How To Start A Contracting Business

How To Start A Contracting Business: The Best Guide For 2022

Elena Hudgens
By Elena Hudgens 16 Min Read

Figuring out how to start a contracting business can be difficult, especially when you don’t know what to expect. A lot needs to be accomplished to create your own business, from getting insured and registering your company to establishing competitive pricing and gaining new clients.

Not all general contractors are as successful and lucrative as they seem, but there is a lot of growth potential. The median salary for a construction manager or contractor is $95,260 annually. It’s also predicted to have an eight percent increase over the next ten years- four percent higher than average. 

Our guide below will provide you with actionable items that will help you traverse your journey about how to start a contracting business more stably. You’ll find pro tips throughout our list to help alleviate some stress later on.

Weigh out the pros and cons 

A general contractor is a person that organizes all phases of a construction project and who’s usually hired by the property owner. They need to be knowledgeable in all stages from start to finish, and understand what it takes to hire subcontractors. 

Starting your own business means you can leverage your skills and experience while also having freedom about how much time you want to spend on projects- but this comes with added responsibilities such as managing your company, reputation, and workload. 

Here’s a checklist to consider before further thinking about how to start a contracting business

  • Do you have the motivation and will to build this business?
  • Do you understand the nitty-gritty of the contracting industry? 
  • Are you good at handling managerial positions? 
  • Do you understand the risks of starting a business? 
  • Do you have the necessary capital for acquiring all the professional equipment? 

If you have answered yes to these questions, then a contracting business is the right one for you.

Determine the services you will offer

Before you execute your journey of how to start a contracting business, you should know the types of services you can offer. When it comes to contractors, there are two types: those who offer a highly specialized service or work in only one area of construction where they have the edge over the competition, and those that provide a full range of services. Knowing what type your business will be before you start can help you create equipment and staff plans for when you first open. 

It also helps give insight into how much money your startup costs will be by allowing you to find local companies that compete with those with similar areas of specialization as yours. Enjoying things is more important than making money- so follow your passion. 

Focusing on specialties that excite or fascinate you allows motivation not just from within but through outside sources such as loyal clients who feel confident in hiring someone who has built up trustworthiness because they do great work while still standing out among competitors due to their reputation built off quality projects completed successfully. 

Get licensed 

Getting licensed is a very important step you cannot miss while you think about how to start a contracting business. General contractors are responsible for all phases of the building process, whether it’s a home addition or a brand-new commercial tower. You need to understand design and building techniques and budgeting and regulations before you can call yourself one. 

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All 50 states require general contractors to be licensed, though requirements vary from state to state, so make sure you check with your local authorities about any changes since last time. 

The process for obtaining a contractor’s license varies from profession to profession, but in general, you can expect to: 

  • Take written exams proving your competency as a contractor. 
  • Provide evidence that you have the financial means for starting your own business or if you will get funding
  • Provide reference letters from past clients and bank statements. Show experience on the job through apprenticeships even if such knowledge is limited. 

In general, experience in construction work at the journeyman level or an undergraduate degree in construction management or civil engineering is required before applying for this type of license – but these requirements do change so doublecheck with your local authority on what they demand nowadays.

Decide a business structure 

Setting up a company is the next step once you have your general contractor’s license. When starting this type of business, many decisions need to be made, like what sort of business structure would work best for it? 

Each one has its pros and cons which, can affect taxes or other aspects of the company. It’s always wise to consult with an accountant or attorney before deciding how to start a contracting business. 

There are three basic structures available:

  1. Sole proprietorship – If you are the only business owner, a sole proprietorship might suit your needs best. You can run your company under either your name or file a DBA (doing business as) form to use an alternate company name. In this case, there is no need for an EIN (employer ID number), and taxes are calculated and filed as part of personal income taxes annually. However, if the company was ever sued financially-damages would fall on you.
  1. LLC – Companies with a sole owner can’t be called sole proprietorships. If you have more than one owner and are looking for limited liability, many small businesses become LLCs instead of a partnership or corporations. The LLC protects both company and individual assets if the company gets sued– it is considered a separate entity by law. Company profits “pass through” to your income tax returns which means less paperwork is involved.
  1. S Corporation – If you organize an LLC, your business can elect to become what is known as an S-corporation. This version of incorporation has some advantages over a traditional LLC and requires less paperwork than the other approaches. However, it also comes with disadvantages related mainly to taxation and filing requirements.

Get Bonds

Generally, every general contractor business needs construction bonds to operate. The objective of surety bonds is to protect your client if you do not fulfill contractual obligations. 

Much like any insurance, surety bonds are provided by a third party and require that you adhere to state regulations and laws which differ from one state to another. You could check out the Small Business Associations Surety Bond Program to help obtain these Bonds.

