This article outlines the requirements and steps to start a general contracting business, including licensing, determining if it is the right fit, creating a business plan, getting the correct permits and licenses, and building a reliable team.
Data from the Associated General Contractors of America shows construction remains a significant contributor to the U.S. economy, with 7.8 million employees (2.9% of the workforce) working for 753,000 employers.
Figures released by the United States Census Bureau in April indicate that the total construction activity for February 2023 was $1.855.1 billion. The industry contributes $1.8 trillion of structures annually, accounting for 4.3% of the U.S. GDP.
General contractor services remain in high demand, with various growth rates in each sector. Growth remains consistent for housing units, but annual construction spending shows more robust growth in the nonresidential and public works sectors for 2023.
Starting a general contracting business provides a wonderful way to make a living, but you must leverage your construction skills with business management skills. Knowing the business side of things is as vital as understanding construction.
If you’re wondering how to start a contracting business, read on to discover how to create a solid business plan, get the correct licensing and permits, set up the correct business structure, create a solid team of reliable sub-contractors, and insure your business against the unforeseen.
How to Start a General Contractor Business
Starting a sustainable general contracting business has several requirements. Follow each one closely to build the solid foundations required to take it to great heights.
1. General Contractor Licensing Requirements
Every state requires that you acquire a license before starting a general contractor business so that you understand the need to build safely and all the building codes. Some states require licensing at the state level, while others require it at the local or county level. A few states also have a minimum project price that contractors can bid for without a contractor’s license. For example, in Tennessee, it’s $25,000. In South Carolina, it’s $5,000, and in Utah $3,000.
Licensing requirements differ between states, but they require proof of industry experience and a pass in the relevant trade exams. In addition, when applying for a license, you must pass a test showing you understand the construction trade’s best practices, regulations, and codes. Finally, to conduct your contractor business in multiple states, you must get licensing according to each state’s requirements.
The building trade includes more than 40 contractor categories, some focusing on specialty trades within the industry. In general, you will require the following to get a contractor’s license:
- Prove your competency in your contracting field by taking an exam.
- In some states, you must present financial records or your net worth and proof of existing general liability insurance and construction bonds to start your business. If you don’t have the funding, you must provide evidence that you can get financing.
- You must present reference letters from past clients, employees, colleagues, and your bank.
- Prove expertise at your job.
FAQ: What does a general contractor do?
The three main types of construction are heavy engineering (bridges, roads, and other large projects), general construction (involving the construction and maintenance of real estate assets), and specialized projects (relating to woodwork, electric, CCTV installations, etc.).
As a general contractor, your responsibility is to manage the building process, ensuring you complete it according to the project’s plan, timeline, and budget. In addition, you prepare the project site and provide the various construction services and materials while inspecting the site to ensure specification and building code compliance.
2. Is General Contracting Right for You?
Before you proceed to find out how to start a contracting business, you must determine if general contracting is right for you.
As a general contractor, your responsibility lies in coordinating the whole construction project through all its phases. Typically, a property owner hires you to carry out a specified renovation or build an entire project on empty land. Your responsibility is to take the project from start to finish. You must hire the necessary subcontractors and oversee their work over the entire project. A crucial requirement is networking; you constantly need to make new connections to ensure project completion.
Starting a general contractor business allows you to work more flexibly and choose the jobs you prefer while leveraging your building skills and experience. However, before jumping in, consider the responsibilities of owning a construction business. These include managing your business and workload correctly to help you build a good industry reputation.
Here are the most critical points to consider before undertaking the following steps on how to start a contracting company.
- Do you have the drive and passion needed to start a business?
- Do you understand the requirements and difficulties of a general contractor?
- Do you have the skill set to manage others in a demanding environment?
- Do you have the equipment required to start a general contracting business? If not, do you have the money to buy the equipment or the credibility to get a loan?
- Do you understand the risks associated with starting a business?
It’s imperative to have answered yes to all the above questions; otherwise, a general contractor business is unsuitable.
