
If you’ve reached the point in your construction career that you’re ready to move into commercial work, congratulations! That’s a huge milestone to reach and deserves celebration.
There are a lot of considerations you may not have had to think about before if you’re moving from residential construction; however, if you’re prepared and have planned out your strategy ahead of time, you’ll be on the road to commercial construction success in no time.
Have questions about how to get into commercial construction? Here are 5 essential elements that will help you start a commercial construction company with success:
- Figure out your finances
- Make industry connections
- Be strategic about jobs
- Monitor costs and labor
- Choose the right tools
Let’s look at each element in more detail.
1. Figure Out Your Finances
Capital is the foundation of a new commercial construction company’s growth and expansion and determines its entire direction. Without access to capital, starting a commercial construction company is simply not feasible.
During the planning stage of your business, take your time developing a financial management strategy that you’ll follow strictly, but with the knowledge that you’ll need to be flexible and modify that plan when necessary.
There’s no aspect of your commercial construction company that finances will not influence: from your employees’ wages and salaries to your net profit and everything in between. Money management will be the deciding factor that determines which jobs you can and can’t bid on, as well as what kind of risk you can assume.
Odds are, your company’s financial profile will be divisible into two parts: capital and credit.
The Role of Capital and Credit in a Commercial Construction Company
Whether you decide to work with a bank or other lender to finance your company or use your own personal investment funds to start, you must have enough capital or credit to operate until you begin producing profits.
This means you have to be able to cover all of your overhead: salaries and wages, tools and equipment, materials, and operating costs. One of the biggest factors to consider when estimating how much time will be required to make your company profitable – as opposed to merely solvent – is retainage.
What Is Retainage, and How Does It Affect the Overhead and Profit Margins of a Commercial Construction Company?
If you’ve been in the residential construction industry for a while, the idea of retainage might be unfamiliar, but in the commercial world, this practice is common. Even after the project is complete, customers typically hold back a percentage of the total bid – a sum called “retainage.”
The owner of the project holds back the retainage amount, which is typically roughly 10% of the total bid, until the general contractor – your customer – turns over the entire project to them.
So, just because your portion of the work is complete, this doesn’t mean you can expect full payment anytime soon. In fact, it’s not unusual for specialty contractors to wait several months – even years – following the completion of a job before receiving retainage monies.
From time to time, you might be able to make a case for a lower retainage amount during contract negotiations, but you can’t count on that, and you must be prepared for any amount of retainage.
How to Better Prepare for Payment Delays Due to Retainage and Slow Payments
Waiting for that 10% of your total bid might mean waiting for your entire profit margin for a job, and even without considering retainage, payment cycles in the commercial construction industry are notoriously slow. So you absolutely must have the capital to continue operating long after that last job is complete without depending on revenue from it.
This can be a big concern for new commercial operations – how can you finance bigger, more lucrative projects without the money to pay for materials for those projects?
A new solution for contractors that increases capital and improves credit is material financing. Billd, the leading company in this space, pays your supplier upfront for materials and then extends you up to 120-day terms. These extended terms improve your cash flow by allowing you to pay for materials after you’ve been paid for work, opening up opportunities to grow your business and take on more, and larger, projects at once.
Unlike a traditional line of credit that stifles your ability to obtain additional financing and tends to require a blanket lien on your business, Billd does not take up any credit because of its project-based financing approach. With a solution like this, you get breathing room to go after bigger bids without sacrificing stability.