The construction industry is one of the top industries for startups, but it has a high failure rate. For example, 63.6% of construction businesses collapse within five years, and even more fail within the first two years.
While contractors are generally great at constructing, most need to gain the know-how to run a successful business. Many contractors are experts but must learn how to win projects and get more leads.
There are multiple reasons why construction startups fail, including poor planning and lack of funding. Therefore, it is essential to research your market and create a solid business plan before venturing into construction. Below are some of the best construction businesses to start.
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Types of construction businesses
There are five main types of construction businesses: residential construction, commercial construction, industrial construction, infrastructure construction, and specialized construction.
Residential construction involves building, repairing, and remodeling structures to house people, supplies, and equipment. For example, residential construction produces townhomes, apartments, condos, dormitories, nursing homes, garages, and utility sheds. The installation and repair of utilities such as electricity and water around residential buildings also fall under residential construction.
Tiny single-family residential houses are typically designed and built by builders. However, larger residential housing projects may require architects, interior designers, and a construction company.
Commercial construction, like residential construction, involves building new structures and repairing and maintaining existing structures. However, commercial construction produces larger structures for public use, such as skyscrapers, sports arenas, hospitals, project schools, retail stores, shopping centers, stadiums, and hospitals.
Commercial construction may be commissioned by private owners and companies or local and national governments.
Industrial construction requires high specialization and technical planning, design, and construction skills. This type of construction typically produces industrial structures such as warehouses, factories, and hydroelectric and nuclear power plants. Industrial corporations or large for-profit firms generally commission industrial buildings.
Industrial construction also includes designing, installing, and maintaining mechanical components for industrial structures and buildings. Industrial construction focuses on functionality rather than style, as these buildings must meet specific industry standards. For example, industrial buildings typically have special conveyance requirements to support manufacturing functions and floor plans allowing smooth foot traffic.
This type of construction requires highly technical expertise or new technology that a limited pool of specialized contractors can only provide. Specialized construction projects include elevators, silos, hoppers, and tanks.
The fourth type of construction is infrastructure construction. Infrastructure construction is commissioned by government agencies or large private corporations due to public interest.
Examples of structures produced by infrastructure construction include roads, railways, communication systems, bridges, transit systems, highways, pipelines, drainage systems, and tunnels.
Factors to Consider Before Starting a Construction Business:
Construction is a unique business niche and very profitable if done correctly. Below are some factors you need to consider before starting a construction business.
Find out if a construction business is a viable option in your market. If the market is saturated and customers are happy with existing companies.
Conduct market research to determine the number of construction companies in the area, their specialty, pricing, and reputation. In addition, try to understand your potential customer base, including their demographics and interests. The above information will be valuable when developing a business plan.
You can start market research with the US Small Business Administration (SBA), which offers free complex data on business markets and customers. For example, using SBA, you can learn about your audience’s demographics, spending habits, and employment status. You will also get market production and sales data.
For more specific information, take a look at local industry publications. Local industry publications are available online via Google. Typing the name of your city + “construction industry publications” will generate direct the relevant magazines. You can either comb through their digital issues or subscribe.
Consider collecting feedback from your potential customer base directly. You can use questionnaires and surveys, individual interviews, or focus groups. Some approaches are more time-consuming and costly than others, so figure out what you need to ask before starting the process.
Ask how often they hire contractors, their biggest challenges, and the main factors they consider when hiring a contractor.
Your new business needs the plan to guide you from your starting point to where you want to be as a construction business. Your business plan should outline your target market, services, business structure, number of employees, marketing plans, the initial estimated cost of starting the business, expected returns, KPIs, and accounting processes.
Determine who your target audience is and learn more about them. Collect data about your audience’s demographics, spending habits, income, and interests. Understanding your audience will help you know how to market to them.
Budget and funding
What will be the initial cost of starting your business? Create a budget and secure funding for your business. If possible, use credit and not your savings. The construction industry relies heavily on cash flow, so you will need to remain liquid in case of any emergencies.
Only start a business once you have enough money to fund it. Several ways to secure funding include bank loans, credit unions, private lenders, government loans, and government funding programs. You can find suitable loans and grants on USA.gov.
Apart from the initial costs of setting up your business, ensure you have enough funding for future projects. Construction has low-profit margins and irregular billing cycles, requiring constant cash flows.
Most projects cost money to start, and paying for these out of pocket can land you in trouble if the client cannot or does not pay you. Instead, insist on upfront payment for projects and charge clients whenever costs arise. This drawback policy allows you to maintain an emergency fund in case of payment delays.
Before registering your business, consider the local and federal legal requirements of setting up a business like yours. The state, location, size, and type of your business will determine the licenses and permits you need. In addition, special permits are required for specific business practices like mining, drilling, and transportation of heavy vehicles. You can check the requirements on the SBA’s federal licenses and permits page.
