Whether you want to be your area’s next big general contractor, or you believe you can build a successful small construction company in a specific niche, getting into the construction business is a process.
But fear not. Yes, there are licenses to apply for, equipment to buy, and maybe even training you’ll need to complete. But once you have a solid construction company business plan and know the direction you want to take, you can start your own construction business.
As Forbes, Abrigo’s ProfitCents, and the U.S. Small Business Administration (SBA) have pointed out, construction is a high-growth industry right now and is expected to remain strong for years to come. In fact, many fast-growing small businesses are connected to construction, such as finishing contractors (e.g., drywall, flooring, and painting), utility systems construction (e.g., water, sewer, oil, gas, and electricity), and structural construction (e.g., concrete, roofing, and siding).
It makes sense. Whether for a residence, commercial use, industry, or public works, someone has to build the buildings, roads, and systems we all use in our daily lives. In developed countries such as the U.S., Canada, and the U.K., the construction industry usually generates six to nine percent of gross domestic product (GDP). According to the U.S. Census Bureau, in 2014, the construction industry as a whole generated $960 billion in annual revenue, and according to the U.S. Bureau of Labor Statistics, employed an estimated 5.8 million in 2013—and the average firm had fewer than 10 employees.
Construction companies have their ups and downs (for example, the economic crisis of 2008 hit construction firms hard), but it’s an industry that will always have demand—and where there’s demand, there’s opportunity.
How will you start your construction company?
For starters, let’s break down what it means to be a construction company.
You can build a construction company that is as big and broad or as narrow and specialized as you want. Typically, the industry is considered to have three main sectors:
- Buildings: residential and non-residential (including institutional and commercial)
- Infrastructure: also known as heavy engineering, heavy/highway, or heavy civil, and usually encompasses large-scale public works projects, highways, roads, bridges, dams, utilities, and water/wastewater systems
- Industrial: typically includes mills, power generation, refineries, chemical plants, and manufacturing facilities
Factors to consider:
Here are factors you’ll need to consider when deciding the scope and niche of your construction company. Throughout this startup guide, we’ll discuss each in more detail.
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- What are your skills, and what field do you want to go into?
- What is the current construction company landscape in your area? Who are the major players?
- Where are there opportunities for a new business to grow and succeed?
- Who are your customers? Who will you be marketing to, and who will be paying you for your services?
- How will you finance your company?
- What legal, trade, and regulatory requirements will you need to meet and adhere to?
- Where will you set up shop? How much space will you need for equipment, meetings, and office personnel?
- What vehicles, small equipment, and heavy equipment will you need to rent or buy? What tools or other materials will you need?
- What will you do yourself, and what tasks or site labor will your hire or subcontract for?
- What will you need in your business plan?
What are your skills, and what field do you want to go into?
Begin with a SWOT analysis, which looks at your strengths, weaknesses, opportunities, and threats. Assess where you are, where you want to go, and how you want to get there.
- What trades do you currently have skills, experience, and industry contacts in?
- If you need to learn a trade, what is that process? Can you work as an apprentice for a company? Are there classes available, such as through your area’s community college system?
- Talk to people in your trade or in a connected trade. Take them to lunch, let them know you’re looking at getting into the business, and would like to ask them questions. (Are you talking to a potential competitor? Possibly. But you are also talking to a valuable contact who may be someone you can work with later.)
What is the current construction company landscape in your area? Who are the major players?
Since there is always demand for construction companies, it is an industry where there can be lots of players. Some are established and can succeed, and some fizzle and fail.
Make sure you understand the local landscape by talking with your local municipal officials, the Chamber of Commerce, trade organizations, and people in the industry.
- What is your area’s population, and how are those demographics projected to grow, decline, or change over the next five to 10 years?
- How much demand has there been for your field? Are there big needs for new residences? Are new industries coming into the area? Is aging infrastructure getting updated? Conversely, where is there saturation, too little demand for a new player to get business, or a high number of firms that fail?
- What trade organizations should you be part of? (Trade organizations are great for networking and help you stay current on industry and regulatory changes.)
Where are there opportunities for a new business to find a niche where it can grow and succeed?
As you set up your construction company, you will face an important decision about how general to make your operation, or if you want to really specialize in a particular niche. Different companies can make each strategy work. Sometimes a company can make it with an attitude of “no job too big or too small,” and take on any job that comes their way. There may be times, in the early stages of your business, where that’s what you have to do to pay the bills.
However, your construction company will have a greater chance of success if you identify a niche where you can specialize.
Could you build your firm to be another builder of new homes? Sure. However, there are other options. Your firm could focus solely on building additions, or in building separate small buildings on a residential property. You could be a general painter—or you could specialize in mid-century restorations.
Identifying your niche:
Here are some ideas to help you identify potential niches.
Remember to make sure that your niche isn’t just riding a trend—because if the trend goes away, your business could be left behind. Make sure you can pivot to new trends, or refocus on a different niche while also retaining some jobs or specialties outside of your core niche.
- Are there demographic trends driving construction needs in your area, such as aging populations, an influx of new families, or a drive to restore houses of a particular style or period?
- Is your area known for, or becoming known for, commercial or industrial sectors?
- Within your field, is there a particular service that you could specialize in? For example, if you are a flooring contractor, could you specialize in laminate floors? If you remodel kitchens, is there an aspect of the work that you could specialize in—such as cabinets or counters—and subcontract the other work? If you are an electrician, could you specialize in panel upgrades or electrical work for outdoor spaces?