FAQ: How much can you expect to make as a general contractor?
Your profit margin will determine how much you make as a general contractor. Data from Indeed shows the average salary for a general contractor is currently $96,770 annually, an amount that you would have to match or surpass to make it worthwhile being a business owner.
As we saw during the last recession, stiff competition in a tight market required razor-thin profit margins to ensure those in the building trade won contracts. Currently, contractors face higher salaries to retain experienced workers and inflationary trends on building supplies. Therefore, reducing costs and delivering quality work is vital to ensure your contracting business produces a healthy profit.
3. Create a Business Plan
Now that you know you’re a suitable candidate, here’s how to start a contracting business.
The first step of any business is to create a solid business plan to help you understand the long-term goals you must follow as you grow your business. You must never omit this step because it serves as the business roadmap during good and bad times.
Another important reason for creating a business plan is that should your business need a small business loan or financing, your lending institution or investors want to see it before providing the capital to help your business grow.
Some of the most critical components to include in your general contractor business plan are:
- The business management structure
- A business description that also defines the business concept and strategy
- An outline of the construction services you will provide
- Define your target market
- The number of employees, if any, you’ll require
- Estimated startup costs for equipment, vehicles, business licenses, etc.
- Estimated monthly running costs
- Your financial projections for the next few years
- Determine your competition
How to decide on the type of services your general contracting business will offer
Some building contractors prefer to enter the market with a niche in a specialized building service, allowing them to gain a competitive edge. On the other hand, you may bid for a large variety of projects that require a full range of building services.
You must decide which services you want to offer at the planning stage of your business. For example, knowing which building services you’ll provide makes it easier to determine your startup costs based on your equipment and employee requirements. It also makes it easier to evaluate competitors.
The more passionate you are about a particular construction area, the better for building your reputation and gaining customer loyalty. When times are tough, it can also help keep you motivated,
What are the startup costs for a general contracting business?
The initial investment for your general contracting business will depend on the type of projects you intend to undertake. You may already have some of the professional vehicles and equipment required, but if you don’t, you will need the essentials to help your business grow, buying more equipment as required.
The one-time startup costs include business licenses and permits, insurance, administrative fees, website creation, and marketing. In addition, you must determine what vehicles and equipment you’ll need and how to fund their purchases.
Funding options include small business loans, government grants, private equity, and angel investors. Your solid business plan will make it easier to get the required funding. Additionally, compare loan options, especially interest rates and repayment terms.
A proper business structure is vital if you plan to get investors to help fund your contractor business, meaning you must incorporate the business.
What ongoing costs can you expect for your contractor business?
Determine the ongoing costs your contractor business will have. These include employee salaries, the cost of maintaining company vehicles, rent if you lease an office space, loan repayments, utilities, and marketing.
Besides paying the ongoing costs for your business, you must also consider the importance of reinvesting in your company to strengthen it. For example, the money used to buy specialized equipment could help land you larger contracts that pay well.
How to reduce costs for your general contractor business?
- Equipment and building material costs impact your bottom line. Think about how to build strong relationships with vendors and suppliers, allowing you to negotiate for the best possible prices.
- Hiring employees remains a significant expense for construction businesses in general. However, if you want to establish a solid foundation before having that expense, you could consider using subcontractors to handle the required construction-related tasks. These could include painters, electricians, plumbers, etc.
- Equipment and vehicles constitute a major expense for any general contractor. You could consider leasing instead of purchasing to save on your startup costs.
- Marketing and advertising your business are essential, especially in the startup phase. Use low-cost channels like social media and flyers to promote your business initially. Word-of-mouth referrals are also vital in marketing your business, but these come once you have completed a few projects. Consider advertising on podcasts and TV shows as your business and marketing budget grows.
Define the demand for your services and your target audience
Consider the services you plan to offer and the areas you’ll serve to make an estimated guess of the market and your business’s potential customers. Next, determine which demographics constitute your target audience that will need your services for their next project.
