5 Steps to starting your own contracting business
You are about to dive into 5 steps that will help guide you on your business adventure. Navigating the murky waters of business ownership are a thing of the past with vast information at your finger tips at all times, but how do you know it’s any good? We have created these simple steps using real life experiences in the business world. We have included some sources to make sure we can provide you with critical information you can ACTUALLY use. If you are interested in learning even more about how to start your business, make sure to come back soon when we release our course on how to start your business and let us run you through all the steps it will take to get your business not only up and running, but running smoothly! Let’s jump into some steps now.
Step 1 – Do your research
Doing your research is important, but how much you decide to do is ultimately up to you. By reading this, it is obvious you are looking to learn more and if you don’t know anything at all about starting a business, don’t worry ConstructionScale’s got you. If you have it all mastered and you know exactly how you are going to set this business up, we welcome you here for refreshing your memory!
Why is research important? Firstly, it creates a baseline for your business. If you are forming your business, no matter how much side work you have done, let’s say you are at zero. As Drake said “Started from the bottom, now were here”. We can start off with a few research points that will help you guide your initial research.
Who is your target client?
If you are a specialty contractor that only installs high end bathrooms, you may not want to target residential markets with a ton of first-time home buyers. Your target market is most likely middle to high class residents, probably mid 30’s to 60+ age range. Now, if you provide low cost flooring, your target market may be the first-time home buyers or the 20’s – mid 30’s age range. You may even want to research the fix and flip market in the area as well. However it is you research your market, make sure it fits your business. Try to stay away from this type of thinking “They will buy my service no matter what because it is great quality” Your quality may be excellent but if you’re in the wrong market, you will lose out on sales simply because the demographic cannot afford your services…AND THAT’S OK! Do your market research so that does not happen and be honest with yourself or your business will suffer.
Where do I want to provide services?
This is a big one because your business can be everywhere or just your small town. This also depends on the size of your business. Let’s be real, we wouldn’t start a national landscaping company with 3 employees and 2 lawnmowers. That’s just not feasible. Now, when you are defining your service area, you will need to look at quite a few things, demographics as we touched on in the last research point, size of the service area, required licensing and permitting, and the size of your business. For example, my company is national and some international areas. This requires research on each country, each state and each city for permitting and licensing so we can provide services in those areas. These things are generally very easy to find. If you have licensing or permitting questions, head to the contact us page and let us know! Some of these licenses require testing which you will need to physically attend or do online, some require a large fee and some not so large. Permitting can be quite confusing as well. You will need to visit the website of the state and the city you are working in and locate their permits. Personally, I like to get the number for the permitting departments and ask them what I will need so there is no confusion after I start my project. These are some hoops to jump through when you are gathering your research on service areas. Don’t worry, they are not as terrible as you think. Pro-tip: If you are planning on opening a business multi-state, it may be in your best interest to hire someone who specifically researches, applies for and renews licensing and permits. This may save you from trouble down the road.
How do I know how many employees I need?
While you are in the research phase, you more than likely don’t have any employees or have very few because you are forming a business. Unless you already own a business, and you are starting another and using those employees which in that case, you probably don’t need help getting employees. First, you are going to want to develop a structure. How do you want to form this company? Will you have one manager for each department, or will you have multiple managers and they report to you or maybe an operations manager? There is an endless possibility for structuring and its all up to what works best for you. Check back for ConstructionScale’s courses on structuring your business for more information on how to structure for success! Once you have decided on a structure for your business, most of your field labor employees should come from your estimate. How did you design your estimate? Did you use 3 laborers to get this done? Did you price the client out for a skilled carpenter? Depending on your specific business, define the roles, set the pay scale, set your production (How much one person can do in a certain time period) and estimate accordingly to provide yourself with the right amount and role of people for the specific project. Once the project is awarded, decide to hire (or use employees from a finishing job) and then if you find yourself producing more than you thought, maybe pull someone off. Vice versa if you are underperforming.
Step – 2 Build a Business Plan
Business plans are a fantastic tool when it comes to how you want to form, structure, manage and grow your business. It is an essential step in the business process, however, it may be daunting and sometimes actual experience in the field you are forming a business in will bring much more focus onto what it is you want your business to achieve. For example, it would be quite hard for Tom to write a business plan for a construction company had he never actually worked in construction. Not saying Tom cannot research and apply his learnings to a business plan but he may miss some key points only taught in the field. The key takeaway here is to spend as much time as you need on the business plan to complete but do not over-complicate the process. For the business plan, you should include the following information:
1. Executive Summary (Introduction)
2. Company Overview (Contact info and relevancy)
3. Market Analysis (Market research)
4. Business Structure (Owners, shareholders, legal structure, employees, et
5. Products & Services (What products & services you offer and why)
6. Marketing & Sales (How you plan to reach your target market and close deals)
7. Financial Plan & Projections (Current finances and projected financial data)
8. Appendix (extra research, charts or relevant info that can’t be included in earlier sections)
Be sure to check back soon when we release the courses on how to create a business plan for your business. This course will take a deep dive into what these sections of the business plan are and how they apply to your business.
