If you’ve got your sights set on starting a construction company in 2023, you’ll need to have the ambition necessary to build a successful business.
I’ve been in the consulting business for over 10 years with some of the largest construction companies, and I can tell you that starting a construction company isn’t as simple as it sounds.
In this article, we’ll cover everything from setting up a legal entity, obtaining the necessary licenses and permits, finding the right clients and subcontractors, and even getting your accounting in order.
Steps to Starting a Construction Company
Starting a construction company can be daunting, but by following the steps below, you’ll be well on your way to success.
Step 1: Research Your Market
Commercial construction is a highly competitive market. Before you start a construction business, it’s essential to take the time to research and understand the trends in your local area.
Doing so will help you determine whether there is enough demand for your services and how much competition exists.
Some ways to conduct this research include:
- Read industry news and reports
- Interview potential vendors, subcontractors, and customers
- Attend local construction events
- Talk to other contractors for advice on starting a business
Step 2: Research Your Competition
Once you know what construction services you’ll be offering, it’s important to research your competition.
Analyze their websites, marketing materials, and business model.
Ask yourself the following questions about your competition:
- What have customers said about their services?
- How are they differentiating themselves from other companies?
- How do they price their services and handle customer service?
By understanding what makes them successful (or not), you can start to develop strategies to differentiate yourself from your competitors.
Step 3: Pick a Niche
Once you’ve researched and understood the competitive landscape, picking a niche is vital.
Picking a niche allows you to focus on specific services or customer segments that will be more profitable for your construction business.
It’s essential to keep the following in mind when picking a niche:
- Trends in the construction business
- Your skills and experience
- Local market conditions
- The availability of materials and supplies
Step 4: Pick a Name
Choosing the right name for your construction company is important. It will be used in all your marketing materials, so make sure it reflects your brand and values.
Be creative but keep it simple and easy to remember. Also, avoid using acronyms or abbreviations that could be confusing to customers.
You may also consider registering a domain name related to your business. This will make it easier for potential customers to find you online.
Step 5: Write a One Page Business Plan
Once you’ve chosen a name, it’s time to write your business plan.
A business plan should outline your goals and objectives, financial projections, marketing strategies, and any other information related to running the business.
It can also be used to secure financing from lenders or investors. Remember that a one-page business plan is usually sufficient for most construction businesses.
Step 6: Establish an LLC
The next step is to set up a legal entity for your business.
You can do this by creating an LLC (limited liability company), corporation, or other legal structure. This will help protect you from personal liability and provide tax benefits.
Be sure to research the specific requirements for your state so that you comply with all local laws and regulations.
Step 7: Get the Necessary Licenses, Certifications & Permits
Once you’ve established your legal entity, the next step is to get the necessary licenses, certifications, and permits.
These requirements vary by state, so be sure to research what’s required in your area.
In general, expect to need a contractor’s license and insurance coverage such as workers’ compensation and general liability insurance.
Step 8: Get Funding
There are several ways to fund your construction business.
These include the following:
- SBA funding
- Vendor financing
- Purchase order financing
- Bank loans
The Small Business Administration (SBA) offers a variety of loan programs that can help you get the capital you need to start and grow your construction business.
Many vendors provide financing for businesses that purchase their products or services. This is often referred to as “supplier financing” and can be attractive if you’re looking for short-term funding.
Purchase Order Financing
If your construction business relies on large orders from customers, you may be able to use purchase order financing to cover upfront costs and increase cash flow.
Banks are another source of capital for small businesses, but it’s important to understand the terms and conditions before signing any paperwork.
Step 9: Build a Website
Now that you have the necessary funding, it’s time to start building your construction company.
A website is a great way to showcase your services and attract new clients. Include photos of completed projects, customer reviews, and other information potential customers may find helpful when making decisions.
Step 10: Attach a CRM
No matter what type of construction business you have, having a customer relationship management (CRM) system in place is essential.
A CRM allows you to track and manage client relationships and generate leads and sales.
Most website builders offer CRM integration, so take advantage of this feature when setting up your website.
