How to Start a Contracting Business – 8 Tips for Contractors

How to Start a Contracting Business – 8 Tips for Contractors

There are many different types, sizes, and complexities when starting a contracting business. They range from small residential remodeling and renovation all the way to large commercial infrastructure and heavy construction organizations.  Regardless of the type of business you have, there are key fundamental business practices which should be considered for starting a contracting business.

A successful contracting business needs to be flexible, well planned and incorporate solid organizational skills.  All too often, contracting businesses, particularity smaller residential operations focus primarily on the trade aspects of the business rather than all the other requirements to successfully run the business.  This often creates challenges for growing, sustaining, and scaling the business while maintaining profitability.  

Step 1. Understand Financial Management

The first step in starting a contracting business has nothing to do with your construction skills but rather making sure you understand the requirements of financial management.

Financial management is a key focus and success factor, especially for smaller contracting businesses where this tends to be less of a consideration and due to smaller size, there is not the luxury of a separate financial department.  Financial management starts with financial literacy which enables you to determine how to run the operations side of the business…manage financial statements, budgets, pay bills, and effectively monitor the company’s financial status.  Just because you are making money or increasing revenue, doesn’t necessarily mean you are becoming more profitable.  In an ever increasingly competitive landscape where margins are thin, solid financial information and analysis are key to not only ensuring a successful construction business, but also just staying in business.

Step 2. Decide Between Independent Contractor or General Contractor 

The next step is to decide what type of contractor you want to be.  Contractors can be independent, acting as their own general contractor, or perform work as a subcontractor to a larger general contractor.  As an independent contractor, you work directly with customers, or you can act as a general contractor using your own subcontractors.  If you are acting as a subcontractor, then you engage with general contractors to provide specific work or specialized tasks which are managed overall by the general contractor.  A subcontractor’s focus is to complete a subset of work as part of a larger project. This is typically the structure for commercial construction, but also is the case for larger residential projects.  An independent contractor can be an individual, have employees or utilize their own subcontractors.  It really depends upon the circumstances, along with your skills, capabilities and size of your business.  Important to consider are also the differences in terms of how taxes are handled as well as licensing and insurance for different types of contractors.  Each state has its own rules and regulations in this regard.  

Step 3. Focus on Customer Service

One of the key strategies to combat the competitive landscape and increase your margins is the focus on exceptional customer service.  Exceptional is the operative word here since it is a critical component of your success.  Similar to financial management, this is sometimes a challenge for a contracting business because typically the primary focus is ongoing project work, delivering a good product and making sure your workers have the necessary trade skills.  It is the softer customer service elements that can easily be under-addressed. 

This is particularly a concern with smaller residential businesses where customer service is even more important as a key competitive differentiator.  Even for small residential renovation, repair or remodeling projects, your customer is paying good money and not only expects to receive quality work deliverables, but expecting good service along the way.  Your customers, which are your most important asset, will remember how they were treated as part of your sales and delivery process.  

If the experience is negative, despite providing quality work, the downside implications are significant not only in terms of future business but also loss of referrals… or worse, word of mouth of the poor experience to others will have significant impact on your business in that locale. Giving your customers the respect they deserve along with being patient and understanding of their emotional considerations are very important ingredients to the success of your current and future business.  

If your customer service delivery is positive and memorable, then you will gain all the associated benefits including the ability to increase your prices.  Customers want the best price they can get for any given construction project, but equally, if not more important, is the experience they will receive.  

Hiring contractors is not a fun process for retail customers and often includes elements of fear and lack of understanding of what to expect.  Your customer service process should include educating your customers on the values you provide as well as addressing any of the fears they might have.  By ensuring that your customer has a great and memorable experience, then you will have a customer for life who will reach out to you first for any new work before contracting with potential competitors.

Step 4. Stay Engaged 

One of the critical requirements to ensure exceptional customer service is to stay engaged in the process and communications with your customer projects.  This is even more critical for larger or multi-phase projects where ongoing communication and follow up is very important.  Not just for providing the necessary status updates but to ensure you are meeting the emotional and psychological requirements of every one of your customers.  In fact, this is a key requirement for being a successful independent or general contractor versus a just delivering quality work as a subcontractor.

It is especially important with residential construction because hard-earned money is being spent by your retail customers.  It is personal, and they have a vested interest in success so emotions along with concerns for any downside risks are elevated.  Even small projects which seem somewhat insignificant to your overall business operations can be a significant cost factor and emotional focus for your customer.  It is very important to treat every project with the service side requirements they expect to ensure your customer is managed effectively through the entire engagement.  Often, larger projects are more complex and confusing, especially for the retail customer, and helping them navigate this journey as their partner in the process is critical to the overall success of the project.

Staying engaged means personally staying involved.  You may have a crew and/or a project manager assigned but customers like to know that the owner or executive of the company will continue to personally be there for them and address any concerns or issues they may have along the way.  This may be a bit of a balancing act, especially if you have many ongoing projects underway at the same time, but it is important that your customer knows that you will be regularly meeting with them and that they are a priority.  As an added benefit, this will also remind your employees and staff than they need to be doing their best work for each and every customer.  Bottom line, staying engaged will ensure that you can continue to grow your business by focusing on your customers, ensuring success, and generating the desired revenue and profitability. 

Step 5. Get your House in Order

As you build your construction business and focus on delivering exceptional customer service, it will be crucial that everything is in proper order to run your business in the most efficient manner. That includes not only the financial management requirements but also focusing on your how much time you spent on things which may not contribute to the value of your business.  

For example, if your range of services are too broad or you are overbooked with too many projects, then you will be at risk of spreading yourself too thin and your work products and customer service will suffer. Not to mention that you may be introducing undue financial risk into your business.

