How to Start a General Contractor Business

1. Develop your business plan.

Just like any worthy endeavor, your general contractor business needs a plan. In its simplest form, this document will outline what your business is going to do and how you’re going to do it.

So what goes in your plan? The best way to think of it is as a collection of answers. In the process of answering important questions about your future business, you’ll develop the framework that will guide your business into the future.

Possible questions to prime the pump include:

• What will your main objectives be?
• What are your key strategies?
• What will your mission statement be?
• How will you market your business?
• How will you stand out from the competition?
• What are your projections for your business?

To thoroughly answer these questions, you’ll need to conduct an industry analysis and additional research. These actions are time-intensive but will provide essential data and spur ideas.

2. Decide on the structure of your business.

When you’re ready for your business to really take shape, it’s time to figure out the name and structure. First, research potential names that would resonate with customers and help you stand out from the competition. Then peruse construction industry directories to make sure the name isn’t already in use. You’ll also want to make sure the domain name is available. Finally, go to the U.S. Patent and Trademark Office’s website to make sure your preferred name is yours for the taking.

At this point, you need to choose a legal structure for your business. There’s no silver bullet here, as each structure has pros and cons. Due to the importance of this element of your business setup, this is an excellent topic to discuss with your mentor.

So what are your options when it comes to business structures? Here’s a breakdown of the five most popular:

1. Sole proprietorships – This route is the easiest. A sole proprietorship is designed for just one owner, meaning every aspect is streamlined. As the single owner, you assume complete responsibility for the business. The profits flow straight to you, but so will any losses. Sole proprietorships do not provide liability protection, meaning your personal assets could be at risk. 
2. Corporations – If there will be multiple owners of your business and liability protection is a priority, you should consider a corporation. With this structure, your business is considered its own legal entity. In the unfortunate case of severe debts and losses, your assets would be shielded. Just know that it’s a fairly complex process to set up corporations, and the costs are higher than with a sole proprietorship.
3. General partnerships – This structure is ideal if there will be more than one owner and everyone wants an equal stake in the company. Each partner will have a voice when it comes to decisions in a general partnership, but the downside is they all share liability for the finances as well.
4. Limited partnerships – If there is a hierarchy among your potential partners, you should consider a limited partnership. The unique structure allows some individuals to be dubbed full partners, while others can assume more of an investor relationship with the business. Full partners will shoulder the liability, while the secondary partners are protected.
5. S corporations – This hybrid structure combines the liability protection of corporations with some of the financial convenience of sole proprietorships. But that’s not to say that S corporations are easy to create and run. You’ll have to meet certain requirements, such as conducting meetings for shareholders, recording the minutes, and soliciting shareholder votes on decisions.
6. Limited liability companies (LLCs) – This common structure is chosen by small business owners due to its user-friendly benefits. For example, an LLC provides liability protection and has lenient tax rules, while also allowing for as many shareholders as you wish.

3. Register for an EIN and create a bank account.

You could have the best business plan in America, but you still probably wouldn’t be able to do business without an Employee Identification Number (EIN). Go to the application page on IRS.gov and you’ll be pleasantly surprised by how easy it is to register your business.

Next, you’ll need to take care of a bank account. The most convenient route is to open a business account at the bank where you already handle your personal finances. Because the bank has your personal data and has established a track record with you, the application process will be much faster.

4. Obtain necessary licenses and permits.

As a general contractor, you’re required to have specific licenses and permits to legally operate your business. The requirements vary depending on your state, so it’s crucial to research what’s needed in your particular location. Typically, a general contractor license, business license, and building permits are a must-have.

To get your general contractor license, you’ll likely need to pass an examination that tests your knowledge of the construction industry and business practices. This license permits you to legally perform and oversee construction projects. Check out the National Association of State Contractors Licensing Agencies for more detailed information on each state’s requirements.

A business license—obtained through your local city or county government—authorizes you to operate a business within their jurisdiction. You may also need to apply for specific permits depending on the nature of the projects you undertake, like electrical, plumbing, or demolition permits.

Remember, it’s not enough to just have these licenses and permits—you must also ensure they are always up to date. Operating without the necessary licenses or permits (or with expired ones) can lead to hefty fines and potentially damage your business reputation. Keeping on top of these administrative tasks can help ensure the long-term success of your general contractor business.