Step 11: Start Marketing Early & Often
At this point, your construction company is ready to start marketing.
Be sure to create an online presence with the following:
- Digital ads
- Email campaigns
- Social media pages
You should also consider traditional advertising methods such as print publications, radio ads, and networking events.
Finally, don’t forget the importance of word-of-mouth referrals. These are often the most effective form of marketing and can lead to long-term success for your construction business.
Step 12: Wow! Your First Customers
Now it’s time to start building your customer base.
Make sure you provide exceptional service from the very beginning and take steps to ensure customer satisfaction. Pay close attention to project timelines, quality control, and safety protocols to ensure the best possible experience for your clients.
Investing in customer service will increase the likelihood of referrals and repeat business.
Step 13: Get Reviews
Last but not least, getting reviews and testimonials from customers is essential.
These can be used on and offline to promote your services and build trust with potential clients.
Be sure to thank customers for their feedback and always follow up after completing a job. This will show that you are serious about providing the best possible service.
Some ways to get reviews include the following:
- Posting on social media
- Asking for feedback directly
- Using review sites such as Yelp and Google My Business
Why do Most Small Construction Businesses Fail?
While there are many reasons why small construction businesses fail, some of the most common include the following:
- Lack of planning
- Poor financial management
- Inadequate marketing strategies
- Poor quality control
- Failure to comply with regulations and standards
- Ignoring customer feedback
- Not investing in technology
- Failing to retain key employees
Lack of Planning
One of the primary reasons small construction businesses fail is due to a lack of planning. Without an appropriate plan, business owners can find themselves overwhelmed and unable to effectively manage their operations.
Without proper planning, construction companies may not be able to allocate resources properly or understand what tasks need to be completed and when they need to be completed.
Additionally, planners must understand the local market and its regulations to ensure that the company complies with all applicable laws. This critical step is often overlooked without a plan, leading to costly fines or other legal issues that can quickly sink a business.
Poor Financial Management
Poor financial management is one of the most common reasons small construction businesses fail.
All businesses need to have a sound understanding and effective management of their finances to be successful, but this is especially true for those operating in the construction industry.
Inadequate cash flow, lack of financial planning, and mounting debt can all lead to significant problems that ultimately cause small construction businesses to collapse.
The cost of materials and labor are two of the most significant expenses faced by these small companies. Without proper forecasting, they can quickly run out of money while having projects left unfinished or other outstanding obligations they cannot pay.
Poor budgeting can also lead to inadequate savings and reserves, leaving them with no room for unexpected costs such as equipment repairs or emergency expenses. This further hastens their demise as they become more unable to meet their financial obligations on time.
Inadequate Marketing Strategies
Without a proper plan for advertising, small construction businesses struggle to reach potential customers, meaning they don’t get as many leads and jobs as larger competitors. If a business isn’t actively engaging in marketing, it will quickly become forgotten or overlooked by potential customers. Unfortunately, this often becomes an obstacle that small businesses can’t overcome.
Adequate marketing involves a multifaceted approach that includes both digital and traditional tactics.
These tactics include the following:
- Conducting interviews and advertisements
- Building relationships with suppliers to help keep costs down on materials
- Creating web content such as articles or blog posts that inform potential clients about the services you offer
- Developing relationships with local publications and radio stations to promote your business
Attending industry events to network with other professionals in the field and more
Additionally, social media campaigns can be used to engage with current and prospective customers while strategically targeting insights around customer preferences related to location, age range, interests, and so forth.
Poor Quality Control
In the construction industry, quality control is essential to ensure that all jobs are completed correctly and safely. Unfortunately, failure to do so can be disastrous for small construction businesses.
The stakes are too high – projects must meet local safety regulations and customer expectations, or there could be severe consequences such as lawsuits or damaged reputations.
Failure to Comply with Regulations and Standards
Construction businesses must comply with various regulations and standards to remain operational. Without proper understanding or enforcement, it’s easy for small construction companies to fall behind or miss essential requirements.
It is essential that all workers are adequately trained and certified, the correct safety equipment is used at all times, and all projects adhere to the local building codes and ordinances.
