How to start a construction company 101

So, you are finally ready to go it alone? You’ve built up the experience and knowledge and you think you are ready, or you’ve simply had enough of working under someone else. Where do you start?

There is a mountain of work to get through before you start. Its going to take some time to do this properly and to put the correct systems and controls in place to ensure your business operates profitably, legally and safely. If the below seems too daunting, you may wish to consider a franchise approach from the likes of experts Carma UK Construction Limited who offer a franchise model to help support startups and established teams alike.

1 – Form the idea

·       What  is it you are going to do?

·       Where are you going to do it?

·       How are you going to do it?

·       Why are you going to do it?

These are the questions you need to consider. Have you found a gap in the market? Are you able to do it better, cheaper, faster than others or is your solution completely unique? Perhaps you are just another offering in the industry where there is a supply demand issue at present. Its worth ensuring your idea stands up for when that supply demand issue flips on its head and the competition with established players hots up. Once you have your clear idea in your head its time to go and speak to potential clients to ensure there is demand. Its so important to test an idea before spending months and months of time developing it into a business. Find a few interested clients and go and speak with them. Be honest that you aren’t ready just yet, but you’d like the opportunity to discuss their needs and to offer your advice. You might get lucky and find some early considerate supporters (but be equally wary of those looking to take advantage more on contracts and payment processes below). Once you are reassured that your idea has a solid footing, it’s time to make a plan. You could consider testing your idea under a sole trader arrangement before progressing to more formal incorporation, but even under a sole trader arrangement, there are necessary steps to take before you can begin to trade.

2 – The plan

The depth of this plan depends on the scale of your business. If its you on your own, then a slimmed down plan/business plan summary may suffice and give you some guidance on what you need to do over the coming months/years. If its more significant, with a larger team, investment, infrastructure, systems, then a full business plan is your next point of call. There are so many templates available online now to help get you started if you’ve never drafted a business plan before. For those who have, there’s no need for me to teach you to such eggs, just to say its time to put the long hours in to ensure you have a solid plan so you fully understand the goals, routes, landscape, financial model and issues before you press go.

3 - Funding

Never start with an empty bank account. Its foolhardy. I can’t stress this enough for anyone setting up a business. Every business, even the smallest sole trader needs some capital. Everyone makes mistakes and as a provider, your clients will expect you to pick up the bill to put them right. What you don’t want is to start your journey with a cash flow squeeze not having enough to buy the small material items, or pay for your families food at the end of the week. Far too many construction companies go into administration due to poor cash flow management. They blame, luck, clients, suppliers, misfortune, but the reality is its so often just poor planning. Never strip a company bare, always leave money in the bank for a rainy day, expand within your reach and ensure you pay attention to good cash flow planning. Get deposits where you need them (future guide to follow) with suitable protection for your clients and ensure there is a clear framework for payment so you have clarity on future income. Secure this income using project bank accounts or Trusts is certainly the most robust way to manage your cash flow (visit www.pay-trade.co.uk for a solution in this space with payments into an account in advance of the project). We believe legislation is imminent to force the industry to adopt better payment practices for the protection of all parties.

If you can, try to secure some small credit facilities with suppliers. This will also help with some short term funding. Even a few thousand to get your started means you will have some time to allow payments to clear without having to hound your clients for money. Chasing clients endlessly 1 day after finishing for payment because you have a cash flow issues due to poor management is a bad way to run a business. Avoid this if you wish to offer a professional service. That said, do set out your payment terms in advance and insist these are kept to.

You could look to obtain a business loan, but as a startup it is likely this will need to be secured against an asset such a second charge on your personal property or director guarantees.

