Construction is one of the top industries for startups; however, it also has one of the highest rates of failure. 63.6% of construction companies close within the first five years, whether due to a lack of business knowledge and experience, lack of finances or lack of planning.1 You don’t have to be one of them.
Researching your market, drafting a concrete plan for how you’ll run your business and getting help can ensure that you have a strong foundation to grow your business on. It can also help you avoid the pitfalls that so many new construction companies run into. So where do you start?
1. Research Your Local Market
Your first question should be whether a construction company is even a viable option in your area. After all, if the construction market is already oversaturated and customers are happy with the current local companies, it might be hard to get a foothold in the industry, let alone create a successful business.
So start with market research. You’ll want to know how many local construction companies are already operating in your area, what they specialize in, how much they charge, and what their reputation is. Coupled with this, you should also have a similar understanding of your potential customer base — how many of them are there, their median age and status, their interests, etc. Knowing these things can help you develop a better business plan and give you a competitive edge for when you finally step out onto the playing field.
Where to Find Construction Market Research
One of the first and probably easiest places you can start your market research is with the U.S. Small Business Administration (SBA). They offer a wide range of free resources that provide hard data on customers and business markets. For example, with the SBA you can look up the demographics of your audience (age, gender), their employment statistics, their spending habits, and more. You can also look into the production and sales statistics of your market.
While it’s a great starting point, the SBA offers more of a general overview, and you might want more specific information. This is where local industry publications can help you flesh out your research.
You can find most local publications by typing your city name + “construction industry publications” into Google. This should pull up a list of publications or direct links to some of the construction magazines in your area. From there, you can either page through their digital issues or, if those are unavailable, set up a subscription. These magazines will be full of ads and articles about local companies and the state of the construction industry around you.
Doing Your Own Construction Market Research
Lastly, one of the best ways to gauge your potential consumer base, is to speak with them directly. To get direct customer feedback, try using surveys or questionnaires, focus groups, or individual interviews. Depending on your approach and your contacts, this can be both time consuming and possibly costly. Whether you’re reaching out to your network or doing paid market research, you want to make sure that you have a good idea of what you want to ask before you start. Consider general questions like:
- how often they hire contractors in your trade
- their biggest issues with contractors
- what’s most important to them when hiring a contractor
These answers can give you a good amount of insight into how you should craft your business plan.
2. Write Your Business Plan
After you feel you have a good understanding of your local market, you can begin drafting a business plan. This is one of the most important documents you’ll create when first starting out as it can help you keep your business on track and increase your likelihood of success. This plan is also what you’ll give to lenders to help source funding, which means it’s incredibly important to be detailed and put all that market research to good use.
Putting Together a Construction Business Plan
Standard business plans will include the following:
- How you’ll structure and manage the business
- What kind of services you’ll provide
- What types of jobs you’ll bid on
- Who your target market is
- The number of employees you’ll have starting out
- How you plan to market yourself
- The initial estimated cost of starting and maintaining the business
- How much you expect to make in your first year and other important KPIs
However, as a contractor you’ll also want to consider your construction accounting processes in your business plan. For example, how will you perform billing? Some clients may want a fixed lump sum price, whereas others may wish to see a time-and-material breakdown. Net 30 billing terms can be customary, but will you offer discounts to incentivize faster payments?
You should also think about whether you plan to operate as a cash or accrual business and whether you’ll recognize revenue by completed contract or a percentage of completion. If you aren’t sure what would work best for you, connect with a construction CPA. They can talk with you about some of these important business considerations.
Getting Help With Your Business Plan
Don’t let the idea of a business plan intimidate you — you’re the expert in your business, and there’s always help available. If no one within your company has formal writing experience and you’d feel more comfortable with a professional drafting the document, you can hire someone to help.
Nationally and locally, there are also multiple programs you can contact for guidance. SCORE is a nonprofit mentorship program partnered with the SBA. They enable you to work with one or several mentors both online and in-person. Through the SBA you can also access the Small Business Development Center (SBDC) list, which contains all the SBDCs in your state. They offer a variety of free business consulting services and low-cost training.
Finally, there are also specific organizations aimed at helping women, minorities, and veterans get their new businesses off the ground.
