Embarking on the journey of establishing a construction company, you must be asking, “What is the cost to start a construction company?” This question is vital as you envision building dream homes and practical facilities. While every business requires initial capital, construction ventures are unique due to various influencing factors.
Providing an exact cost can be tricky, but industry reports typically suggest a small startup might range between $40,000 to $50,000. Larger operations, naturally, involve significantly higher costs. Several elements impact the total cost, such as your location, project scale, associated risks, and the size of your company.
Though it sounds daunting, proper financial planning can help you meet these expenses. Whether through savings or a business loan, with the right expectations and strategy, you can gather the required funds to set your construction business in motion.
The first costs to account for are the costs you’ll incur while starting up your new business. While we can’t list all the potential startup expenses, let’s talk through some of the most common expenses to start a construction company.
You can’t build a house without hammers, saws, and nails, right? And odds are you’ll need lots more equipment than that, from small pieces like band saws to large vehicles like backhoes and graders. You don’t necessarily have to buy this construction equipment; you may be able to rent or lease it, too. But no matter what your decision is, it’s almost guaranteed that you’ll need to budget for equipment and tools to start your company.
Whether you’re just transporting yourself and your team to the next job site or home renovation or you’re hauling your heavy equipment along, you’ll need vehicles to run your construction company. Like equipment, you can choose to buy or lease vehicles. But it’s an expense you’ll need to plan for.
It’s a wise choice to register your construction company as a limited liability company (LLC) or corporation. These business types offer liability protections, and sometimes lenders or investors are more likely to invest in them.
Registering as a corporation or LLC does cost money, though. You’ll need to pay the filing fee for a form, such as the Articles of Organization or the Articles of Incorporation. Every state charges a different filing fee, with some charging just $50 or others charging upwards of $500.
Hopefully, your primary “office” will be the site of the latest project you’re working on. But while you’re preparing a bid for your next client or interviewing new employees, you’ll need a cleaner, quieter space to work in like an office. Or if you’re building smaller projects like sheds, you’ll probably need a separate worksite to use.
No matter what type of construction business you’re running, there’s a very good chance you’ll need to budget for some sort of workspace.
You can’t start a construction company without licenses or permits. Frankly, there’s a long list of potential licenses you might need. For example, you might need a general business license from your state, county, or city. You may need zoning permits, too. And then there are licenses required for general contractors, licenses for operating certain vehicles, and more.
Put simply, there’s a good chance you’ll need multiple licenses to run your construction business compliantly. And you’ll need to pay an application fee for each of them, along with renewing them when they’re set to expire.
Insurance is vital to protect your construction company from startup well into the future. Some insurance policies are often required by states, such as worker’s compensation and unemployment insurance. Other policies are just a wise business decision, such as general liability insurance, builder’s risk insurance, property insurance, and more.
Of course, you can expect to pay monthly premiums for these policies, so you’ll want to appropriately budget for your insurance.
Start-up costs are only half of the battle. If you stay in business, you’ll have ongoing costs to account for. Here are just a few potential ongoing costs you’ll need to pay for your construction company.
Building an office building is practically impossible if you don’t have the right team of employees backing you up. And understandably, employees don’t work for free. No matter how competitively you’re paying your workers, your employee salaries will make up a significant portion of your annual budget. For most businesses, employees are the biggest expense they’ll put on their books in a given year.
In addition to providing your employees with a salary, you’ll also have the expense of their benefits. Of course, there’s the legal requirement of a workers’ compensation insurance policy (in most states). But if you provide other benefits like health insurance, maternity and paternity leave, or any other perks, you’ll need to budget for those expenses.
Business taxes will be a part of your construction company’s life every year, and we highly recommend hiring a professional to help you navigate them. Technically, you can do them yourself, but taxes are notoriously complicated. Help is almost essential.
Whether you’re hiring an attorney to chat you through whether S corporation status is right for you or you just need an accountant to file your taxes in April, you may want to plan ahead. There are always fees for hiring a tax professional (and they’re often well worth the expense).
Unless you’re able to buy your office space and worksite outright, you’ll need to pay ongoing rent or mortgage payments. Of course, these costs will vary depending on your location and space. But until you fully own your workspace, you’ll have regular payments to make on your space.
Your business will only be successful if you attract good clients regularly. And to make that happen, you’ll need to have a marketing strategy. The good news is, you can tailor your marketing expenses to your budget. If you need to keep things small, you can use smaller campaigns, such as an ad on your local paper’s website or in a local trade magazine. But if your budget is bigger, you can pull out all the stops and hire a marketing agency for a gorgeous logo, mailers, billboards, and everything you could need to promote your business.
Regardless, it’s reasonable to expect that you’ll need to pay some money for marketing efforts every year.
From safety equipment like hard hats and steel-toe boots to sandpaper and nails, you’ll have to regularly purchase the supplies you need to do your work. Be sure to maintain enough working cash to be able to stock them as needed.
Remember those licenses and permits we discussed earlier? Most permits require renewal. Some have to be renewed every year, and others require a renewal every few years. Regardless, it’s an expense you can’t avoid.
Funding your construction company is a crucial part of starting your business, but there isn’t a single “right” way to do it. For some business owners, personal savings are enough to get the ball rolling. Others prefer to get loans from friends and family, and many pursue traditional bank loans. If you can attract venture capitalists or angel investors, those can be a viable option, too. Loans from the Small Business Association (SBA) can be a great option as well, as can their small business grants.
Ultimately, you have to carefully evaluate which funding option is right for your business goals, risk tolerance, and more.
Saving on startup costs for your construction company can seem like a big ask, but there are ways to reduce your costs somewhat. For starters, if you start your LLC with ZenBusiness, you’ll pay $0 (plus your state fee) to get up and running.
Even if you’re already up and running, there are practical ways to save money on your start-up costs. For one, you can buy used equipment to pay less (and avoid a big appreciation drop). When possible, bundling your insurance policies can save you money, too. If you need a physical location for administrative tasks, consider buying or renting in a more affordable location can help, too. You can also use free tools on social media as your primary marketing strategy.
Ultimately, one of the best, surefire ways to save yourself money is to stay compliant with your state’s requirements. Skipping — unintentionally or otherwise — one of these requirements would subject you to a lot of penalties and fees. Staying compliant saves you from that.
Here at ZenBusiness, we understand that starting a construction business can be an expensive and overwhelming endeavor. But you don’t have to go it alone. We’ll help you with the red tape side of business, such as forming your LLC or corporation for $0 (plus state fees). Our business license report can also help you learn which licenses your construction company needs, too. And last but not least, our Money Pro tool makes it easy to manage your finances as smoothly as possible. With our help with paperwork and maintenance, you can focus on what matters: your business.
Disclaimer: The content on this page is for informational purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Labor is often the biggest cost for a construction company, often accounting for 20% to 40% of the total project cost. Other significant costs include materials and equipment, which can vary greatly depending on the projects undertaken. On the administrative side, insurance, licensing fees, and other overhead expenses also contribute significantly to a construction company’s total costs. It’s crucial to have an efficient cost management system in place to maintain profitability.
Construction companies can be highly profitable, especially with the consistent demand for housing and commercial infrastructure. However, profitability largely depends on the company’s efficiency, project management skills, and the ability to control costs. On average, the net profit margin for small construction contractors ranges between 3% to 7%, while larger companies can achieve margins above 10%.
Starting a construction company comes with its set of challenges. These include a substantial initial investment, securing the necessary licenses and permits, hiring skilled labor, dealing with health and safety regulations, and coping with the cyclical nature of the industry. However, with thorough planning, reliable networks, and efficient operations, these challenges can be managed effectively.
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