Know your competition
Who are your competitors? What contractor services do they offer? What value proposition do you bring to the table that they don’t? These are critical questions. Once you know your competition and what you can offer, you can make better business decisions and accelerate your success.
FAQ: How much money do you need to start a general contractor business?
You can expect to spend anything from $15,000 to $500,000 to start your general contractor business, depending on its size and the projects you plan to compete for.
Unless you have the money available, you will likely need to raise capital for your general construction business. Consider your options, and remember that you must factor the loan repayment into your budget.
4. Surety Bonds and Insurance
Once your licensing requirements and business plan are ready, the next step is to get the relevant surety bonds and insurance before continuing with the following steps in this article on how to start a general contractor business.
Surety Bonds – All general contractor businesses require surety bonds. These are also known as construction bonds, and they protect your clients if you cannot meet your contractual obligations. You get the bonds from a surety bond agency, but they must comply with state regulations.
Insurance Coverage – Several factors determine the type of insurance your contractor business requires. Every contracting business needs general liability insurance. However, depending on your equipment, vehicles, and property, you may also need commercial auto insurance, property insurance, etc.
If hiring workers, you will also need worker’s compensation, unemployment insurance, and state disability insurance to ensure their protection.
5. Choose a name for Your General Contractor Business
Every business needs a name to make it easier for its customers to identify. Remember that the easier your businesses name is to read and remember, the easier it becomes for customers to look you up when they need contracting services.
Ensure your business name indicates the services you plan to provide to avoid confusion. Once you choose the appropriate business name, you must conduct a state and U.S. Patent and trademark search to ensure another business is not using it.
Brainstorming a business name is quite exciting. If you don’t feel your ideas are good, ask friends and family to help. You can also use any of the online business name generators. It’s a good idea to have up to three business naming options.
Ensure you also purchase the domain name for your business because you might struggle to find it later.
6. Choose Your Business Entity
We have reached the halfway mark on how to start a contracting business. In this step, you decide how best to incorporate your business by choosing the most suitable business structure.
There are several entity types you can choose from to form your business. These include a limited liability company (LLC), a corporation, and the less formal sole proprietorship or partnership.
Small corporations with 100 shareholders or less can register S Corporation tax status to benefit from their “pass-through” taxation by filing Form 2553 with the IRS. However, all members of an S Corp must be domestically based, and they can only issue one stock class.
FAQ: Which is the best legal structure for your general contractor business?
When looking into how to start your contracting business, choosing the proper legal structure is essential.
You want your business to become a separate legal entity to protect your personal assets in case of unforeseen circumstances like settling a lawsuit debt or bankruptcy. Both the LLC and corporation provide the safeguards required.
However, these have advantages and disadvantages:
LLC – An LLC combines pass-through taxation and limited liability. You can choose to be taxed as a partnership or corporation with an LLC. The main advantage of forming an LLC is that your general contractor business has the least formal annual requirements.
Corporation – The owners and stakeholders of a corporation enjoy limited personal liability for any business-related debts. However, the corporation is a separate taxable entity. The corporation and owners pay tax on corporate profits. To maintain corporate status, you must meet the meeting requirements of corporations. Additionally, your business can raise capital by selling stocks.
S Corporation – Choosing S Corp tax status preserves the liability of your chosen entity since it’s a tax status. Creating a sole proprietorship or partnership is more expensive, but the potential tax savings make up for that. Despite offering the same advantages as an LLC, an S Corp has similar advantages. However, it’s limited to one class stock and no foreign members.
7. Register Your General Contracting Business
The next step is to register your general contract business with your state. However, you can also form a Wyoming LLC for the added benefits of the state’s asset protection laws, low taxes, anonymous ownership, and low fees. When registering, you need to have chosen a business name and your business structure. During the registration process, you must also provide the name of a registered agent.
Now that you have listed your business with the state registry, you are almost ready to start taking building contracts.