Check local zoning ordinances for a state license and permit requirements to ensure your chosen location is viable. If your site is feasible, check the state’s website or visit your local courthouse for license and permit requirements. The correct licenses and permits will keep you away from heavy fees and tax penalties, and possible closure.
Steps to start a construction business
- Identify your niche - you will likely appeal more to potential customers with a very targeted niche business. For example, carve out a niche for your construction business to improve your chances of success.
- Choose a business structure - you can register your business as a sole proprietorship, partnership, LLC, or corporation. Most construction business owners choose the LLC business structure to shield them from debts and liabilities.
- Register your business - register your business to make it a legal entity. Business registration ensures personal liability protection as well as tax and legal benefits. Once you have registered your business name with the local and state governments, you can acquire an Employer Identification Number (EIN) or a Federal tax ID. A federal tax ID allows you to trademark your logo and business name.
- Obtain necessary licenses and permits - once your business is registered, obtain the required state and federal permits to enjoy legal and tax benefits.
- Establish a brand and marketing strategy - establish your brand (name, logo, colors, and way of doing business) and develop a plan to market your new business.
Challenges faced by construction businesses
Construction businesses face harsh challenges, especially during inception. Some of the challenges are:
Construction is a harsh industry with stiff competition from large, established businesses. Unfortunately, this level of competition acts as an entry barrier for small businesses, and most new companies fail within the first 2-5 years.
Economic factors such as cost overruns, cashflow issues, high insurance premiums, and increasing prices of raw materials make it difficult for construction businesses to make profits.
90% of construction projects experience at least 30% cost overruns due to poor planning and cost estimations, payment delays, or design changes. Cost overruns lower profit margins, shortages, and a blow to the company’s reputation.
Cash flow issues also cause construction challenges. Construction businesses require steady cash flow to run. Projects will be completed on time if employees, vendors, suppliers, and subcontractors are paid on time.
High insurance premiums are another economic challenge for construction businesses. High premiums cripple small construction businesses.
Finally, the rising cost of raw materials and construction land has increased the overall cost of doing construction business. Due to this price volatility, many small construction businesses need help to make decent profits.
Safety is a significant issue problem in the construction industry. The construction industry records more deaths than any other industry in the US. This problem has persisted for years, and it is time for businesses to prioritize the safety of workers.
The average time an injured or ill worker requires from work is ten days. In 2016, there were 82,760 construction accidents, 26,010 of which required at least 31 days away from work. This means that at least one-third of accidents and injuries result in employees requiring time off. Time spent away from work translates to reduced productivity for the business.
Regular training is critical to keep workers safe. There can always be a little safety training. However, safe work practices must be enforced. Companies with robust safety programs are more efficient.
The skilled labor shortage is one of the most significant challenges in construction. The labor shortage has been an issue since before the Great Recession in 2008 when many construction workers were permanently laid off or left the industry.
Older construction workers are retiring faster than they can be replaced, as the younger generation seems uninterested in construction. Over the last decade, there has been an 8% decline in construction workers aged 25-54.
The recent pandemic further exacerbated the labor shortage as millions of construction workers lost jobs, and some left the industry. Since construction relies heavily on skilled manual labor, these shortages significantly affect businesses.
Technology has disrupted many industries, and construction is no exception. However, the traditional brick-and-mortar industry is notorious for the slow adoption of new technology. As a result, construction companies that cannot adapt fast are at risk of extinction.
Available technology includes estimating technology, cloud-based software, IoT, mobile wearable devices, BIM, and telematics. While these technologies can improve efficiency and productivity, they are too costly for smaller businesses that use traditional methods.
Technology is fast becoming a critical part of the construction, and some companies are riding that wave early. Companies incorporating new technologies into their project workflows create a sustainable competitive advantage. However, the majority are hesitant and, therefore, less efficient.
Tips for running a successful construction business
- Hiring and managing employees - focus on attracting and retaining high-quality talent. Building a reliable, experienced team is a good investment for a new construction business. Remember, your team is the foundation of your company.
- Building a solid network - establish meaningful relationships with customers, suppliers, vendors, subcontractors, and workers to benefit from word of mouth and referrals.
- Embracing technology - adopt relevant new technology as it emerges to reduce reliance on outdated manual systems and improve operational efficiency.
- Quality control and customer satisfaction - maintain a high quality of services and collect regular feedback from customers to ensure they are satisfied. Set customer expectations early and deliver on all your promises.
- Continuous learning and improvement - stay up-to-date with market trends to ensure you deliver the best services possible.
The construction industry has numerous opportunities for prospective business owners. However, conducting market research and determining your specialty is essential before venturing into the industry. Consider important factors such as market research, business plan, target audience, budget and funding, and legal requirements before launching your new construction business. Anticipate challenges even as you begin your new venture.