Starting a contracting business can be very profitable. With proper planning, execution and hard work, you can enjoy great success. Below you will learn the keys to launching a successful contracting business.
Importantly, a critical step in starting a contracting business is to complete your business plan. To help you out, you should download Growthink’s Ultimate Business Plan Template here.
14 Steps To Start a Contracting Business:
- Choose the Name for Your Contracting Business
- Develop Your Contracting Business Plan
- Choose the Legal Structure for Your Contracting Business
- Secure Startup Funding for Your Contracting Business (If Needed)
- Secure a Location for Your Business
- Register Your Contracting Business with the IRS
- Open a Business Bank Account
- Get a Business Credit Card
- Get the Required Business Licenses and Permits
- Get Business Insurance for Your Contracting Business
- Buy or Lease the Right Contracting Business Equipment
- Develop Your Contracting Business Marketing Materials
- Purchase and Setup the Software Needed to Run Your Contracting Business
- Open for Business
1. Choose the Name for Your Contracting Business
The first step to starting a contracting business is to choose your business’ name.
This is a very important choice since your company name is your brand and will last for the lifetime of your business. Ideally you choose a name that is meaningful and memorable. Here are some tips for choosing a name for your contracting business:
- Make sure the name is available. Check your desired name against trademark databases and your state’s list of registered business names to see if it’s available. Also check to see if a suitable domain name is available.
- Keep it simple. The best names are usually ones that are easy to remember, pronounce and spell.
- Think about marketing. Come up with a name that reflects the desired brand and/or focus of your own company.
2. Develop Your Contracting Business Plan
One of the most important steps in starting a contractor business is to develop your business plan. The process of creating your plan ensures that you fully understand your market and your business strategy. The plan also provides you with a roadmap to follow and if needed, to present to funding sources to raise capital for your business.
Your business plan should include the following sections:
- Executive Summary – this section should summarize your entire business plan so readers can quickly understand the key details of your own business.
- Company Overview – this section tells the reader about the history of your contracting business and what type of contracting business you operate. For example, are you a residential construction business, site preparation business, or are you a flooring contractor, etc.?
- Industry Analysis – here you will document key information about the contracting industry. Conduct market research and document how big the industry is and what trends are affecting it.
- Customer Analysis – in this section, you will document who your ideal or target market are and their demographics. For example, how old are they? Where do they live? What do they find important when purchasing services like the ones you will offer?
- Competitive Analysis – here you will document the key direct and indirect competitors you will face and how you will build competitive advantage.
- Marketing Plan – your marketing plan should address the 4Ps: Product, Price, Promotions and Place.
- Product: Determine and document what products/services you will offer
- Prices: Document the prices of your products/services
- Place: Where will your business be located and how will that location help you increase sales?
- Promotions: What promotional methods will you use to attract new customers to your contracting business? For example, you might decide to use pay-per-click advertising, public relations, search engine optimization and/or social media marketing.
- Operations Plan – here you will determine the key processes you will need to run your day-to-day operations. You will also determine your staffing needs. Finally, in this section of your plan, you will create a projected growth timeline showing the milestones you hope to achieve in the coming years.
- Management Team – this section details the background of your company’s management team.
- Financial Plan – finally, the financial plan answers questions including the following:
- What startup costs will you incur?
- How will your contracting business make money?
- What are your projected sales and expenses for the next five years?
- Do you need to raise funding to launch your business
3. Choose the Legal Structure for Your Contracting Business
Next you need to choose a legal structure for your contracting business and register it and your business name with the Secretary of State in each state where you operate your business.
Below are the five most common legal structures:
1) Sole proprietorship
A sole proprietorship is a business entity in which the owner of the contracting business and the business are the same legal person. The owner of a sole proprietorship is responsible for all debts and obligations of the business. There are no formalities required to establish a sole proprietorship, and it is easy to set up and operate. The main advantage of a sole proprietorship is that it is simple and inexpensive to establish. The main disadvantage is that the owner is liable for all debts and obligations of the business.
A partnership is a legal structure that is popular among small businesses. It is an agreement between two or more people who want to start a contracting business together. The partners share in the profits and losses of the business.
The advantages of a partnership are that it is easy to set up, and the partners share in the profits and losses of the business. The disadvantages of a partnership are that the partners are jointly liable for the debts of the business, and disagreements between partners can be difficult to resolve.
3) Limited Liability Company (LLC)
A limited liability company, or LLC, is a type of business entity that provides limited liability to its owners. This means that the owners of an LLC are not personally responsible for the debts and liabilities of the business. The advantages of an LLC for a contracting business include flexibility in management, pass-through taxation (avoids double taxation as explained below), and limited personal liability. The disadvantages of an LLC include lack of availability in some states and self-employment taxes.