8. Apply for an Employer Identification Number
Most business structures require that you apply for an Employer Identification Number (EIN) or Tax Identification (TIN). The EIN is the equivalent of a social security number for your business. For example, you require an EIN to open a bank account, for your business tax returns, and to hire employees.
Most people obtain their EIN by applying online with the IRS, but most business formation providers can also help you apply for one.
9. Get a Business Bank Account
You will need a business bank account before your business can accept or make payments. Your legal entity ensures that you keep personal finances separate, but you also need a separate bank account to safeguard the protection.
Several types of bank accounts are suitable for businesses, and several reputable institutions to choose from. Your choice of banking institution depends on whether you prefer physical banking, online banking, or a combination.
A business banking account provides the following vital services:
- You can accept and make payments in your business name, billing customers or paying contractors and suppliers will appear more professional than taking payments into your personal account.
- A business bank account gives your general contractor business more credibility.
- The business banking account will make preparing your business tax return easier. It also makes it easier to assess your business profits and losses. Keeping separate finances also reduces the chance of a tax audit because it provides transparency.
- If your business ever faces a lawsuit, a business account keeps a clear separation between your business and personal finances. Your valuable personal assets do not appear in your company assets, ensuring you don’t pierce the corporate veil or blur the line between the two.
- Finally, every business needs to establish a good credit history. Having a business account and credit card makes it easier to apply for financing. Also, remember that as a general contractor, a good credit history can help you when you need to purchase expensive equipment and vehicles for demanding building contracts.
When you approach a bank to open a business account, they will ask for the business EIN, Operating Agreement, and Articles of Organization. It’s easier to open a bank account by visiting a local branch because it makes it easier for the bank to verify that you’re the business owner, member, or manager.
FAQ: Which State is Best to Register a General Contractor Business?
Delaware might be known as the Incorporation Capital of the U.S. thanks to its corporate case law, but it’s most suited to multi-national corporations. However, companies pay state corporate tax, personal income, and franchise taxes. They also face higher annual renewal fees than most states, and the state has regulations compelling information disclosure.
On the other hand, Wyoming has no state corporate tax, personal income tax, or franchise tax. Wyoming’s filing and annual renewal fees are economical, and the state doesn’t require share certificates. Most importantly, the owners and managers of a business are not listed, providing anonymous ownership, and the state protects attorney-client privilege. Wyoming also extends the corporate veil offering the most protection of all states.
By creating a Wyoming LLC, you can get the desired anonymity in another state because you can use that LLC as the listed owner of your general contracting business. However, not all states support the double setup.
10. Hire Employees and Subcontractors
Now that you have completed all the tasks required to set up and register your general contractor business, the time has come to find the people you will work with when taking on building projects.
Hiring the right people with a good reputation remains critical for the quality of the construction services you provide, whether you plan to hire employees or subcontractors.
Hiring subcontractors according to each specific contract need might prove better and cheaper in the beginning because you aren’t responsible for the expenses of hiring employees. However, as the demand for your contractor services grows, hiring tradespeople with the right skills may pay better.
Hiring and paying employees has tax implications, requiring that you maintain the legal formalities of being an employer. Make sure that you know the differences between employees and independent contractors to avoid paying penalties.
FAQ: Is a general constructor business profitable?
The construction business is profitable and provides many opportunities. However, research shows that most general contractors don’t know how much profit they make, leading to a high failure rate of one out of five businesses.
Therefore, to ensure your construction business is profitable, you must ensure that your business has money left over from your bid on the job’s completion. When working out a quotation, you must carefully calculate your equity, overhead, labor, and material costs before adding your profit.
Bids require careful planning, and construction management tools that are ideal for helping you follow the process to create them accurately. Additionally, these tools make it easier to manage all aspects of your contractor business, including payables and receivables.
11. Developing Your Brand
Creating a strong brand is the next step in this article to start a contracting business because it helps distinguish it from your competitors.
