How to Start a Construction Company in 5 Steps
Deciding to start your own construction company can be an exciting, but overwhelming experience. With so much research, reporting, and paperwork to complete, it’s easy to get lost in the administrative details and forget the passion that inspired you to start your own business to begin with.
In fact, 68% of small business owners regret not spending enough time to learn the basics of managing a business in the first year. Luckily, the process of starting a construction business is actually pretty simple, so long as you know where to start. Construction companies take time to plan and build, so by starting earlier, you can set yourself up for success later.
And although COVID-19 has caused halts in production in major cities, there are still 36 states where construction is considered an essential service as of the publish of this article.
We’ve compiled everything you need to know about getting your company off the ground, from how to write a solid business plan to what types of insurance are needed and beyond. Here is how to start a construction company, broken down into 5 steps. Click the links below to jump to each section:
1. Gather Research About the Construction Industry
Thanks to the internet, there is an abundance of free, publicly available data available to you, so long as you know where to look. Here are a few great information sources that you can use while doing market research:
- U.S. Small Business Administration: The SBA provides a broad range of tools to help small businesses at every stage of growth, with specific tools targeted to the construction & facilities industry.
- U.S. Bureau of Labor Statistics: The BLS collects data about employment in the construction industry, like job openings, hires, separations, earnings, hours, and more.
- Construction Industry Publications and Statistics: Organizations like the Fails Management Institute, the Construction Marketing Association, Data USA, and other publishers like ours have construction statistics that can provide valuable market insights on the industry.
- Local Industry Publications: Many construction statistics vary widely according to geography, so Googling construction organizations or publications in your town/city or county can provide an additional layer of insight that can place your business plan a step above the rest.
Doing your research ahead of time is optional, but it will make the rest of the process of setting up your construction company much easier. Particularly, having your research completed will make it much simpler to complete the next phase of the process: writing your business plan.
2. Write a Business Plan
Every startup needs a business plan, not just to help guide you through the process of starting your company but also to help raise investment funds, get approved for loans, and more. Here are the steps you’ll need to take to write up your construction company’s business plan:
The executive summary is the introduction to your business plan. It should be brief (one or two pages), comprehensive, and compelling.
The Small Business Administration recommends including your mission statement, basic biographical information about your company, the products and services you offer, financial highlights and funding goals, relevant past successes, and your future plans for the business. The rest of your business plan will contain the same elements touched on in your executive summary, but in greater detail.
After the executive summary, give an overview of your company: who the founders are, when it formed, and what it does. You should also write a value proposition statement that states why your company’s offerings are in demand in your specific market.
You should also be sure to note here whether your business is structured as an S-Corp, a C-Corp, or an LLC, and how ownership is divided if you’re not the sole founder.
In this section, you’ll need to provide the research that proves the existence of a specific demand in your target market and why your company is uniquely positioned to satisfy that demand.
Here are a few details you should consider including in your market analysis:
- State of the Industry: Provide data that demonstrates that your target market is healthy and capable of supporting your new business.
- Your Target Market: Cater your analysis to the market that your products and services are targeting, using customer demographics and specific, local data.
- Growth Opportunity: Show that your target market is not only capable of supporting your company, but that there is enough demand to allow your company to grow.
- Market Share and Product Pricing: Calculate what percentage of potential customers you’ll be able to capture compared to your competitors. Based on this information, estimate a pricing plan that is both competitive and profitable.
- Competitor Research: Highlight your competitors’ strengths and weaknesses and illustrate how that will inform your company’s business strategy.
Here is where you’ll describe your company’s structure in detail. You should include:
- Who owns the company and how it’s divided
- Division of shares among investors, if you have any
- Your company’s legal structure (corporation or LLC)
- Organizational layout
- Number of current employees and necessary future hires
Remember that your goal is to explain how each structural element contributes to your business’s future success.
Products + Services
This section is where you’ll go into detail about what products and services you offer. Discuss current or past projects that can serve as examples of your company’s offerings, if possible. Since construction also relies heavily on materials sourcing, highlight any existing partnerships you have with building suppliers, sub-contractors, etc.
