Starting your own general contracting business is a great way to combine construction and management skills and leverage them for success. The rewards go beyond the financial benefits of running a profitable company, but also bring the satisfaction and pride of building your own company.
But starting a general contractor business can be a challenge too. Having a solid business plan before naming your company and firing up your website will increase your chances for success for years to come.
We are here to help. In this guide, we provide a step by step guide of how to start a general contracting business, and offer questions to ask yourself before you decide to venture out on your own.
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Who should start a contracting business?
As a general contractor, you are the conductor leading the orchestra, and in charge of seeing a project from start to finish. Running your own business gives you the freedom of not working for others, but it also carries the burden of responsibility. The credit for the success of a project goes to you, but so does the blame should things go wrong. Successful general contractors have strong managerial skills, are good communicators, and also understand the intricacies of the contracting business.
The ability to organize workers, and materials and to follow blueprints is as important as knowing how to manage finances and work effectively with clients. Finally, beyond having a range of business skills, successful contractors possess the passion, drive and stamina it takes to run and grow a successful business.
How much does it cost to start a contracting business?
As with any business, there are start-up costs before opening a contracting business. The total expenses for starting a new general contracting business can reach $15,000 and beyond. Besides the costs of hiring a team and purchasing high quality tools and equipment as needed, there are a host of business expenses.
These include the cost of business licenses and permits, liability insurance, and workmen’s compensation coverage. Also figure in the cost of opening a physical office if that is part of your business plan, as well as a phone system or other communications infrastructure that provides ways for clients and vendors to reach you. There will be costs for marketing, advertising, including building a professional business website to give your business a strong online presence.
Balancing and limiting these costs to assure that enough work is coming in to pay for your expenses will be a key to your success, especially early on. Keep an eye on spending too much at the onset, but don’t overlook investing in the essentials covered in this article.
What does it take to start a contractor business?
If you are considering starting your own general contractor business, here are some steps to follow to help smooth your journey:
Step 1: Conduct Market Research
What services do you plan to offer? Who is your target client? Is there a demand for the work you do in the geographic area you plan to serve? These are some of the key questions you’ll need to answer to find the best market fit for your business.
Research the competitors in your area to learn what type of work they do, the average budget and more. Contact industry and professional trade groups which can provide insights into building and renovation trends. Then, identify gaps in the market and assess whether there is potential demand for those services. Knowing your target market will inform how best to reach your ideal customers through marketing, advertising and word of mouth.
Step 2: Choose Your Niche & Contractor Business Name
The market research will help you determine your niche, a necessary step for breaking through the vast and varied contractor services offered throughout the industry. Then, pick a name for your contractor company that reflects the type of work, project scope and budget you want to specialize in.
An effective name makes it easy for homeowners to recognize that your company is the right match for the work they are seeking to have done. They don’t want a contractor who specializes in new home construction if they are seeking a kitchen remodel, nor a bath specialist if they are interested in creating a new outdoor room.
Take your time in picking a name that is professional and will stand out. Make sure it is not already in use nor easily confused with the name of a competitor. Search possible names online and conduct domain searches to see if the names you are considering are already taken. Potential clients will better remember names that are easy to spell and pronounce.
Step 3: Develop Your Contractor Business Plan
Some contractors, in the excitement and rush to get started, skip the crucial step of developing and writing a business plan. The process of mapping out a plan helps you see around the corner in your business journey, anticipate the potholes along the way, and identify any gaps before you open your doors. Also, should you ever apply for a small business loan or seek investors, they will want to see a business plan first.
Here are the common elements included in a typical business plan:
- Company Description: This summarizes the type of services you offer, the size, location, and name of your business and other pertinent information. Will you have employees at the start? How many?
- Target Market: Outline your company’s niche market and ideal customer. Be specific about what services the business will offer, as well as average project size and budget. Then, outline the type of clients who are seeking this type of work.
- Market Analysis: Here is where you describe the market environment and provide the data of why you picked your niche and the reasons you think your company will successfully serve that market. It will also include information on the potential scope of homeowners in the region whose renovation budgets can afford your services.