4) C Corporation
A C Corporation is a business entity that is separate from its owners. It has its own tax ID and can have shareholders. The main advantage of a C Corporation for a contracting business is that it offers limited liability to its owners. This means that the owners are not personally responsible for the debts and liabilities of the business. The disadvantage is that C Corporations are subject to double taxation. This means that the corporation pays taxes on its profits, and the shareholders also pay taxes on their dividends.
5) S Corporation
An S Corporation is a type of corporation that provides its owners with limited liability protection and allows them to pass their business income through to their personal income tax returns, thus avoiding double taxation. There are several limitations on S Corporations including the number of shareholders they can have among others.
Once you register your own construction business, your state will send you your official “Articles of Incorporation.” You will need this among other documentation when establishing your banking account (see below). We recommend that you consult an attorney in determining which legal structure is best suited for your company.
4. Secure Startup Funding for Your Contracting Business (If Needed)
In developing your contracting business plan, you might have determined that you need to raise funding to launch your business.
If so, the main sources of funding for a contracting business to consider are personal savings, family and friends, credit card financing, bank loans, crowdfunding and angel investors. Angel investors are individuals who provide capital to early-stage businesses. Angel investors typically will invest in a contracting business that they believe has high potential for growth.
5. Secure a Location for Your Business
If you’d like to maintain an office for your contracting client meetings and administrative functions, the first step is to find a location. This can be done by looking at online resources or in the local newspapers. You can also go door-to-door to see if there are any businesses or office spaces for rent.
Once you’ve found a few potential locations, the next step is to visit them and see which one is the best fit for your business. You’ll want to consider things like the cost of rent, the amount of traffic in the area, and the availability of parking.
After you’ve narrowed it down to a few places that meet your needs, schedule a meeting with the owner or manager of the building. Make sure that you have all of your paperwork on hand including business licenses and permits. If they ask for any additional documents, give them those as well.
Take your time and make sure to do some research before making this important business decision.
6. Register Your Contracting Business with the IRS
Next, you need to register your business with the Internal Revenue Service (IRS) which will result in the IRS issuing you an Employer Identification Number (EIN).
Most banks will require you to have an EIN in order to open up an account. In addition, in order to hire employees, you will need an EIN since that is how the IRS tracks your payroll tax payments.
Note that if you are a sole proprietor without employees, you generally do not need to get an EIN. Rather, you would use your social security number (instead of your EIN) as your taxpayer identification number.
7. Open a Business Bank Account
It is important to establish a bank account in your contracting business’ name. This process is fairly simple and involves the following steps:
- Identify and contact the bank you want to use
- Gather and present the required documents (generally include your company’s Articles of Incorporation, driver’s license or passport, and proof of address)
- Complete the bank’s application form and provide all relevant information
- Meet with a banker to discuss your business needs and establish a relationship with them
8. Get a Business Credit Card
You should get a business credit card for your contracting business to help you separate personal and business expenses.
You can either apply for a business credit card through your bank or apply for one through a credit card company.
When you’re applying for a business credit card, you’ll need to provide some information about your business. This includes the name of your business, the address of your business, and the type of business you’re running. You’ll also need to provide some information about yourself, including your name, Social Security number, and date of birth.
Once you’ve been approved for a business credit card, you’ll be able to use it to make purchases for your business. You can also use it to build your credit history which could be very important in securing loans and getting credit lines for your business in the future.
9. Get the Required Business Licenses and Permits
In order to start a contracting business, you will need to obtain a business license and a contractor’s license. You may also need to obtain permits from your local municipality.
Nearly all states, counties and/or cities have license requirements including:
- General Business License: getting your Articles of Incorporation as discussed above
- Specialty Licenses: depending on your specialty (like electrician, drywaller, roofer, etc.), you will need to obtain licenses from industry associations.
Depending on the type of contracting business you launch, you will have to obtain the necessary state, county and/or city licenses and permits.
10. Get Business Insurance for Your Contracting Business
There are a few different types of insurance you will need to operate a contracting business. The single most important type of insurance to be carried by a contracting business is General Liability Insurance (GL). This provides an umbrella over other types of coverage in order to protect you against claims or lawsuits resulting from injury or property damage sustained by a third party.
Other business insurance policies that you should consider for your contracting business include:
- General liability insurance – this covers your business if a visitor suffers an injury at a construction site or you damage a client’s property.
- Professional liability insurance – also known as errors and omissions insurance, this will help pay for the costs of a lawsuit over a construction defect.
- Builder’s risk insurance – this protects your business if fires, vandals, or weather events damage a structure in progress.
- Workers’ compensation insurance – most states require construction businesses and contractors – even those without employees – to carry workers’ compensation insurance to pay for the costs of injured employees’ medical bills and reimburse them for lost wages.
- Contractor’s tools and equipment insurance – this reimburses you for tools or machinery that are lost, stolen, or damaged.