You may also want to include the type of contracts you plan to use with potential clients. Lump sum, unit price, cost plus, and time and materials contracts all handle materials sourcing differently, so your vendor needs will differ depending on the type contract you plan to use.
Marketing + Sales
Here is where you’ll explain how you plan to reach potential customers and convert them into clients.
Some points to highlight in this section are:
- Value Proposition: Why your target customer needs your company’s services and why your offerings are more competitive than those offered by others in your market.
- Positioning: How you plan to find and reach your target customers.
- Promotion: The type of marketing or advertisement strategy you plan to use
- Sales Strategy: How you plan to convert marketing prospects into contracted clients
Financial Plan + Projections
Give a comprehensive overview of your company’s current finances and where you plan to be financially in the future. If you don’t have previous financial data, include projected versions of the same documents and attach the market research and analysis you used to make those forecasts.
Here are some of the documents you should include:
- Income Statements or Projected Income
- Cash Flow Statements or Cash Flow Forecasts
- Balance Sheets or Projected Balance Statements
You should also document all of your debt obligations—this includes other investments you’ve secured, mortgages on any company property, equipment loans, etc.
Finally, you’ll include the financial details of the funding you need or hope to raise. Include the funding you’re soliciting presently as well as any additional rounds of funding you anticipate being necessary in the future. Be sure to earmark each amount for a specific purpose, like equipment purchases, property leasing, etc.
Any charts, notes, research, or other pieces of information that you believe are relevant to your business plan but are too long or don’t belong in the document itself can be added to an appendix.
Here are some documents that might appear in a construction company’s business plan:
- Charts, tables, and graphs
- Detailed market analysis
- Past project details
- Permits or licenses acquired
- Proof of insurance
- Founder or founders’ resumes
- Company organizational chart
- News coverage
Once your business plan is complete, it’s time to make it official by registering your business legally with federal, state, and local governments.
3. Register Your Business
Registering a company is fairly simple. Here are the steps to registering your construction business:
1. Decide on a business entity: Choose your business name and decide whether you’re going to register as an LLC or a corporation.
2. Get an Employer Identification Number (EIN): Your EIN is your federal tax ID which you’ll need in order to pay taxes, hire employees, open a bank account, and apply for business licenses. You can apply for one online via the IRS website.
3. If you’re registering as an S-Corp, file Form 2553 with the IRS: Whereas LLCs are handled by the state, corporations need to file with the federal government.
4. Register with state agencies: Some states require a paper registration while others will allow you to register online. You can use the SBA’s state lookup database to find out what your state requires. (Remember that if your company operates in more than one state, you need to register with each state’s government.)
5. Register with local agencies: You’ll need to visit your local government websites to determine what registration is required, if any.
One of the biggest stumbling blocks for new business-owners is the process of deciding how to structure the company. There are 4 main business structures to choose from, each of which has its own strengths and weaknesses.
Sole Proprietor: As a sole proprietor, you have total control over your company. You’re also totally liable, which means that if your business defaults on a debt, the bank can seize your personal assets as a result.
Limited Liability Company (LLC): A Limited Liability Company is designed to reduce the risk associated with operating as a sole proprietor. As an LLC, you’ll separate your personal assets and debts from your company’s finances, which protects you as an individual.
The drawback to registering as an LLC is that it can be harder to raise investment capital. If you’re planning to rely heavily on investment capital to start your construction company, you should consider registering as a corporation.
C Corporation: The traditional corporation is the C Corporation. Like an LLC, a C Corp protects business owners from taking on personal risk, but makes it easier to raise capital by allowing ownership of the company to be divided among shareholders.
Of course, involving shareholders complicates the process, so the drawbacks to filing as a C corp include lots of paperwork and a higher filing fee. C Corps are also subject to double taxation—the corporation will be taxed as an entity, and shareholders will be taxed on dividends.
S Corporation: The other common type of corporation is an S Corp, which is like a C Corp with a few key differences. S Corps can’t have more than 100 shareholders and all shareholders must be U.S. citizens or residents.
