5 Keys to Growing and Financing Your Small Construction or General Contracting Business

Published by BradyRenner CPAs | June 12, 2017

Despite dramatic shifts in the global economy, opportunities continue to abound for those interested in the real estate and construction sectors. From custom homes and single subdivisions to major office, industrial or mixed-use projects, small construction companies can grow dramatically by identifying niche opportunities in the marketplace.

The greatest challenges faced by small construction companies include employee recruitment and talent management; regulation and risk management; and securing effective project financing. Here are five keys that can help your small construction business achieve success:

1. Talent and Labor Management

It’s essential to build and manage the right team, and in today’s environment skilled laborers and trades workers are in high demand. To address this challenge, consider building your own training program or working with a building and trades council, union or an association of other companies in your sector to create professional development pathways, joint recruitment programs and other training opportunities.

In addition, it’s essential to develop effective standards and management practices to ensure that employees and front-line supervisors are following appropriate standards and practices in their daily work. Finally, make sure you’re building a strong drug-free workplace culture, supported by proactive planning, training and testing.

2. Technology and Work Processes

It’s still possible to start a small construction business with nothing more than a drafting table, some blueprints and a bill of materials. However, it’s not possible to grow a small construction business this way. That’s why software and technology remain extremely critical to the scalability of your business. They can also help reduce costly (or dangerous) errors by assisting to ensure that the correct components or materials are ordered; that the right work items are on the job site; and that the best people and most suitable equipment are scheduled for the day’s activities.

3. Industry Regulations and Safety

Safety in the workplace and on the job site takes on increased urgency in the construction industry. In addition to the risks associated with heavy equipment and slippery or dangerous conditions, construction projects involve employees from multiple businesses working together in close quarters across a constantly changing work environment.

Workplace safety regulations are mandated at the federal level by the Occupational Safety & Health Administration (OSHA), and is further augmented by regulations at the state and local level. Safety priorities include training, employee protection, proper management and maintenance of equipment, and overall workplace safety standards and practices.

4. Licensing, Bonding and Managing Risk

In nearly every U.S. jurisdiction, businesses must apply for and receive a general license to do business in their locality. In addition, construction and contracting businesses are usually required to secure additional, specific licensure at both the state and local levels. For example, tradesman licenses are often necessary if your firm will be providing services involving areas such as plumbing, electrical, gas fitting or HVAC. In addition, depending upon the nature of your offices themselves, you’ll usually need to have an occupancy permit (or in the case of a home office, a home business permit). These are typically issued by your local government (town, borough, county, city or township).

Along with the proper licenses and permits, you’ll also need insurance. Standard insurance for any small business should typically include general liability, errors and omissions (for contracts), directors and officers insurance, worker’s compensation, and insurance covering the firm’s vehicles and property. Of course, you’ll also need to obtain and pay into the unemployment insurance pool appropriate to your state.

For most small businesses, the list stops there but for construction companies, there’s one more key risk management requirement — a surety bond. A surety bond is a form of construction bonding in which a third party provides a guarantee to make your customer whole if a project is left unfinished, abandoned or otherwise unable to be completed.

5. Financing

Construction is a capital-intensive and time-consuming business, which means that to be sustainable in the industry you need access to significant funds, and they need to be able to be tied up for a long time before they can be released at a project’s conclusion. Commercial construction financing typically involves both short-term and long-term financing vehicles, the first being used for the construction phase of a project and the latter being put in place to take out the short-term financing and support a project after construction is completed.

A variety of options can be utilized for construction financing. These include traditional commercial loans issued by banks or backed by the SBA, as well as traditional and non-traditional loans (or lease agreements) for equipment. Another option asset-based lending such as using equipment or property (including real estate) the firm already owns as collateral for a construction loan.

Further out from traditional lending, you may also want to consider factoring (which provides cash for the business today against the value of invoices which will be collected in the future), as well as revenue-based loans (useful for working capital financing) and cash advance loans — which can be a useful consideration for small firms with limited or weak credit (although interest rates can be extremely exorbitant).

Focusing on Key Priorities

By focusing on these five priorities in an integrated manner, you’ll be well-positioned to achieve new growth and sustain it over time as you build a team and a company that can source talent, manage risk, deliver today’s projects and secure funding for tomorrow’s ones reliably. New market opportunities continue to expand, so for small construction companies with an eye toward the future, these five priorities can provide a powerful blueprint for long-term growth and success.

Image Credit: OSU (Flickr @ Creative Commons)