How to start a Construction Business: Things to Consider
Construction can be a rewarding business, especially for startups. This especially so due to the ever-growing need for housing as the demand is at an all-time high. According to Aaron Terrazas, the senior economist at Zillow Group Inc., America is underhoused and more needs to be done to improve the rate of building new homes. This is especially so at such a time where homeowners are more focused on getting a reliable home performance contractor.
Getting into construction can be a fulfilling experience as you seek to take control of the home’s flow of air, energy, heat and moisture and improve the occupants’ health and comfort. However, this does not mean the road to success in this business is smooth. In fact, the recent past has seen the highest rates of failure.
Research shows about 63% of construction startups fail and close shop within the first five years. This failure is a result of a combination of factors including lack of experience, limited training, little business knowledge and poor planning. However, you do not need to be part of the statistics. Here are 7 of the top tips and considerations when starting a construction business.
Source of Funding
In most cases, most startups will use personal savings to cater for the basics of the business. However, if you are employed, then you may see the need to go for loans to boost your capital. Other notable sources of funding may include government loans, private lenders and credit unions.
Extensive research and an effective business plan to boot is nothing if you do not have enough funding for your construction business. Talking of costs, specific figures will depend on a number of factors including location, type of building and materials. For instance, convenience stores that are usually cheaper to construct would cost about $100 per square foot. However, other costs like insurance would also come in. Notably, insuring non-combustible materials like concrete in the United States is less costly compared to combustible materials like plastic and wood. Costs may also increase based on geographical locations. For instance, the estimated cost for insurance premiums in New Jersey for a commercial property is about $22,120 for concrete and $52,000 for wood.
Apart from the high startup costs in the construction industry, you also have to deal with the fact that it has considerably low profit margins. In 2017, for instance, Construction News did an analysis of the top contractors like Interserve, Balfour Beaty, and Laing O’Rourke and found that their average pretax profit margins were -0.5%. This could be attributed to losses from problem contracts.
Research is Key
Just like any other business, starting a construction company needs extensive research. This is especially so if you are specializing in home performance, as you have to stay updated on current trends. This is because housing and construction changes so fast, especially in this digital dispensation, where smart homes are now trending. Start with your local area by looking at the companies already in operation and determining their weak points, if any. You can do this by studying their customer base and trying to understand what they miss from their provider. Understandably, some regions may be saturated, and you do not want to invest blindly only to burn your fingers in the process.
Take a look at your potential customer base; what are the numbers? What are their interests, age and financial status? These factors will come in handy when starting out as they will help you map out the areas with the most demand in the industry around you.
There are various ways you can use to do your research; one of these is using the US Small Business Administration (SBA). This is a revolutionary research entity that offers free resources to help you find hard data on customers and the market as a whole. However, SBA tends to offer a general view, and this may not be enough to give you the real state of the market. In this regard, you may also see the need to do your own research by speaking with potential customers directly. You can easily do this using a questionnaire, surveys, or individual interviews.
Create an Effective Business Plan
No business will start and pick up without an accompanying business plan. After research, sit down and draft a plan on how you will run your business. This will not only help keep your business organized but also increase your chances of success. The business plan will also come in handy when seeking funding from lenders since it will detail all aspects of the business.
Your business plan will include details on how you plan to manage and structure the business. It will also include your target market, services you look to offer, your marketing strategies, estimated starting capital, and how much you project to make in your first year of business. If you do not know how to draft a business plan, you may consider hiring a professional business plan writer to help you out.
Get the Right Insurance
Construction is a business prone to many dangers and hazards. As such, you do not want to risk losing your entire investment in case a disaster strikes. This is especially so considering you will be working with electricity, heavy machinery and other such dangerous equipment.
Talking of insurance, a construction business has to adopt at least two basic types of insurance; business and employee insurance. You will need general liability insurance for your business to abide by the basic construction business law. This will help protect you against site accidents, injuries and other unforeseen disasters that may otherwise see you counting losses.
For employee-related insurance, you will need to purchase unemployment, worker’s compensation, and disability insurance. These will keep you cushioned against any unforeseen issues related to your employees, such as injuries at work, and even deaths.
Licenses and Permits
Just like insurance, permits and licenses are legally required to be in place before you start the business. The licenses you need will be dependent on the location of your business, type of construction, and the size of the company. Remember, there may be additional licenses and permits for both the federal and state level. So take your time to determine all the licenses you will need before you can legally operate as a construction business.
Once you have identified your location, check through your state’s website or local government office to determine the type of permit you will need. Remember, without the requisite licenses, you run the risk of paying hefty fees, possible task penalties, and worst of all, government closure of your business.
Invest in People
Construction is one of those industries where you cannot make it on your own. From employees to partners and other support structures, you need people along the way. The current construction market is slowly falling short of skilled labor. This can be traced back to the 2008-2009 Great Recession where the construction industry is estimated to have lost about two million workers. Most of these never returned and companies are still struggling to attract new talent. A report from the Associated General Contractors of America says as from August 2018 up to 80 percent of construction companies are struggling to find craft workers.
This problem can be partly blamed on the lack of interest from the younger workers to fully embrace the construction expertise. In fact, high schools and colleges in the United States seem to put more emphasis on the importance of white collar jobs at the expense of skilled trades. As such, you will need to come up with strategies that will create a strong culture that will retain your employees. This may include practices such as in-house training, creating social bonds within the company, and constant appraisals.
Get the Right Training
The construction business can be a hard nut to crack if you do not have the right training. This is especially so if you specialize in home performance. This is because in such an instance, the homeowner relies on your expertise to help improve their existing building, or better still, come up with a new one that meets the modern home performance standards. Before this, however, you want to decide on whether you will operate strictly as a consultant, as a contractor, or both.
A home performance contractor worth his salt will take advantage of the various science-based training offered by weatherization programs. For instance, states like California have notable organizations like the Efficiency First California (EFCA) that offers integrated training. This training aims at offering real-world applications of modern diagnostics.
There are plenty of opportunities out there for both performance contractors and other players in the building industry. There may be plenty of other factors and steps that will help you succeed in the construction business, but these are the basics that will get you off the ground. Remember, this is a business that may take time before it breaks even. With persistence, effort and patience, you will eventually reap the fruits of your labor. Simply put, the success of your construction business, just like a building, will be dependent on the effort put on its foundation. Put everything in order before you start, rather than playing a catch-up game later.
Jim Hughes is a content marketer at OpenCashAdvance who has significant experience covering technology, finance, economics, and business topics for about 3 years. He likes to share all the insight and knowledge he has.
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