Your brand must represent the values and goals you expressed in your business plan. Develop and define your general construction brand by following these steps:
1. Design a Suitable Logo
Your general contractor business logo serves two crucial purposes. Firstly, it helps with your advertising and marketing efforts. Secondly, after your business name, it’s the next item your potential customers see. Therefore, make it impressive and beneficial by ensuring it represents your company, values, and goals. Whether you use an online logo maker or a professional logo design team depends on you. However, before deciding on a logo, research which design resonates with your market for your industry.
2. Promote Your Brand
Promoting your brand assists in several ways. It helps people remember your business when they need your services and shows professionalism.
- Distributing flyers and brochures that you can leave at homes or businesses in the areas you serve is the best way to create local brand awareness.
- Carry business cards everywhere with you to hand out at any marketing opportunity or when you meet potential clients.
- Email marketing requires a minimal budget and provides a considerable return. You can email thousands of property owners and potential customers in your area to notify them of your new general contractor business. You can also keep your contacts informed when you add a new service or run a promotion.
- Use networking opportunities to grow your client base and get referrals. Look for networking opportunities at industry events and online using LinkedIn’s professional connection platform and on social media like Twitter. When you meet influential people in your space, keep in touch with them. Finally, use your skills and knowledge about the contracting business to establish yourself as an expert in your industry. You can even start a blog where you provide tips and advice.
3. Establish an Online Presence
- You will need a professional website for your general contractor business, and it doesn’t need to cost a fortune if you use a website builder tool. A website is a valuable tool for every business because it’s a point of contact with prospective and existing clients. You can share your contact details and collect customer contact information through it. Use your website to share the prices for your contracting services, upcoming specials, types of services, etc. Ensure your website is functional, easy to navigate, and mobile-friendly.
- Place an ad on Google local services for people looking for construction companies. With these ads, you only pay for leads, making them affordable, and you get excellent local exposure.
- Use SEO and local keywords to make it easier for people searching for your services to find your general contractor business.
- Social media benefits all businesses, including contractor companies. However, target your customers according to your location, niche, demographics, etc., to avoid getting lost in the crowded space on socials.
- Encourage reviews and testimonials on your website by creating a section for them. Additionally, include the review configuration on Google and all paid search campaigns. Finally, an incentive will encourage customers to leave a review.
- You could also offer incentives through discounts for customers that refer your construction business to others.
- Finally, look for partnerships with other businesses that can provide you with opportunities for co-marketing campaigns, giving your contractor business exposure to a broader consumer base.
FAQ: What are the typical daily
tasks of a general contractor
The daily tasks of your general contractor business mainly focus on the needs of your building contracts. Whether you’re working on a residential or commercial project, you must follow the plans while ensuring you have the materials and equipment required to complete the task in the time stated on the contract.
Creating timelines ensures you maintain strict control of any time limits on projects, and you must remain within the allotted budgets. Negotiation skills are vital in getting the best prices from your suppliers to help you outbid other contractors while ensuring a healthy profit margin.
At the same time, you must keep track of customers inquiring about contractor services, and provide timely quotes. If you have more than one job going at any given time, you must also ensure you have enough employees or subcontractors to keep within the time limits of each project. Besides inspections before taking on a building contract, you will also need to perform them regularly, to ensure work-quality control.
Bottom Line of How to Start a General Contractor Business
Like all end markets, the construction sector faces exposure to transport bottlenecks, supply chain vulnerabilities, rising inflation, and skilled workforce shortages. In addition, the need to adopt digital technologies and embrace sustainable practices continues to pressure them, meaning you must follow and embrace trends to differentiate your business in a competitive market.
After completing the critical steps of incorporating, opening a business bank account, getting an EIN, and insurance, you are ready to brand and promote your contracting company. Construction remains a robust business in the U.S., but it requires effort to promote it and grow your reputation as a reliable general contractor.
How to start a general contractor business? Suppose you want to start and incorporate your general contractor business in Wyoming for the anonymity and asset protection it provides. Wyoming LLC Attorney’s business creation services provide a complete and seamless experience to have it running in no time.