Additionally, S Corps are subject to pass-through taxation, meaning only the shareholders are taxed on their dividends.
Registering your company as a legal business entity is just one half of the administrative process. As a construction company, you’ll also need research and obtain the necessary permits, licenses, and certifications you need to perform different types of work.
4. Acquire Licenses, Certifications, Permits & Insurance
You’ll need to look up the specific licenses and permits required by your state and, in some cases, by your municipality. In order to find out exactly what licenses you need, consult your state’s Contractors’ Board and/or your local Department of Labor. There are a handful of considerations that vary from state to state, like liability and workers compensation laws.
Here are some common licenses required for construction companies:
State and Federal Licenses
These are the two main licenses required to perform construction work:
- General Contractors’ License: In most states, construction companies need a general contractor’s license. You can use this state-by-state guide to determine what paperwork you’ll need and which applications to file.
- Specialty Contractors’ License: If your business includes work like carpentry, painting, electrical, roofing, HVAC etc. you may need to acquire a specific license for that work.
If you plan to bid on government contracts, you’ll also need to register as a government contractor.
You absolutely need to make sure your construction company is insured before beginning any work whatsoever to make sure that you’re covered in case of an accident or emergency. You’ll also need various specific insurance policies to cover different aspects of your business like property assets and employees.
- General Liability Insurance: General liability insurance protects you in case of worksite accidents, injuries, property damage, etc.
- Property Insurance: If you have a physical office, you’ll want to make sure you have property insurance that covers you in case of property damage, theft, natural disaster, or if a client is injured while on the premises.
- Vehicle Insurance: Most construction requires the use of at least some heavy machinery. If you own your construction equipment, you’ll need to make sure that it’s insured. If you opt to rent your equipment, you can either provide your own insurance or purchase a waiver that will reduce your liability for damage.
- Workers Compensation Insurance: When an employee is injured on site, your general liability insurance will cover the immediate consequences of the accident. However, if the injury causes lost wages or long-term injury, you’ll need workers comp insurance to cover those benefits.
- Unemployment Insurance: If an employee loses their job for reasons beyond their control (layoffs or company closure, for instance), unemployment insurance provides monetary assistance until they find a new job.
- State Disability Insurance: If a job injury causes a long-term disability that prevents the employee from being able to work, they can file a state disability claim for financial assistance.
Now that you’re fully registered, licensed, and insured, you’re ready to start thinking about the most important element of business: money.
5. Find Funding for Your Construction Startup
Most construction companies need funding in order to rent or purchase the equipment and supplies necessary to begin work. Our guide on renting or buying construction equipment can help demystify the process.
Once you decide what supplies you need, here are several types of funding available for small businesses:
Small Business Loans
The SBA offers a variety of low-interest loans that are designed to help small businesses thrive. Generally, SBA loans are only available to business owners with a long credit history and a good credit score.
Lender Match can help you find lenders that offer SBA-guaranteed loans.
Working Capital Loans
Certain loans can be acquired for very specific purposes, like working capital loans, which are designed specifically to cover day-to-day operational expenses like payroll or office utilities. Working capital loans are popular in highly seasonal industries, where the majority of a company’s revenue for the year comes in over a period of a few months. During the rest of the year, companies may apply for working capital loans to cover expenses while business is slow.
Purchase Order Financing
For industries that rely heavily on materials sourcing, including construction, there are short-term financing options available to help companies cover the cost of a project’s materials up front.
Purchase order financing organizations offer monetary advances to help cover purchasing orders and typically carry an interest rate of between 1.8% and 6% per month.
Another way to finance materials is to work out a financing agreement with the materials vendor. Rather than a monetary advance, a vendor financing agreement allows the construction company to negotiate a longer payment term on an order without incurring late fees or penalties.
Vendor financing is especially useful if you decide to use a contract with your customers that does not stipulate any customer payment up front.
Grow Your Business
Don’t sit back and relax once your construction company is off the ground. Every business decision you make should be carefully considered with the goal of growing your business in mind. While promotion is important, remember that the best marketing strategy is high quality work that speaks for itself.