It’s also important that a construction company has adequate liability insurance to protect itself from any potential claims or lawsuits.
Ignoring Customer Feedback
The customer is always right, and that’s never more true than in the construction industry.
It is essential to listen to what customers say and make changes or adjustments as needed to exceed their expectations.
If a business fails to do this, it risks losing existing customer relationships and new customers.
Not Investing in Technology
Technology is a crucial differentiator in the construction industry, and not investing in it can be a significant mistake.
Adopting digital solutions such as project management software and collaborative tools can help streamline operations while reducing costs and minimizing errors.
Additionally, new technology such as drones or 3D modeling can help provide an edge over competitors and help ensure jobs are completed correctly and efficiently.
Failing to Retain Key Employees
Construction businesses depend on their employees to get the job done, and a company must invest in retaining key personnel.
This includes doing the following:
- Creating a culture of respect and appreciation
- Providing competitive salaries and benefits packages
- Implementing educational opportunities for employees to grow professionally
Without these elements in place, an organization is unlikely to be able to attract and retain key personnel, which could lead to a decrease in productivity and profits.
Starting a Construction Company Pros and Cons
Starting any business comes with risks and rewards, and a construction company is no exception.
It’s important to carefully weigh the pros and cons before taking the plunge.
The following are some of the advantages and disadvantages of starting a construction business:
– Potential for high profits
– Ability to build something from the ground up
– Opportunity to become a leader in the industry
– Can be relatively easy to enter
– High overhead and start-up costs
– Difficult to secure financing
– Risk of poor quality control
– Potential for failure to comply with regulations and standards
How Profitable is a Construction Company?
The profitability of a construction company depends on several factors, such as:
- Overhead costs
- Type of services provided
- Customer base and competition
A key factor in how profitable a construction company can be is overhead costs.
Overhead costs are the expenses incurred by a business that are not directly related to producing goods or services.
They include things like the following:
- Office supplies
- Administrative salaries
To maximize profitability, these costs should be carefully managed and minimized as much as possible.
Type of Services Provided
A construction company’s profitability largely depends on the type of services it provides. Businesses should strive to provide a wide range of services that will meet the demands of their customers and ensure that they stay competitive in their industry.
For example, a company may offer general contracting services such as:
- Project management
- Supervision of subcontractors
They may also provide specialized services such as electrical installations, plumbing installations, HVAC design and installation, carpentry and masonry work, painting, and drywall finishing.
Each of these services requires different levels of skill and expertise, which can be determined by the contractor or subcontractor providing the service.
Customer Base and Competition
A construction company’s customer base and competition can have an immense impact on how profitable it is.
For example, if a company has a wide customer base and its services are in high demand, it can charge more for its services or resources.
This will give the company higher margins and contribute to greater profitability. On the other hand, too much competition in the market can drive down prices and cause margins to shrink.
Therefore, having the right customer base is crucial for the success of any construction business.
Is Starting a Construction Company Hard?
Starting a construction company can be hard work, but it can also be incredibly rewarding.
Doing thorough research and preparing a business plan before beginning the process is important. It’s essential to understand the industry, know what services are in demand, and find ways to differentiate your company from competitors.
You will also need to secure financing for start-up costs, obtain necessary licenses and permits, hire the right personnel, and manage overhead expenses.
What Part of a Construction Company is Most Profitable?
The most profitable part of a construction company depends on the type of services it provides and the level of competition in the market.
For example, suppose a company specializes in large-scale commercial projects. Those projects typically have higher profit margins due to the larger scale and time they take to complete.
On the other hand, residential projects can be more profitable if there is less competition, as these smaller jobs require fewer overhead costs and resources.
The key to success in any part of a construction business is providing quality work that meets or exceeds customer expectations while keeping overhead costs under control.
Starting a construction company can be a difficult but rewarding endeavor.
By following the steps outlined in this article, any aspiring entrepreneur can position themselves to be successful and profitable.
Do you have any questions about starting a construction company? Let us know in the comments below!