4 – Protection

How do you intend to protect your clients, your staff and yourself/family? Insurance is a basic requirement of the construction industry. Professional indemnity, public liability and contractors risk are some of the policies that you will need. There are lots of providers, but often the generic online providers do not provide the cover you actually need. A broker will be able to advise. The bigger your projects and the bigger your team the more it is going to cost and it is not cheap. Some insurance policies are established on a project by project basis to ensure robust protection is in place. It is also worth ensuring your clients home insurance provider is also aware of the building works being carried out at their property to ensure they are insured for damage and catastrophic events. Ensure you plan for this item in advance to avoid any negative results by not having the protection in place you need. It would also be sensible to take out your own life insurance, critical illness, sickness and business insurance to ensure if you are unfortunate enough to have an injury at work, that you, your family and business can continue to be financially sound.

You also need to deal with the day to day protection of your staff and the people around you. You will need to draft a health and safety policy, draft a risk assessment and method statement for each project, carry out site inductions and toolbox talks with any of your team members to ensure all work is carried out according to your plan and safely. You’ll need to ensure site welfare is provided to all members of your team. There are lots of tools available to make RAMS and method statement production a breeze or you can look to pay for a health and safety consultant. Much of these processes will be covered in the appropriate industry training courses and assessments. SMSTS is a must for those managing a construction site. SSSTS for those supervising and CSCS for anyone working on the site. These are often ignored for domestic works, but regardless of the size of the project, appropriate training must have been conducted.

5 – Incorporation

Sole trader or company or partnership. There are multiple way to set up your business. Each with their positives and negatives. We’d suggest a limited liability company to be the most robust method of launching a construction company ensuring that you personally aren’t liable if disaster strikes. Sometimes businesses do fail, and a limited liability company allows you to cut your losses and start again. You need to register your company with companies house (can be done online in 10 minutes), set up a business bank account (Starling Bank is great for this to be done quickly), register with an accountant or at the very least in the modern world register with an online accounting/book keeping system (QuickBooks, xero are fantastic).

6 - CITB registration and HSE

The Health and Safety Executive (HSE) is Britain’s national regulator for workplace health and safety. They are dedicated to protecting people and places, and helping everyone lead safer and healthier lives.

Their role goes beyond worker protection to include public assurance. We work to ensure people feel safe where they live, where they work and, in their environment.

There are many requirements from the HSE on construction companies (see future guide), so it is worth ensuring you read the requirements to ensure your sites are safe.

CITB is the industry training board  for the construction sector in England, Scotland, and Wales. It’s their job to help the construction industry attract talent and to support skills development, to build a better Britain.

All employers must pay a levy to the CITB and be registered. When incorporating your business you will need to also register with CITB.

7 – Tax

There are a variety of taxes you need to be aware of in construction whilst starting out for the daily running of your company. Vat, CIS and corporation tax.

VAT is applicable when your turn over tips £80,000 per annum or more. If that is going to be the case, then register for VAT immediately ahead of time and at the very least when you reach this amount. Often those starting out try to avoid becoming VAT registered which can be a tact for short term project wins, but it is also a strong indicator to a client that you are a small provider. How do you wish to be perceived? VAT is a tax at the point of sale charged on labour and material. You’ll also be paying for VAT when you buy material, so you need to be aware you shouldn’t be double charging for material VAT as you’ll be able to claim your material VAT back from HMRC as part of your monthly/quarterly or annual VAT return. If you are a sub-contractor to other larger businesses, you will no longer be paid VAT once you are VAT registered, so once again, be careful with your cash flow as you’ll no doubt be claiming VAT back from HRMC each month rather than having surplus in your bank account.

CIS is appliable to all businesses and sole traders in the construction industry. This stands for the construction industry scheme. It is in effect a payroll tax paying up to 30% to HMRC for labour at the point of payment. As you grow you can apply for gross status so you manage your own CIS payment only once HMRC deem your solvent enough to do so. Be mindful when sub-contracting that the main contractor will deduct up to 30% (typically 20% once registered) from your labour rates as they will need to pay HMRC in advance. Make sure you have accounting for this in your cash flow planning and that you are ready to report on this when filing your accounts to HMRC as it is a payment of tax in advance which is deductible at year end.