3. Register Your Business
Once you have your business plan together, it’s important to register your business to make it a legal entity, which can provide personal liability protection, legal benefits, and tax benefits. Registering your business is usually as simple as registering the name of your company with state and local governments. However, as not every state may provide them automatically, you should also take the extra step to register your business on the federal level to get your federal tax ID or Employer Identification Number (EIN). This will also allow you to trademark your business name and logo with the United States Patent and Trademark Office.
4. Find the Right Licenses & Permits
After you’ve registered your business, it’s time to get your licenses and permits in order. Depending on your state, the location of your business, the size of your company, and even the type of construction you plan to do, you’re likely going to need some type of license or permit to operate legally — on both the federal and state level.
Federal law requires permits for certain business practices, from transportation to drilling and mining. For example, there are special permits required for oversize/overweight vehicles. That means that if you’ll be transporting building materials, prefabricated walls, or equipment you could need a permit. For federal permits and licenses you can simply select your business activity on the federal licenses and permits page on the SBA website.
On the state level, your location is the main factor in license and permit requirements. However, you’ll first need to check local zoning ordinances. According to the SBA, zoning ordinances “can restrict or entirely ban specific kinds of businesses from operating in an area,” and while “you might have fewer zoning restrictions if you base your business out of your home. . . zoning ordinances can still apply even to home-based businesses.”3 So make sure your chosen location is viable before you start checking which permits and licenses the county and city require.
Once you have the OK on your location, you can check which permits and licenses you need through your state’s website or the local county courthouse.
Without the correct license or permits, your construction company may not only be looking at hefty fees and tax penalties but also the possibility of governmental closure.
5. Secure Insurance & Liabilities
While you’re considering licenses and permits, you should also start thinking about insurance for you and your employees. Given the dangerous nature of many construction jobs, making sure you’re covered in case of an injury is vital. Accidents happen, and it’s important for any construction business owner to make sure they fully understand all the possible liabilities involved. Even if you aren’t ready to commit to a complete contingency plan at the start, you should at least have a realistic idea of what it would look like for your company if something were to happen.
At the very least, most states and construction contracts will require you to carry valid workers’ compensation insurance. But you may find you need general liability insurance, professional liability insurance, auto insurance, and builder’s risk insurance as well. So the sooner you start planning, the better it will be for you.
6. Get the Funding You Need
Finally, you want to make sure you have the money to finance your new business. If you aren’t able to use your own savings, you can secure funding elsewhere in a variety of ways. These include private lenders, bank loans, government loans, credit unions, or government funding programs. The USA.gov site offers a full list of sites where you can find loans and grants that will work for you.
On top of basic financing, you should also think about how you’re going to ensure funding for your projects. Remember that construction has notoriously low profit margins. The irregularity of construction billing cycles means that cash flows are incredibly important for your business. Many projects will require a disproportionate amount of costs at the beginning of the project. Cash receipts may not come for a while. So while you can front the money yourself for material and equipment costs, you may run into a problem when a client is late on paying or outright refuses to. Instead, it may be better to use the draw process where you ask for money for any project up front and bill consistently and proactively as the job progresses.
To be safe, you may want to have an emergency cash fund to draw from if you encounter any problems.
7. Grow Your Business
One of the greatest contributing factors to longevity in the industry is customer loyalty and reputation. Your aim is to walk away from every project and client on good terms. The best way to do this is to be honest and communicative. As much as possible, be upfront with your clients from the beginning about how long a project is going to take. Update them throughout so they understand when problems arise.
You should also have a clear project timeline in your contracts — including contingency time for unexpected delays due to weather, equipment, etc. You may also want to include terms of payment, a claims for extra work clause and an estimate on the scope of the work. Everything you discuss with your client should be in writing, no verbal-only deals. This is the best way to protect not just you and your company, but your client as well.
The more accountable and open you are with clients, the more likely they are to use you again. And more than that, the more likely they are to recommend you to others. That can set you up for a snowball-effect of success.
Conclusion: Don’t Go It Alone
Starting a construction business isn’t the simplest process, but countless generations of contractors know how rewarding it can be. Contractors are naturally resourceful and hardworking and continually find ways to make their businesses work. At the same time, construction has some of the highest closure rates for companies in their first five years. So the biggest challenge is starting on a strong foundation and staying successful.
That’s why the best advice anyone can give you if you’re looking to start your own construction business is this: Don’t go it alone. Join industry associations, network and get help from professionals like construction-specific CPAs and utilize construction accounting software. Partner with people that will give you the resources and support to help your hard work translate into real success.