5. Secure the right insurance.

Just as important as obtaining the necessary licenses and permits for your general contractor business is securing the appropriate insurance. When operating a general contractor business, several types of insurance are considered industry standards. These include:

1. General liability insurance – This type of insurance provides coverage for any accidents or injuries that occur on the worksite. It typically covers medical expenses, legal fees, and any damages awarded in a lawsuit.
2. Workers compensation insurance: – If your business has employees, most states require you to carry workers’ compensation insurance. This coverage provides wage replacement and medical benefits to employees who are injured on the job.
3. Commercial auto insurance – If your business owns vehicles, commercial auto insurance is a must. This insurance protects your company from the financial fallout of an auto accident, including coverages for property damage, medical expenses, and liabilities.
4. Builders’ risk insurance – This type of insurance covers a construction project from various risks such as fire, theft, or natural disasters while the project is underway.
5. Professional liability insurance – Also known as errors and omissions (E&O) insurance, this covers you if a client claims that errors or negligence in your work caused them financial harm.

Remember, the specific insurance requirements may vary depending on the location and nature of your projects. It’s crucial to work with an insurance expert or broker to identify the right coverage for your business needs. Operating without the right insurance can expose your business to unnecessary risks and potential financial hardship.

6. Understand the importance of contractor bonds.

In addition to securing the right insurance coverage, another crucial aspect to consider when starting a general contractor business is obtaining contractor bonds. Contractor bonds, often required by law, provide a financial guarantee that you will fulfill your contractual obligations to your clients.

There are different types of contractor bonds, but the most common ones are:

• Bid bonds – These assure the client that you will honor the terms outlined in your bid if it is accepted.
• Performance bonds – These provide a guarantee that you will complete the project as per the terms of the contract. In case of default, the client is compensated up to the full amount of the bond.
• Payment bonds – These ensure that all subcontractors, laborers, and material suppliers involved in the project will be paid.

Obtaining a contractor bond involves applying through a surety company or a bond broker. They will evaluate your financial health, industry experience, and creditworthiness before issuing a bond. Keep in mind that you may be required to pay a premium, usually a percentage of the bond’s total amount.

Remember, having contractor bonds not only fulfills legal requirements but also enhances your credibility with clients by demonstrating your commitment to completing projects as promised. It’s always a good business practice to stay bonded to protect your business, your clients, and your reputation in the industry.

7. Finance your business.

One of the most important elements of your business plan is deciding how much money you will need and when you’ll need to acquire it. There are diverse expenses related to getting a construction business up and running, including materials, equipment, vehicles, trailers, tools, insurance, licenses, office furniture, computers, and software.

You’ll also need to consider less obvious expenses, such as advertising, maintenance, payroll, and professional fees. Many entrepreneurs struggle with their budgeting because they don’t account for all of these ancillary aspects.

When you know exactly how much money you need, you’ll be in a prime position to seek any necessary financing. Here are five common types of financing for general contractors:

1. Term loan – A term loan is a lump sum of capital you pay back over a fixed period. The payments are made monthly, and the interest rate can be either fixed or variable.
2. Invoice factoring – As a general contractor, you may find that some clients don’t pay their invoices promptly, which can create cash flow problems. Invoice factoring is a financial solution where a third-party company, called a factor, buys your unpaid invoices for a fee. You get the cash immediately, allowing you to finance ongoing operations, while the factor collects the invoice payment when due. This option can be highly beneficial if your construction business operates on a B2B model.
3. Equipment financing – This type of financing involves borrowing money to purchase equipment and other assets. The asset serves as collateral for the loan, often leading to lower interest rates.
4. Business credit card – Most entrepreneurs get business credit cards so they can begin separating their business purchases from their personal expenses. They function just like any other credit card.
5. Line of credit – This financing product is similar to a credit card because it gives you ongoing access to a set amount of money. The benefit here is that you can spend cash only when you need it and keep it as a safety net when you don’t, rather than always needing to pay interest on a lump sum.

Regardless of which route you take for your financing needs, it’s advisable that you get an accountant to help manage your money from here on out. Not only will an accountant keep your finances accurate and secure, but they can also help you spot potential problems and find remedies before it’s too late.