Step 3 – Register your Business
Registering your business is a crucial step if you plan to do business as anything other than yourself, and that includes reducing your personal liability. The same way you would think of yourself, think of your business the same way. Just as you own a car, your business can do the same. Just as you may own real estate, your business can do the same. One of the reasons this is so important is because while it may cost me less to act as a sole proprietor (un-registered business entity consisting of a person doing business as themselves) it means that you are personally liable for any damage or accidents when you are working. While you may be able to cover some of this with personal insurance, you can end up losing everything you own. When you register your business, your business is now liable and if you did not personally leverage any of your belongings, you cannot be held liable for most accidents.
Choose a business entity:
There are a few business entities to choose from but for this article, we will discuss the most utilized entities. A Limited Liability Company (LLC), C-Corporation and an S-Corporation.
• Limited Liability Company (LLC)
o Pros
Protection against liability;
Less hassle than setting up a corporation;
Can be set up with state.
o Cons
Securing funding for business may be difficult.
• C-Corporation
o Pros
Protection against liability
Relative ease securing funding.
o Cons
Cost to file is expensive;
Hassle to set up;
Must be registered federally;
Reduced control by the induvial;
Entity and shareholders receive double taxation.
• S-Corporation
o Pros
Protection against liability;
Relative ease securing funding;
Entity and shareholders are NOT double taxed.
o Cons
Cost to file is expensive;
Hassle to set up;
Shareholder and entity limit are set to 100 or less;
Must be registered federally.
Get an Employer Identification Number (EIN):
Also known as a federal tax ID, you will need an EIN to pay taxes, hire employees, open a bank account and, apply for business licenses. You will register for an EIN with the IRS and you can do this online.
Register with state and local agencies:
Remember when we were talking about licenses and permits for state and city earlier? Well this is the same idea. You will need to register your business with state and local governments. Some local governments do not require this. However, you should do your due diligence and make sure to check. If you have any questions on registering with state or local government, please contact ConstructionScale on our about us page and we will make sure we get someone to assist you.
Step 4 – Get business license, Insurance, Certifications and Permits
When looking into specific permits and licenses you need, be sure to check the state government website and your local government website as well. Your state Contractors board and local department of labor will know what you need to begin doing business.
The two main types of licenses are General Contractors License and a Specialty Contractors License. The General Contractors License usually requires you or someone on your team pass a test and then pay a fee. Specialty contractors Licenses generally do not require testing, just fees.
Insurance is a huge deal. You will need to make sure you are insured before you start a project. If you are planning on bidding public commercial projects for example, they will require you to meet their needs on insurance. Even if you are repairing a toilet, or tightening a loose screw, you need to have insurance. The possibility of an accident or damage is very likely to happen. Obviously, we do everything we can to minimize risk but ultimately accidents will happen and insurance will be there when you need it.
The 6 types of insurance you should include on your policy are:
1. General Liability;
2. Vehicle;
3. Property;
4. Workers Compensation;
5. Unemployment;
6. Disability.
We will cover these types of insurance and what they do for you in our courses, so be sure to come back for more information!
Step 5 – Funding your Business
This goes without saying but you are more than likely going to need funding and we have simplified the process for you. Funding will help you purchase equipment, get employees, set up marketing and ultimately, get your business running smoothly. It is not a requirement to secure funding. However, unless you have large sums of money sitting under your mattress or have come into money recently, funding is going to take a lot of the pressure off of your personal wallet. While it may be a huge stressor to pay back large amounts of money, this can be done in a way that is right for you.
Small Business Loans
Small business loans are perfect for the company that has been around for a little bit and is prepared to take on larger projects or expand. A small business loan may not be very helpful for the brand-new business as it requires a long credit history and a good credit score.
Working Capital Loans
Working capital loans are great for seasonal businesses because working capital covers expenses like payroll and office utilities while business is slow.
Purchase Order Financing
Purchase Order Financing is great for businesses that require large material orders much like ours. Purchase order financing requires the financier to pay the supplier in which you are receiving the material. Much like a credit card, however it offers much lower interest rates and is backed by credit and good faith.
Wrapping it all up
Now you have learned some steps to start your business. Please do your own research when it comes to federal, state and local regulations and requirements. Starting your own business should be exciting and fulfilling. Unfortunately, there is so much information out here it is hard to know which information is the best or what works. If you dissect these steps and include your own research and look deeper into these, you will find what works best for your induvial business. At ConstructionScale, we pride ourselves for being the contractor’s best friend. We want to deliver the best information possible. If you have any questions or comments, please contact us through the contact us page on our website.
