With the pandemic-fueled recession slowly gaining distance in the rearview mirror, the construction industry has begun to revive itself. With new infrastructure projects passed by Congress and a housing market that is sizzling hot, Patrick Shin (owner of Nan Inc) says that now might be the time to start your own construction business.
Before you start picking out company names, first understand what it will take to launch your new business in 2022 successfully:
1. Business Planning
No matter which industry you want to start a new venture, you need a thoughtfully-crafted business plan. This document will help you navigate the startup process, understand the market you’re competing in, help you keep your financial goals achievable, and provide a host of guidance for your operation. It’ll also be a central piece to any funding you hope to receive from investors.
Ensure your plan includes the following information:
- Business objectives and goals
- Service descriptions
- Market information
- Sales plan
- Competitive analysis
- Operations management outline
- Financial analysis
If you aren’t sure what a business plan should look like, the Small Business Association website has a handy template you can download to write a comprehensive plan.
2. Choosing a Business Structure for Your Construction Company
There are multiple business entities that you can operate when establishing your construction business. The four most common are:
- Sole Proprietorship
You are the business. This formation means you and your companies are one and the same. Also, you take on full financial liability for anything that goes wrong.
- Limited Liability Company (LLC)
Since its inception, the LLC structure has been hugely popular for those in the construction industry. It offers financial liability protections to protect your personal assets and offers pass-through taxation benefits.
- General Partnerships
This is ideal for businesses that have two or more individuals holding an ownership stake. While no registration filing is needed, it’s crucial to outline the responsibilities of each stakeholder in the company.
Businesses owned by shareholders often choose to form a corporation to protect themselves from personal liability for company-related debts.
Each entity type has its own pros and cons, including when it comes to tax implications. Before deciding which you should form, consult a knowledgeable business advisor and/or tax attorney about which is best for you.
3. Handling All the Red Tape
You can expect that your state and municipality will likely require a few licenses and permits to run your new construction company. This includes any industry-specific guidelines and even work you’ll be doing that is trade-related. In addition, you need to be licensed to become a construction business. Failing to obtain these requirements could cost you significant financial penalties and force your company to close until you comply.
You’ll also likely need to get a surety bond through a third party so that if you meet your contractual obligations, the party providing the bond will pay the client on your behalf for incurred damages. Because bond requirements vary from state to state, be sure to do your research and find out what qualifications you need to meet.
4. Insuring Your Construction Business
Another important thing to consider before taking your first construction contract is purchasing adequate insurance to protect your business against costly liabilities. From workers getting hurt on the job to incorrectly laying a foundation for a home when things go wrong, your bottom line suffers.
When considering what coverages you need, don’t focus on how much your insurance costs but on the protections it provides:
This is a policy nearly every business must carry to operate. It not only protects your construction firm against incidents where someone gets hurt visiting your job site (not your employees), but it can pay for the cost of their medical care. This coverage also is useful when damages to a customer’s property occur that aren’t the result of a professional mistake. For example, if an employee cracks a newly installed window or leaves ruts in a yard with their heavy equipment.
It’s important to note that general liability only covers third-party claims and not instances of professional negligence.
Professional Liability Insurance
We’re all human, and mistakes can happen. But some errors or omissions in judgment are professional in nature, such as a construction design creating structural problems you should have known would occur. This coverage steps in and deals with the fallout of these incidents, including paying for your legal defenses if the client sues you.
No matter how large a fleet you own, you need commercial auto insurance if you have vehicles used for business. For example, it may be tempting to just use your own truck for hauling construction supplies and tools, but if an accident happens, your personal policy will likely deny any claims made and leave you with the bill.
Personal auto insurance was never meant for business use, which is why it’s personal. You should also consider putting your vehicle’s title under your company’s name to prevent any conflicts if you need to file a claim.
Inland Marine Insurance
This may sound like an odd insurance option for construction firms, but when it was first developed, most transportation of goods took place on the water. Nowadays, everything gets transported by vehicles, but the name remains the same.
From tools and equipment to construction site materials and supplies, inland marine coverage protects these items while in transport to a job site or back again to your business. Typically, your auto policy won’t pay for claims involving theft of these assets, but this insurance will.
Your business has a duty to provide employees financial protection should they get hurt on the job. Many states require this coverage because it ensures workers receive quick access to medical care and recover lost wages because of a workplace injury or illness. This policy will also protect you against personal injury claims alleging your construction company was somehow negligent and caused the conditions leading to your employee’s injuries.
5. Hire Skillful Construction Workers and Contractors
Some construction projects will feel like you need an army to get the job done. This means having a talent pool full of qualified and highly trained construction workers who will get the job done right the first time. Hiring employees is a crucial step in forming your new business, and at first, you may need to rely on contractors to fill this need. Just make sure that anyone they bring on your site is qualified to be there.
The Foundation of Your Construction Business Starts with Preparation
As you have read, starting a construction company requires diligence, planning, and a will to succeed in a competitive market. As your business grows, so will opportunities and the risks that come with them. The good news is that with a solid foundation built on informed decision-making and risk management, you will be able to weather the storms that come with the industry. Business insurance should be the bedrock you build upon. It will protect your financial security and reputation and help your firm rebound more quickly.