Surety bonds provide small businesses with incentives to bid on contracts. In this way, they help the customer feel secure in their decision and encourage these businesses to win bids for work that might not have been completed otherwise. 

The SBA guarantees sureties for certain companies, which allows those sureties to offer them to small business owners who may meet requirements other than the private ones offered by some of the larger corporations.

Get insurance

It makes sense that business insurance may not be at the top of your to-do list while thinking about how to start a contracting business. There are several things to consider, from ensuring that you have up-to-date licenses and bonds to filing paperwork for your startup. 

It is still important not to ignore it, though – mainly because contractors are responsible for all aspects of each project. This means a lot can go wrong with no liability coverage.

Like getting the required permits and licenses, it is unwise to operate your business without proper insurance. In some instances, having insurance is optional. However, since one in every five worker deaths are construction-related, you will want coverage before heading off on your first job. 

To emphasize how important ensuring a contracting company can be, the CDC reports that nearly half of all death at worksites are from those who are self-employed or companies with 10 or fewer employees account. 

You’ll also want general liability insurance covering injuries, property damage, and worker’s compensation. Also, look into tool and equipment coverages.

The amount of insurance coverage that your company needs depends on several factors, but you will need some type of coverage in almost every case. Aside from general liability insurance, you might also require property and vehicle-related protection.

Hire subcontractors

It is not uncommon that subcontractors will do much of the work completed on your projects. Hiring the right people with all the necessary skills and a good reputation to get it done, takes a lot of time and effort- so you need to be aware of tax implications, legal formalities, etc. 

Whether or not you choose to hire employees for yourself or if independent contractors are more suitable for your business type- make sure they’re properly compensated to avoid any future problems. After all, your client depends on you and what happens with a subcontractor(s).

The difference between employees and independent contractors impacts your bottom line. This is because it dictates how you withhold taxes and the legal consequences of hiring them, like potentially owing back taxes or penalties for improper classification. Learn about these differences before hiring your first employee. 

Independent contractors can qualify as employees under certain circumstances if they meet the legal definition.

But what does that mean? If a contractor meets ‘legal employee’ status, you’ll need to pay back taxes and penalties incurred by misclassification, provide benefits (if applicable), and reimburse wages (if applicable). 

Independent contractors operate independently from their clients, which means they invoice them directly for work completed; this makes it easy to avoid costly mistakes in classifying such a person.  

Establish and market your brand

Word of mouth is a great way to grow your business, but it’s not always 100% reliable in some cases. Put together a marketing plan and calendar for promotions you can schedule, such as first-time customer deals, referral perks, and more that you can share through social media posts or paid ads.

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As you build your customer list, keep all of their data and buyer history in one database. You should use a CRM system to send targeted and personalized messages with promotions or deals for future purchases. 

Here are some methods to market your business effectively- 

  • Giving out informational products and promoting them is a terrific way to get your name there. For instance, printing high-quality brochures and fliers outlining your services and distributing them to local businesses will help build brand awareness locally.
  • Using professional business cards is a tried and true way of creating brand awareness, and it’s an absolute must for any serious entrepreneur. Business cards come in handy since they can be carried everywhere; you never know when the opportunity to market your services may arise. A savvy businessman always keeps his eyes peeled for new sources of potential clients.
  • Email marketing is a cost-effective, simple way to reach out and market your products or services. Email marketing can be used on a large scale (putting your business in front of thousands of potential customers) or as an effective one-time advertisement.
  • Networking at in-person events and on social media platforms like Twitter is key to growing your client base and getting referrals. Attending industry events will permit you to establish word of mouth about your business, build a reputation as a thought leader, and stay connected with expert influencers in the field.

For the average consumer, it takes 10 reviews before they can trust a business. You want to generate reviews as quickly as possible – and generating positive feedback on sites like Google and Yelp will make you appear on the first page of search results for your area. 

It is important to ensure you have met your customer’s needs before leaving the site. Try following up with a text message or email requesting them to leave a review. If they do not reply, offer them a discount when booking their next service.

Conclusion 

You now have everything you need to about how to start a contracting business successfully. Continue building your client base and offer some additional services. Invest in equipment, and tools and expand your staff to stay on the path towards success. 

As time goes by, you may be able to revise a few things in the future after hitting milestones or goals as well.

Being prepared is essential for efficiency and profitability in your business. Regardless of the size, being prepared can mean success or failure. However, it isn’t always what you think will make or break you for contractors.

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Posted by Elena Hudgens
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Elena Hudgens is an entrepreneur with 10+ years of experience. She started her journey by building her own e-commerce website on Shopify and turned her $1000 savings to millions in just 2 years. Soon she started different ventures in which she failed and succeeded. And now, she's on a mission to help other entrepreneurs with her life and business lessons.
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