- Commercial auto insurance – if you own business-use vehicles, you will want to purchase a commercial auto policy to cover any damage from accidents.
- Surety bonds – these protect government agencies that issue building permits and are frequently required for construction projects. Surety bonds guarantee that your company will pay financial damages to government agencies if a third party sues them over your work.
Find an insurance agent, tell them about your business and its needs, and they will recommend policies that fit those needs.
11. Buy or Lease the Right Contracting Business Equipment
Depending on your specialty, you will need some or all of the following equipment to start a contracting business:
- Earthmoving equipment
- Aerial work platforms and scaffolding
- Pumps and generators
- Other equipment such as concrete pumps and mixers, pavers, carpentry and woodworking tools, heating, drying and cooling equipment, landscaping equipment, etc.
The price for this equipment varies, depending on how much you are willing to invest. It is best that you shop around to get the best prices. You should also check what kind of warranty comes with the equipment and how much it will cost to repair if something breaks down.
12. Develop Your Contracting Business Marketing Materials
Marketing materials will be required to attract and retain customers to your contracting business.
The key marketing materials you will need are as follows:
- Logo: Spend some time developing a good logo for your contracting business. Your logo will be printed on company stationery, business cards, marketing materials and so forth. The right logo can increase customer trust and awareness of your brand.
- Website: Likewise, a professional contracting business website provides potential clients with information about the services you offer, your company’s history, and contact information. Importantly, remember that the look and feel of your website will affect how customers perceive you.
- Social Media Accounts: establish social media accounts in your company’s name. Accounts on Facebook, Twitter, LinkedIn and/or other social media networks will help customers and others find and interact with your contracting business.
13. Purchase and Setup the Software Needed to Run Your Contracting Business
To start a contracting business, you need to have some software to help manage your operations. One important piece of software is a project management tool to help keep track of your contracts and projects. Other software that can be helpful includes accounting software to help with billing and invoicing, and CRM software to help manage customer and business relationships.
14. Open for Business
You are now ready to open your contracting business. If you followed the steps above, you should be in a great position to a successful business. Below are answers to frequently asked questions that might further help you.
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How to Start a Contracting Business FAQs
There is no one-size-fits-all answer to this question, as the difficulty of starting a contracting business will vary depending on your specific services and location. However, some key factors that can make starting a contracting business more or less difficult include the availability of contracts and clients, competition from other independent contractors, and your ability to market yourself effectively.
It is easy to start a contracting business in locations where there is a high demand for services and clients are eager to hire contractors. In these locations, it's much easier to find contracts and clients will generally be willing to work with you if they have not yet found a solution that meets their needs.
If you're looking to start a contracting business but don't have any experience, here are a few things you can do:
- Work for a respected contractor. Find an existing contractor who will hire and mentor you. If the contracting business you want to start is in a highly competitive field, it might be best to quietly learn from your boss through observation, or by making sure you get experience in all aspects of the operation.
- Get started on your business plan. This will help you figure out the specifics of your business, including what services you'll offer and how you'll market them.
- Build your network. Reach out to other contractors and professionals in your field, and learn from their experiences.
- Start small. Try out your business with a few clients, and gradually grow it over time.
- Be patient. Building a contracting business can take time and patience. Don't get discouraged if it doesn't immediately become successful.
The most profitable type of contracting business is a general contracting business. General contracting businesses tend to make above average profits because they are not limited to working with one speciality.
The startup costs for a contracting business vary depending on the services you offer and the industry you're in. However, as a general rule of thumb, you can expect to spend between $10,000 and $50,000 to get your business up and running. This includes things like setting up a legal entity, obtaining licenses and permits, purchasing equipment and supplies, and hiring employees (if necessary).
The ongoing expenses for a contracting business can include the costs of doing business, such as marketing and advertising, office supplies, and equipment costs. Also included is the cost of doing business with a company that provides services for your business. For example, office supplies from a wholesaler, software from a vendor, and advertising from an advertising agency are some of those types of expenses.
At the same time as these costs are running up, you will also need to pay yourself as owner of the company. So, you will need to set aside funds for your salary and for withholding tax on that salary. Since it takes time between when the services are provided by yourself or your employees and money is collected, there may also be costs involved with waiting to get paid. A business checking account with a merchant services provider can help with this.
A contracting business makes money by performing services for customers and charging them a fee. The company may also charge for materials used in the project, or subcontract some of the work to other businesses.
Profitability depends on a variety of factors, such as the size and scope of the contracting business, the area in which it is located, and the competitive landscape. However, contracting businesses can be extremely profitable if they are well run and consistently perform quality work.
Contracting businesses can fail for a variety of reasons, the most common being cash flow problems. Other reasons can include: not having the proper licenses or insurance, not having a solid business plan, hiring the wrong people, and not getting paid on time.