How Much Does It Cost To Start a Construction Company?
How Much Does It Cost To Start a Construction Company?
Construction business can be a great venture. Startup costs for a new construction company will vary widely depending on industry, location, and specialization. A general contractor that specializes in heavy industrial markets will have to raise significantly more capital compared to a local contractor servicing residential markets.
If you're thinking about starting up a construction company, it's important to understand what the upfront costs are, and how much profit you can potentially earn as an owner.
In this article, we’re going to take a look at the major expenses you can expect as a construction business owner.
Disclaimer: The pricing stated here is based on average data from third-party research. Prices may still vary due to differences in seasonality and supplier.
How Much Do Construction Owners Make?
The demand for construction companies has been growing steadily. New construction business owners are part of a global industry that totals about $10 trillion a year, making it one of the world's largest in the world. In the U.S., the construction industry is forecast to grow 8.8% this year alone following a strong rebound in demand in 2021.
The construction industry continues to be a resilient and profitable business model despite setbacks caused by recent global events. With an average net profit margin of nearly 7%, residential construction companies are the most profitable they've been since the Great Recession of 2008. Net margins can be even higher for new home construction, specialty work, and remodeling.
As a whole, we’ve seen construction profit margins rise by as much as 20% to 30% compared to pre-pandemic levels. Data from Construction Services Industry shows that construction companies have recorded gross margins of 26.96% for the second quarter of 2022. That’s up considerably from the 20.13% pre-pandemic gross margins.
Source: Construction Services Industry
Related: Check out our beginner’s guide to construction profits.
How Much Does It Cost To Start A Construction Company?
Capital costs will be the single largest expense for your new business. You'll need money to buy necessary equipment, pay staff, and make other initial expenses. The amount you need will largely depend on how much work you intend to do, your specialization, and how many assets you'll need to purchase. This can range anywhere from $20,000 up to millions of dollars depending on the size of your company's funding.
Reviewing startup costs helps you:
- Estimate profits
- Establish sales targets
- Conduct a break-even analysis
- Secure business loans
- Attract investors
Business Registration Fees
Business entity registration allows contractors to bid, advertise, and perform construction work. County or city licenses and permits may be necessary for LLCs, corporations, and partnerships. Some entities are better for tax breaks and liability protection compared to others. Check out this guide from the U.S. Small Business Administration.
Your governing state will require you to file articles of incorporation or articles of organization if you decide to incorporate or form a limited liability company. Depending on the state, filing fees can range from $50 to $725. Most states, however, charge less than $300.
Check out SBA’s state lookup database to find out what your state requires. For more information on local registration requirements, visit your local government website.
Licensing Expenses
While most contractors focus on establishing startup costs based on assets and manpower, legal compliance documents are equally important. A license or permit is necessary in order to operate legally, protecting yourself, your clients, and your business.
There are two main licenses required to carry out construction projects: general contractor’s license and specialty license. HVAC, roofing, and electrical are some of the trades performed by specialty contractors. Most states require license applicants to demonstrate industry experience, financial stability, and specialized training.
Different states have their own set of rules. Some states don’t have licensing requirements for commercial contractors such as in Kentucky and Indiana. On the other hand, states like Illinois have a licensing fee structure that depends on the amount of work you intend to perform. License fees in Illinois range from $300 up to $2,000 yearly for an uncapped number of contracts. In other states like Minnesota, general contractors are not required to have a state license. There is, however, a requirement for residential building contractors or remodelers to be licensed.
Be sure to check with your local government about licensing requirements before taking on projects.
Equipment Expenses
Construction is a seasonal and project-based industry. Unless your company has an established client base, acquiring millions worth of new equipment upfront may not be the best move.
As a construction business owner, you must carefully consider whether your current project pipeline and potential projects in the future would require the purchase of a new piece of equipment worth hundreds of thousands of dollars as compared to renting the same for only a couple hundred dollars per day.
The rental of heavy equipment is a practical option for many contractors. This way, you can obtain the exact equipment you need only when needed, thus doing away with the need for financing. From a cash flow perspective, renting also helps you minimize project costs and manage overhead expenses, especially when faced with tight production schedules.
Outsourcing your equipment is not only a cost-effective strategy but it also saves you from problems like equipment depreciation, storage, logistics issues, and monthly maintenance costs. Credit facilities and banks consider equipment purchases as liabilities thus affecting your ability to obtain credit that could otherwise have been utilized for other purposes such as materials procurement.
If you do decide to acquire your own heavy equipment, here are some of the ways to secure capital funding:
- Small business loans such as from the SBA.