Corporation tax is applied to your profit at the companies year end. This amounts varies depending on your company size and location. Any CIS contributions made by others for your sub contracts will be deductible from your tax payments so some or all of this may already have been paid for. Its quite a confusing minefield, but accounting software and professional appointments will help guide you to compliance.

8 – Finding work

There are a number of ways to establish your sales funnel for your new business:

·       Marketing

·       Rating/job referral sites

·       Post

·       Telephone

·       Vans

Marketing takes many forms with the majority now going online. You can look to utilise pay per click search engineer adverts such as google ads, social media ads offered by the likes of facebook or linkedin, or onscreen adverts on specific popular websites. Our suggestions when considering your online marketing strategy is to appoint an expert. You’ll need to pay them, but their experience will be very valuable avoiding your time having to be spent on this ever moving process.

Perhaps the first and easiest point of call will be to join a rating/job referral site such as Checkatrade, rated people to name just a couple of the many. Try them out and find out which ones create the best lead pipeline for the amount you spend. There is often a lot of poor value jobs posted on these systems, so be warned you’ll likely need to do some careful sifting to ensure you take on the right sort of project.

Postal marketing is still live and well. Draft a professional flyer of your services and post them out to your targeting audience. You can utilise services from Royal Mail to carry this out for you. Be warned its not a cheap process, but can yield good results at the very least for brand awareness which is a significant and important part of any firms marketing strategy and spend.

Pick up the phone. There is nothing better than speaking to people to communicate your message. Target other construction companies that you can carry out work for and call them. You may wish to drop them an advanced email to warn them of your call and you will certainly want to send a follow up email after the call so ensure you have your messages drafted and basics like email signatures created. It is also helpful to register a web domain so your email ready (name@companyname.com or .co.uk). This provides comfort that once again you aren’t a one man band operating using a gmail and outlook account. You’ll notice that many still do on the various vans driving around the UK. We’d suggest you go one better for what is a tiny cost and is so easy to do.

9 – Pricing work

So many new firms (and established) fall down and cripple their businesses with poor pricing work. Don’t sell yourself too cheaply. You must work out what you need to carry out the work and remain in business. What are your overheads that you need to cover on each project to keep the lights on and importantly, to pay your wage and generate a profit (the aim of a business). You are not a charity, or if you are, then profit is perhaps not as important. There are lots of estimating services offered in the UK. Some will be more appropriate to your type of work than others. You may find paying an experienced hand to support your early parts of your journey the best route forwards. Pricing work yourself is of course the option for many in the first instance, but pay attention to quality of pricing submission and clarity to avoid any contractual pitfalls.

10 – Contracts

Never do any work outside of a contract. Far too many sob stories start with poor or no contract at all. You may need some support in establishing your first few contracts but this is really important to get right. Basic contracts can be found online from the likes of JCT and RIBA or you can use tools offered from payment platforms such as Pay Trade to create basic contracts for you. Never sign an agreement you don’t understand the risk you are taking on.

To go with any contract you will want to draft your own terms and conditions. You may wish to cobble this together through seeing other companies, but it would be best practice to approach a legal practice when affordable to draft this for you correctly for your needs.

11 – Location

To have an office or not. In the short term I’d suggest you can work from home. This will allow you to keep you overheads low. When your cash flow and cash in the bank has been established, a physical presence in the community is great for branding and visibility. There are more and more retail shop fronts available rather than industrial unit tucked away from public view. Make your office part of your marketing strategy and get some high street presence.

That should get you going. You’ve now got a sales pipeline, incorporated, set up basic company processes, drafted your business plan and set up the basics for carrying out work safely, prudently and correctly. Keep an eye on that cash flow and most importantly, enjoy what you are going. When you get to the point you don’t enjoy your work, its time to rethink what you are doing. Life is short. Enjoy the ride.