Who are your customers?
In other words, who will you be marketing to, and who will be paying you for your services?
The answer might surprise you. Your customers are not necessarily the end occupier or user of the finished work.
Think of it this way: You want to market your services to the people or organizations who will be writing checks to you.
Determining who your customers are:
- If you are working on a commercial space, your customer may be the development group or property owner.
- If you specialize in remodeling repossessed houses, your customer may be the bank or credit union that owns the property and wants to re-sell it.
- If you are specializing in utility systems or public works projects, your customer may be a municipality or other public entity.
- If you are a subcontractor, your customer may be a general contractor.
Make sure you understand who will be making the decision on whether to bring on your firm or a competitor. Be sure your marketing and networking efforts target that customer—because they are the ones who will be writing you checks and referring business to you.
How will you finance your company?
A construction company is a capital-intensive business.
You may need to rent or buy heavy equipment, or purchase materials in bulk. A solid business plan can outline your assets, and make the case for your new construction company to access funding from investment sources, from private interests to SBA loans.
What legal, trade, and regulatory requirements will you need to meet and adhere to?
Construction overall is a highly regulated industry. Make sure you know the code, laws, Occupational Safety and Health Administration (OSHA) practices, insurance requirements, and regulations that you will have to comply with. Some requirements will vary industry to industry, state to state, or locality to locality.
Here is an overview of the legal requirements you should be aware of:
- Building codes used and enforced in your area, such as the International Building Code (IBC). Your local area may also use variants of the IBC that you will have to know.
- States have different classes of construction companies, and different regulations and limits apply to each class.
- Safety practices and personal protective equipment (PPE, often mandated by OSHA).
- Bonding, licensing, and insurance requirements, which vary by industry and state.
Where will you set up shop?
How much space will you need for equipment, meetings, and office personnel?
Some small-scale construction companies can operate out of a pickup or modified box utility truck. Other firms may need large properties with shop space, office buildings, and parking areas for heavy equipment.
Identify the scale of headquarters and shop space you’ll need, while also consulting with other local contractors on properties (such as industrial parks) that may be a good fit for your business. Use your business plan to identify your initial and overall personnel needs, so that you can find the appropriate space to get you started and provide opportunities to grow and change as the business grows.
Just like with property and office or shop space, you’ll also need to know what tools, materials, and equipment you have, and what you will need to rent or purchase.
Also, use this as an opportunity to get to know the equipment and material suppliers in your area, as you’ll be relying on them to get you the tools and materials you need to fulfill your jobs.
What will you do yourself, and what tasks or site labor will your hire or subcontract for?
Here are some questions to consider:
- What work will you be doing by yourself?
- What personnel will you need in the field, in management, and in the back office?
- Who will you hire, versus who will you subcontract work to?
- How will your personnel and labor needs change based on growth or specific job requirements, and how will your construction company meet those needs?
What will you need in your business plan?
As you can see from what we’ve covered, there are lots of things you’ll need to figure out in advance of actually starting your business. That is where a solid, thorough business plan will be to your advantage. Here are some of the areas you’ll want to cover in your construction company business plan.
- Executive Summary: an overview of who you are, what you will do, and where you will do it, including:
- Introduction: describes the organization’s goals and focus
- Products/Services: what problems you will be solving for your customers
- The Market: an analysis of your industry in your market
- Mission: a succinct, in-a-nutshell statement of why your business exists and what sets it apart in the market
- Company Summary:
- Your business name, entity, and where your base of operations is located
- Startup requirements, assets, liabilities, expenses, and investment amount sought
- Safety: Discuss known safety issues and how your organization will operate in a safe manner that complies with relevant laws and regulations
- Services: a broader explanation of the work you will provide and what makes it better than the competition
- Applications: typical target customers and users of your products and services
- Market Analysis Summary: list statistics, data, and financial numbers that show your understanding of the industry on a local and national scale, and also demonstrate the market conditions that make your business a good investment with a promising future
- Market Segmentation: Show the recent history of your target market and state where in the market you believe you can stand out and succeed
- Strategy and Implementation Summary: State who your target customers are and how you will secure their business
- Sales Forecast: Show a projection of monthly sales estimates during the first 12 months of operation, and annual sales estimates for the first three years of operation
- Marketing Strategy: Outline your core marketing and networking strategies to acquire and retain customers
- Management Summary: Detail your core management team as well as guiding company principles
- Personnel Plan: Outline expected personnel numbers and costs, including employees, subcontracted labor, and other personnel or business services
- Financial Plan: A detailed analysis of projected financials, including:
- Projected Cash Flow for at least the first 12 months of operation
- Break-Even Analysis for at least the first 12 months of operation, to show progress of investors toward a break-even point
- Projected Profit and Loss that plans for potential loss periods, and how company will work toward profitability
- Projected Balance Sheet showing three years of assets, liabilities, and capital, to indicate projected net worth
- Business Ratios that show typical cost percentages for an organization in your industry
- Appendix detailing other information, tables, or data, such as sales forecasts, personnel numbers, interest rates, cost of sales, cash flow, and so on
Planning your construction business may not be an easy endeavor, but now that you understand the scope of the work involved, you are ready to figure out what you need to get started.
Know your niche, develop your business plan, and you will be on the road to starting your own construction company.