- Marketing & Sales Strategy: How will you reach your target market? Part of your business plan should list the type of marketing and advertising planned to draw in clients and keep a steady flow of qualified leads in the sales pipeline.
- Startup Costs: Conduct research and read on to learn more about some of the expenses associated with opening a business. Then, break down the costs and calculate an estimated total.
- Financial Projections: Detail here the amount of profit you expect to make in your first year of operation, and then extend that out to five and 10 years. Consider what factors will help determine that rate of growth.
Step 4: Choose Your Business Entity
Another early decision you will face is choosing the legal composition of your business. The most common business structures are a sole proprietorship, limited liability company, partnership and corporation.
Among other factors, the legal makeup of a business determines how taxes are filed, and impacts the liability a business owner is responsible for should something go wrong. For example, in a sole proprietorship, a business owner can be held personally liable if the company is sued, while an LLC and corporation provides more legal protection of an owner’s personal assets.
Research the various types of structures to see which best fits your situation.
Step 5: Register Your Contractor Business
Before you start your business you will need to register in the state or states your business is located. Taxes vary from state to state, and therefore, find out what taxes may apply to your business. Registering involves applying for an Employer Identification Number (EIN) which is issued for both state and federal tax purposes.
Step 6: Get Licensed
There are other licenses required to legally operate your business. This typically includes applying for a state seller’s permit so that the state can track the state sales taxes businesses are required to collect on the sales of goods and service. A certificate of occupancy is often required for offices or construction trailers on project sites. Check with your state to learn what other permits and licenses you will need so that you do not face fines down the road.
Step 7: Get Insured
The contracting business involves risks whether it's an injury to a client or worker, or damage caused to a client's home by a subcontractor. General liability insurance is a baseline for getting some liability protection and covering damages. Other types of additional insurance may be applicable depending on the specific nature of the business such as property and vehicle insurance. If you have employees, you will need to acquire worker’s compensation, unemployment and disability insurance.
Insurance companies often offer lower rates for bundling the various types of insurance so seek out information on rates, types of policies, coverage, and deductibles.
Most contractors also are required to acquire surety bonds to protect clients if the contractor does not complete the contract requirements of a project.
Step 8: Set Up Your Contractor Finances
There are several steps in getting all your financial ducks in a row before starting a contractor business. Here are some common ones:
- Open Business Accounts: Having a business bank account and business credit card accounts as needed helps separate your business transactions from your personal ones. The neat line between personal and business accounts is a business best practice, and makes your business finances more organized on multiple levels. (However, as noted above, this action alone does not legally protect you from potential personal liability).
- Secure Necessary Financing: If you do not have the capital to start your contractor business, decide how you will secure financing whether through a business loan, investors or family members. Then, gather the documentation that will be needed to apply for the financing.
- Create a Pricing Structure: Determining the salary you will pay yourself and the hourly rate you will pay your crew, is a first step toward establishing the prices you will charge clients to cover the costs of a project and also turn a profit. Again, industry organizations, along with other contractor companies, can help you determine the going rate. The goal is to make your pricing competitive without undercutting your competition or overpricing your services. Learn more about How to Price a Job in Construction: Expert Tips & Techniques
- Set up a Process for Budgeting, Tracking: Consider how you will create realistic budgets both for your business and each project. Tracking expenses and revenues in real time helps you stay within budget, and also makes it easier to gather the documentation needed when tax season arrives. Business management software such as Houzz Pro which is tailored for contractors helps pros handle these financial aspects of their business. Learn more in this Guide to Construction Budgeting and find out more about Construction Billing Methods.
Step 9: Build a Strong Contractor Brand
Creating a strong brand for your contractor business helps distinguish you from your competitors, and makes you recognizable to homeowners seeking a trusted company to take on their project. A brand represents the values and goals of what a company stands for. It represents how it defines success for its clients and company. As a company builds and grows its brand, it becomes increasingly known for the professional reputation the brand represents.