- Working capital loans can be used to cover operating expenses, particularly during the lean season.
- Purchase order financing can be used to fund materials sourcing for your projects.
Labor Expenses
Because construction is largely driven by manpower, labor costs on average will range anywhere from 25% up to 50% of your gross revenue. When setting up your own construction company, bear in mind your business plan and sector when considering the number of full-time employees to hire.
Here’s an overview of the average wages for common construction positions in the U.S.
Average Pay of Construction Workers vs Pay of Other Best Jobs
On average, construction workers receive a salary of $43,000 in 2020. By contrast, comparable jobs received the following average salary in 2020: Carpenters made $54,200, structural iron and steel workers made $58,650, cost estimators made $72,960, while construction managers made the highest salary which is $107,260.
Labor expenses must not be taken at face value, because there are also indirect costs associated with wages, this is known as labor burden. Considering how significant your labor costs are in relation to gross revenue, remember to consider the labor burden rate when preparing a bid on projects as this may quickly put your profit margin in the red.
The average labor burden rate is around 30% to 40%. For example, an employee earning $30 an hour would cost $39 after you add up all the other indirect costs such as insurance premiums, uniform costs, and paid holidays, just to name a few.
Here are some of the indirect expenses that make up the labor burden:
- Overtime
- General liability
- Employee health insurance
- Workers' compensation insurance
- Paid holidays, vacation, sick days
- Federal and state taxes
Marketing Expenses
Gone are the days of printed flyers and business cards. In this digital world, having a digital presence is vital. Your potential customers use the internet to look up construction companies and evaluate their options. If you don’t have a website, your competitors will be getting more exposure than your company.
Your website should be the first item on your marketing investments. It’s an effective way to showcase your unique value proposition as a construction firm and highlight your company’s portfolio. There is endless amounts of research that shows that having a professional website boosts customer confidence. A study completed by HubSpot in October 2022 shows that more than 54% of respondents admit that a website influences their decision about whether or not to make a purchase.
As a rough estimate, a basic website and email domain could cost between $1,000 - $4,000 depending on how professional you want it to be. Having a website and professional email domain should be the bare minimum of your marketing expense.
Here’s a breakdown of the costs for setting up and running a company website.
Aside from establishing your online presence and having a professional email domain, the other marketing investments you should also consider are advertisements, content marketing, and traditional media buying to further raise awareness for your business.
Office Space
For your business registration requirements, you must have a physical address.
In addition to covering the office rent and the down payment for the office space, you'll also have to pay for utilities such as electricity, gas, water, internet, and phone.
According to Iota Communications, the average cost of utilities for commercial buildings is around $2 per square foot. U.S. offices averaged slightly more than $35 per square foot in the second quarter of 2020, while industrial space cost just under $8 per square foot.
These are the average office space rental costs as of 2020 in the U.S.
Insurance Policies
To say that construction is a risky business is an understatement. Risks are the biggest threat to your success as a construction business owner. You absolutely need to make sure your construction company is insured before beginning any work whatsoever to make sure that you’re covered in case of an accident or emergency.
It protects your company from various liabilities, including injury claims and subsequent medical expenses. General liability also protects your business from claims arising out of damage you may cause to a customer’s property, or from damage caused by a product you installed, such as faulty plumbing or improperly sealed windows or doors.
Software Expenses
Software is now considered an essential tool in the construction company’s arsenal. The use of construction software significantly increases the efficiency and productivity of your business workflows and ultimately decreases your costs overall.
In the construction industry, you will likely need construction management software. This software streamlines all your work into a central hub for easy collaboration on projects across your entire organization, from financials to CRM to project management. Another extremely useful construction tool is estimating software that helps estimators generate takeoff reports instead of manually doing them with pen and paper.
Here’s an overview of selected construction software prices as of writing*.
Decrease Your Costs Through Togal.AI
It’s no secret that construction is considered by many as a high-risk business undertaking. For those willing to take on the risk, construction can be a very profitable business. Reviewing and optimizing your costs upfront will certainly go a long way in helping you start in the right direction - and ultimately toward success.
Are you thinking of starting your own construction business? Top general contractors are using AI estimating software like Togal.AI to significantly reduce their operating costs. General contractors who use Togal.AI report saving up to 90 minutes per drawing and perform takeoffs 80% faster. Powered by deep machine learning, Togal.AI automates your takeoffs in just a few clicks saving you hours worth of work so your estimators can focus on fulfilling more bids.
See how Togal.AI seamlessly integrates into your estimating workflow. Book a demo today.
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