddy work by the contractor. 

#5 Business Bank Account

One of the first things you should do is open a business bank account. Doing this can help protect your personal assets. Using a business bank account, regardless of your business’s structure, can prevent confusion.

Utilizing a business bank account can assist you in separating your personal and business finances.

Accounting and Payroll

Understanding basic accounting principles and being able to handle payroll are just two of the many new skills you need to learn. These two aspects are likely the most important things to sort out when opening your own company.

Payroll mistakes cause unhappiness among the employees. It is common knowledge that happy employees who feel taken care of work harder and are more loyal to the company.

Managing your company’s accounts is key to financial success. It is also important to ensure that you are fulfilling government regulations in case of an audit.

Luckily, we live in the golden era of technology. There is so much software available to assist you in both accounting and payroll.

Quickbooks is an excellent software, capable of helping you keep your company’s finances in order. Quickbooks offers you the ability to give estimates, send invoices, send payment reminders, change orders, and take down payments. It has really almost everything you need to get your construction business off the ground.

In some cases, it can feel impossible to manage these two critical aspects of your business. If this is the case, there is an abundance of qualified accountants, HR specialists, and financial experts for hire. Add one of them to your team.

Marketing and Promotion

Your business is only as good as it’s marketing. As a business owner, it is your job to handle the marketing and promotional aspects of your business. These two aspects are what make you money.

Understanding marketing and utilizing promotional materials and deals will help you attract clients.

Advertising Your Business Online

The easiest way to promote your business is through advertising. The internet provides you with a variety of platforms to do this. Advertising your business online also increases the amount of attention your advertisement receives. 

There are two main avenues when you are going about advertising for your construction business online. 

The first way is to advertise on Facebook and Google. We used these two platforms with great success as they allow such targeted advertising. If you want to see what we can do for your construction business, get in touch with us.

The second way is to use a homeowner lead generation platform like Angie’s List, Houzz, Home Advisor, Porch, etc. These platforms all run a bit different. Some of them have a pay-per-lead model while others have self-serve advertising solutions. It is best to try all of them to see which one works best for you. Some contractors have zero luck on these platforms while other contractors swear by them. If you aren’t sure how to use these or want marketing experts to handle your marketing on these sites, talk to us and we can get you started.

Users Cost Per Lead Membership
Home Advisor
>30 million
$15 to $60 per lead depending on category and market
$350/year
Angie’s List
>6 million
Dependent On Ad Campaign
None
Houzz
>30 million
Lead generation included in membership
Starts at $199/mo depending on category
Porch
N/A
$5 to $65 depending on category
Free or $35/mo

Company Website

A company website is a great thing to have, but difficult to make. A company website can be used to promote the company in the best possible light. The website can communicate with your clients and allow them easy access to relevant information.

Many consumers utilize the internet to find what they need. Services are no different. Consumers use the internet to discover new contractors and find qualified help at a reasonable price.

If you have no website development experience, don’t worry. There are multiple ways to develop a company website. Hiring a professional can allow you to save time and achieve a fantastic website. If you want us to create you a stellar website, we can do that too. Just get in touch with us

If you want to try to find web designers yourself, you can use a freelancer platform like  Upwork. This platform allows you to post a job and seek a freelancer to complete it.
  

Building The Website Yourself

Another option is to build the website yourself. There are various software available to assist you in creating your own website. 

Squarespace is a convenient website builder that many beginners use. This website builder allows you to easily create your website by clicking and dragging. Again, this takes some learning and will take a lot of time if you aren’t familiar with building a website. If you want us to do it for you, get in touch with us! 

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