Focusing on good organizational practices is a learned skill and doesn’t come naturally to everyone.  Organization will help ensure that tasks are completed on time and within budget and enable you to proactively stay on top of the important things which need to get done.  Even simple checklists or daily to-do lists, as much as they sound time consuming, can go a long way in making the process of staying organized a success.  Organization will also help you become more proactive with your decision making rather than reactive.  It is a much better feeling to be in control of your circumstances than to have your circumstances control you!

Step 6. Define Your Project Pipeline

While making sure you have sound financial management, quality work products and exceptional customer service in order, many contractors, particularly smaller residential construction business, may believe that this all that is required to generate enough referral business and ongoing work opportunities.  Many don’t have the budget or staff to focus on this area therefore it becomes less of a priority for the marketing and sales requirements and more of a priority on delivering current work.  However, once the project is done, then it is time to find more work.  

Without a well-planned pipeline, this can become a viscous cycle. Contractors will tend to scramble once projects are completed, looking for the next opportunities and accepting whatever they can find.  Projects which perhaps should be avoided or further evaluated for fit can result in bids with reduced prices, lower margins, compromises on quality and impacts to customer service.  Building a solid pipeline is very important and the best time to do it is when you already have projects in process.  

While maintaining solid customer relationships and building your referral business is key, it often takes more proactive measures to attract new customers and it takes effort to figure out the best ways to enhance your business development efforts.  

This requires analyzing your financial management objectives to determine how much sales effort is required to establish a net profit margin to meet the expenses of your business and continue with profitable growth.  

Also analyzing the type of customers and projects to work on is key.  This analysis or profiling process is a way to help you organize and define what customers, project types, size of jobs, locations and even markets you should focus on to maximize your revenue and margin potential.  This will enable you to create a target list and priority of the best potential customer candidates.  Then building your own marketing and sales programs around these types of defined targets will be much more effective than just trying to find the next paying customer.  

Step 7. Use Business Management Software

Construction tools are important, but even more important today is good business management software which provides the tools to help automate the various aspects of your business.

Focusing on the right construction management software to improve the process and visibility of your contracting business and will enable you to determine where to focus your time and efforts as well as projects to avoid and optimizing your bid strategy.  This means utilizing the best construction estimating software which can provide fast, easy and accurate estimating as well as providing true job cost information.  Just increasing revenue doesn’t mean your increasing profits.  Increasing competition will demand that you provide the best price to win the work.  It is your job to win the work while also ensuring you protect your required profit margins.

All project work begins with estimating the job.  If takeoffs are incorrect, that will impact your estimating. If your estimates are incorrect, under-estimated, or it takes too long to turnaround bids then the resulting downstream processes will also suffer.  That can result in job delays, cost overruns, job site surprises and of course will impact positive customer service. These are things you want to avoid at all costs.  

Construction estimating software is a huge time saver and a way to significantly mitigate these potential issues.  All too often and in particular with smaller residential contractors, the estimating process is either done by the one key person who has it “all in his or her head”, or through some type of arduous manual process.  Even using spreadsheets which is still the most popular form of automation among contractors is problematic and prone to error.  As the adage goes, all it takes is misplacing one decimal point in an estimate to make or break a project.  Best thing to do is to avoid this type of risk altogether.  

Today with the new and more advanced cloud-based construction management software, contractors can find solutions which will provide all the material, labor, subcontract and other costs in one system which can be shared across an entire organization, making it possible to avoid mistakes which can be potentially catastrophic to your business.  In addition, the more advanced solutions also provide communications and contracts between customers, suppliers and contractor as well as help provide scheduling, time logging, purchase order process, job costing, invoicing and other critical construction financial and accounting management functions such as integration with accounting software like Quickbooks. In fact, Quickbooks is used by a large percentage of contractors for handling their overall accounting requirements. 

By implementing the right construction management software, you can help ensure that your contracting business can be better organized and managed, run at peak efficiencies, win more high-quality jobs, provide that exceptional customer service and continue to grow the business in a profitable fashion.

Step 8. Befriend Yourself

All too often, and especially with residential contractors who run their own business, try to do all they can to take care of everything for the business but tend to put themselves and even their family on the back burner.  However, just like any business, when you own it, it can easily own you.  

It is easy to understand that in this modern day and age, and with the pace of business, stress is one of the key factors which can significantly impact you and therefore will have an impact on your business.  Taking time to invest in yourself is not only prudent but is probably one of the best investments you can make in your business. That means starting with the basics like food, water, sleep, exercise, breaks etc.  All common sense but all too often ignored as we continue to meet the challenges of the businesses in almost a 24×7 mode.  

Life is too short and will certainly become shorter if you operate in that fashion.  Keeping connections with your friends, loved ones, family, relatives and others is not only time consuming but challenging when you are trying to run your business.  But it is a key social activity which will help reduce stress, create a better piece of mind and a better work environment.

It also doesn’t help that we are surrounded with all kinds of technology and devices which operate on a 24×7 basis.  Take a pulse check and figure out how much time you spend on your mobile device on a weekly basis.  It is ironic that the developers of smart phones have created apps to tell you how much time you spend on their devices in an effort to help you reduce the amount of time you spend using their devices.  It has reached almost epidemic proportions. 

Stress however is not always a bad thing.  In many cases it is necessary and can be a good motivator to get things done.  But when you have, or think you will have, a very stressful day, plan ahead and figure out ways to set your key goals and objectives and so you can focus on the most important tasks which have to get done.  Not on what needs to get done to complete all your tasks.  

One wise project manager once said… don’t worry about what you haven’t completed by the end of the week.  It will all be there waiting for you on Monday.  That is unless you plan to convert your weekend days to workweek days.  Bad idea if you can avoid it! 

So make sure to carve out time to focus on self-care as a priority for your daily life and make it part of your key business objectives for success.

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