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If you’re thinking about starting a construction company, you probably have many questions. How much does it cost to start a construction company? What initial expenses do I need to cover? How quickly can my company become profitable?
Here are all the costs you need to cover when starting your construction business in a post-COVID world.
Average Cost to Start a Construction Company
As of 2022, the average cost to start a construction company is about $37,390. With that figure in mind, owners should have at least $40,000 saved up to give themselves some breathing room in the start-up stages.
The United States construction industry is currently valued at $1.36 trillion as of its last update in 2020. $1.6 billion went into construction in 2021, but we don’t know exactly how much the bottom line has changed.
However, we can see that the industry is growing despite a less-than-ideal economy. In fact, six out of the ten fastest-growing small business industries fall under the umbrella of construction. So take heart: your private business has great profit potential!
There are five primary costs to start a construction company that you should evaluate first:
The first step of any business venture is to register your company’s name, employee ID number, structure and other details. The registration process differs by state, so make sure you read up on your state’s registration requirements.
You should choose your business structure based on the best tax breaks and liability protection. A sole proprietorship or limited liability corporation (LLC) are usually – but not always – the best options for construction start-ups. Once you have your name, structure and ID number, you can move on to acquiring the necessary licenses.
Construction companies need many licenses to stage projects at certain locations, use certain equipment and build certain structures. Again, these licenses will vary by state. There are two main licenses that every construction company needs:
- Contractor’s License: this license’s requirements depend on the types of structures you build and their dollar value. If you’re looking to do expensive projects, you’ll need an expensive contractor’s license.
- Business License: your local municipality determines the cost and scope of your business license. It can cost a few hundred dollars in the most competitive areas. You have to renew this license every year to remain a valid business.
Many new business owners get held up during the licensing process because they did not know all of the requirements. Take your time while researching your state and local licensing rules.
Construction is a dangerous business accounting for about 20% of all worker fatalities in private industries in the United States. Every company needs a comprehensive insurance plan to protect its livelihood and employees. These are the types of insurance you’ll need:
- General Liability
- Builder’s Risk
- Worker’s Compensation
Your state might also require you to get disability and unemployment insurance. You’ve probably noticed by now that location plays a huge role in the value and structure of a construction company. Such precautions are necessary when engaging in a high-risk business.
Your selection of tools and vehicles can make or break your company’s success early on. It will be your most expensive initial investment by far. You may have to purchase used equipment to minimize the cost, but that’s okay. Buying used equipment also puts you ahead of the depreciation curve because the first owner paid the initial depreciation costs.
Hiring and paying employees is the most straightforward initial expense on paper, but it’s also the most unpredictable. You have to choose between hiring full-time staff or bringing on independent contractors for specific projects. Full-time staff will make the job sites more efficient and perhaps more fun, but contractors are generally cheaper to hire and have flexible hours.
You will at least need a handful of full-time employees to help with paperwork, finding projects, ordering materials and other management tasks.
Funding Your Company
If you don’t have at least $40,000 saved up, it’s in your best interest to acquire a Small Business Administration (SBA) loan. SBAs are harder to get than other loans, but the results are worth it. They have low interest rates, flexible terms and generous loan amounts. Here are a few common SBA structures:
- SBA 7(a): offers up to $5 million in loans to cover existing debts, build more working capital or upgrade the project management system.
- SBA Microloan: provides loans of $50,000 or less as needed to help start-ups make periodic expansions to their business.
- SBA CDC/504: provides loans up to $5.5 million to help businesses buy major assets, such as new equipment or more real estate.
You might also consider getting a business line of credit. It won’t provide the same loan amounts as an SBA, but it offers more flexibility. Every start-up needs a flexible loan program.
Start Your Construction Company With Confidence
So, how much does it cost to start a construction company? The average cost might give you a good benchmark, but you can’t get fixated on that number. Every start-up has a unique situation with a wide range of variables.
In any case, you should start your construction company with confidence. The economy as a whole might not be looking up, but the construction industry has remained resilient and continues to grow.