8. Hire subcontractors.

Hiring subcontractors is a crucial part of running a successful general contractor business. As a general contractor, you’ll often rely on subcontractors to complete specific parts of a project that require specialized skills. Here’s how to go about it:

1. Identify your needs – First, determine which tasks or projects require subcontracting. This could be anything from electrical work and plumbing to roofing and flooring. Understand the scope of the project and the skills needed to complete it successfully.
2. Search for subcontractors – Once you’ve identified your needs, start looking for suitable subcontractors. You can leverage online construction networks, trade associations, or local business directories. Word-of-mouth referrals from other contractors, suppliers, or previous clients can also be helpful.
3. Evaluate potential subcontractors – After identifying potential subcontractors, assess their skills, experience, reliability, and reputation. Check their references, previous work, and online reviews. Also, ensure they hold the necessary licenses, insurances, and bonds.
4. Negotiate terms – Once you’ve chosen a subcontractor, negotiate the terms of the contract, including the scope of work, deadlines, payment terms, and responsibilities of each party. Be sure to put everything in writing to avoid future disputes.
5. Manage and communicate – Maintain regular communication with your subcontractors once the work begins. Clear, regular communication helps to ensure everyone is on the same page regarding project expectations and deadlines.

Remember, hiring the right subcontractors can greatly affect the quality of your work and your reputation as a general contractor. Take your time to select subcontractors who are experienced, reliable, and professional. After all, the success of your general contractor business depends heavily on the team you build.

9. Seek out a trusted mentor.

Every entrepreneur can benefit from the guidance of a mentor, but it’s especially helpful for those in the construction industry. Whether this guru is actively working or has retired, it’ll be essential to draw from the experiences and problem-solving abilities of someone who has already built a business from the ground up.

If you have a difficult time finding a potential mentor, don’t be afraid to venture outside of your immediate sphere of contacts. Start by checking out the free resources available from your local SCORE chapter or SBA Small Business Development Center.

It won’t matter if your mentor is a close friend or a stranger. The important thing is that you’ll have a support system and sounding board in place. The construction industry can be a rocky road, so stay close to those who know how to best navigate it.

You can also make powerful relationships by joining an industry association. Two great choices are Associated General Contractors and Associated Builders and Contractors. Use these networking opportunities to get answers to your questions big and small.

10. Deploy effective marketing strategies.

In today’s competitive business environment, marketing your general contractor business effectively is more important than ever. A well-structured marketing strategy can help increase your visibility, attract new clients, and ultimately grow your business. Here’s how you can go about it:

1. Establish a strong online presence – In the digital age, an online presence is vital. Start by creating a professional website showcasing your services, past projects, client testimonials, and contact information. Maintain an active presence on relevant social media platforms where you can engage with potential clients and share updates about your work.
2. SEO and local listings – Optimize your website for search engines (SEO) to make it easier for potential clients to find you. List your business on local directories and Google My Business, ensuring your contact information is accurate and consistent across all platforms.
3. Network – Attend industry events, join local business networks, and build relationships with other professionals in your field. Networking can often lead to referrals and new business opportunities.

Remember, marketing is an ongoing process, not a one-time event. Keep testing different strategies, track your results, and continuously adjust your marketing plan based on what’s working for your general contractor business. The key to effective marketing is consistent, authentic engagement with your audience.

11. Learn how to bid on construction jobs.

Estimating and bidding on construction jobs are essential skills for running a successful general contracting business. These processes allow you to competitively price your services, win contracts, and ensure your projects are profitable. Here’s a brief walkthrough:

1. Understand the project scope – Before you can create an accurate estimate, you need to fully comprehend the project’s requirements. This involves understanding the client’s needs, reviewing blueprints, and identifying needed materials, labor, and equipment.
2. Calculate costs – Next, calculate your direct costs, such as labor, materials, and equipment rentals. Don’t forget to also factor in indirect costs like overhead, permits, and insurance.
3. Add your profit margin – Once you’ve calculated the total costs, add in your desired profit margin. This will be the basis for your bid.
4. Prepare a bid – Your bid should be detailed, professional, and accurate. Be sure to include a breakdown of costs and a timeline for the project.
5. Submit your bid – Once you’re happy with your bid, submit it to the client. Be prepared to negotiate and answer any questions the client may have about your bid.

Bidding on projects can be complex, but with practice and the right approach, you can create effective bids that win you more business. For a deeper dive into this process, check out this Beginner’s Guide to Bidding on Construction Jobs. It provides a comprehensive look at the bidding process, from understanding the project to submitting your bid.

12. Stay the course, but stay limber.

There’s no doubt that your business plan will be crucial in the coming months and years. But it should remain a working document—never treat it like it’s written in concrete. The future holds many exciting opportunities for your business, as well as unexpected difficulties. Your ability to adapt and refine will be essential to your success.

By working hard and leveraging your network, you can help your general contractor business thrive. Entrepreneurship takes courage, so even on the toughest of days, hold your head high. You’re not just building a business. You’re building a legacy.