Your brand sets the tone for your company’s distinct identity in the minds of clients, future customers and your team. Your logo, business cards and other promotional materials should reflect the message you want to convey through your brand.
Your online presence through your website will be a key communicator of your brand because it will likely be the first place many homeowners visit to learn more about your general contractor business.
Learn more about How to Brand Your Construction Business.
Step 10: Market Your Contractor Services
Marketing does not have to be a mystery, but it is a must for businesses to thrive and grow. Creating a social media presence, and delivering regular email marketing campaigns is a low cost way to find new clients and keep your business top of mind when past clients are ready for their next project. Network with industry peers through trade and professional organizations to build your company’s reputation as a pro in your field. Past clients can be your best marketers so find a way to leverage their referrals through testimonials and five-star reviews.
Paid online advertising that is customized to target what services potential clients in your geographic area are searching for can also be an effective way to attract new customers.
Learn more tips for marketing your general contracting business through these guides:
When should you start a contracting business?
Are you ready to make the leap into entrepreneurship? Let’s review some of the benefits and things to consider.
Here are some benefits you can expect:
- Financial Rewards: At first, new business owners pour much of their profits back into the growth of the business, but over time, a successful contractor business can offer significant profits and provide an excellent way to make a living.
- The Thrill of the Build: It is exciting and rewarding to build a business from scratch that you can be proud of.
- Independence: You are your own manager and do not have to work for another company or supervisor to get your paycheck.
- Do the Work You Love: Since you are the one who decides the type of work you do, you get to pick the projects.
Here is a checklist to consider before continuing to research how to start a general contracting business:
- Responsibility: With freedom comes the responsibility of managing multiple aspects of a business including its workers, clients and reputation.
- Management skills: Running a business successfully can, at times, challenge anyone’s managerial skills because as a general contractor you are responsible for managing the expectations of employees, clients, vendors, inspectors and more. Consider whether you have the type of supervisory experience required.
- Energy & Passion: As a business owner, you need to be more on than off so make sure you have the drive to match the demands.
- Construction Skills: Knowing the ins and outs of the construction industry helps avoid the costly mistakes that come from not understanding the trades and the work.
- Capital: Do you have the money or the means for raising it to get started. How about the equipment, tools and people?
Other tips to remember when starting a contractor business
As a future owner of a general contracting business, here are some other things to keep in mind as you continue to learn how to start a contractor business:
- Some Things Can Wait - It’s easy to think you need to do everything at once, but part of being a successful business owner is balancing your expenses and energy.
- Get Estimates Right Early - The skill of estimating quickly and accurately is a huge advantage over the competition in winning jobs and staying within budget. Make it a priority to focus on improving and nailing the process.
- Build a Strong Team - A business is only as good as the people it comprises. Prioritize hiring a quality team.
- Keep Your Lead Pipeline Overflowing - Having a steady flow of leads in various stages of the sales pipeline assures there will be jobs waiting each time another project is completed. Focus on refining your leads process so that little time is wasted on those that do not produce jobs.
- Follow up on Leads Quickly - Just as key to having a steady flow of leads is following up with those that come in. This not only shows professionalism, but signals to clients that you want their job more than your competitors do.
- You Can’t be an Expert in Everything - Know what you don’t know. If you lack expertise in an area, seek out those who can teach you, and be constantly curious about learning more.
- Build a Strong Online Presence - Make building a professional website a priority. This is how potential customers learn about your company. Add high-quality photographs of your projects as quickly as you complete them to build a compelling portfolio that will wow clients.
Conclusion
Starting your own general contractor business can provide immense rewards as your next step in the industry. When you think you are ready, take the time to follow a few crucial steps up the ladder toward success. Creating a business plan now is likely to pay off later in helping your business grow. Protect yourself by knowing the legal requirements of starting a business, and invest in a skilled team and the high quality tools you will need to get the job done.
And, don’t forget to invest in branding and marketing so your ideal clients will start knocking on your door. Good luck!
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