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What Are the Startup Costs for a Contracting Business?

Illustration depicting the business side of contracting

Posted by: Holly Welles, The Estate Update
Published: April 22, 2019

In your time as a contractor, you've taken on your share of tough projects. You've gained enough experience to start your own business, and, little by little, developed the management skills you need to lead a team of your own. More than that, your industry has seen incredible growth over the past several years.

The residential building construction industry held the top position as the fastest-growth industry for small businesses, and six of the 10 fastest-growing sectors were involved in construction work. However, an aspiring entrepreneur shouldn't rest on their laurels, regardless of market conditions.

As context, many contractors will fail to correctly price their services to make up for the cost of business, a common occurrence that can cause difficulties. Competitive bids from several contractors for the same work can differ by as much as 30 percent — and that's in the same geographical area of the country.

Clearly, contractors like yourself should make these calculations a priority. If you only have a tentative grasp on the startup costs of your contracting business, you risk small mistakes with serious implications for your bottom line.

Equipment Expenses

When budgeting for your contracting business, you should start with your direct costs. These are the expenses that are specifically related to the projects you'll complete, including equipment. This requires a significant investment, but there are many money-saving strategies you can employ.

Many people in your position choose to rent or purchase used equipment in order to reduce the size of an initial investment. After the first fourth of its lifespan, a piece of heavy equipment will depreciate to around 50 percent of its value when it enters the market. This means that startup contractors can secure necessary equipment at a much more affordable price point.

Free Guide: 23 Simple Strategies to Grow Your Contracting Business Today.

Labor Expenses

On the subject of direct costs, you'll also have to evaluate your labor-related expenses. The true value of labor is often a difficult concept for new business owners to grasp, and it makes sense. Beyond the hourly wage you plan to pay any employed workers, you need to consider a long list of other factors as you budget, including:

  • Overtime
  • General liability
  • Health insurance premiums
  • Workers' compensation insurance
  • Paid holidays, vacation and sick days
  • Federal and state unemployment taxes
  • Medicare and Social Security taxes

When you combine these costs into your labor burden, you'll have a better understanding of your business expenses. Just remember, an employee earning $10 an hour actually costs far more than that when you add up all the associated expenses. It's a crucial consideration as you budget for your contracting business.

Licensing Expenses

Many contractors have equipment and labor at the forefront of their mind as they budget, but the paperwork for legal compliance is just as critical. You need certain licenses and permits to operate, a necessary precaution that protects yourself, your clients and your business from any legal complications.

Beyond a general business license, you'll have to obtain a trade license for plumbing, electrical, HVAC, gas fitting and other construction trades. A home business permit is also essential if you plan to headquarter your company at your house. Check your state license business office for more information.

Advertising Expenses

Most companies in the construction industry use word-of-mouth marketing to grow their business, and it has its benefits. You don't have to spend money on advertising or manage the minutia of marketing your brand. All you have to do is encourage your best customers to recommend your services.

Of course, this doesn't mean you shouldn't engage in other forms of advertising. If you're starting your own contracting business, you need to do everything within your power to increase awareness. Your efforts could include an incentive for referrals, or even a commercial, depending on your budget.

As you continue to research and prepare, remember that expenses can change on a case-by-case basis. Just because another contractor spent a certain sum to get their business off the ground doesn't mean you'll pay the same.

Getting Started With a Contracting Business

In your time as a contractor, you've taken on your share of tough projects. Starting your own contracting business might seem like the hardest one yet. Even so, you have resources to reference as you lay the foundation for your company, ensuring your success as you move toward the future.

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Holly Welles is a real estate and construction writer. You can find more of her work on her own blog, The Estate Update.