The construction industry is incredibly competitive and there are already a lot of well-established businesses out there, which means that new companies in this field face an uphill battle. Building a loyal customer base and finding enough work to cover all of your overheads is tough, but it’s not impossible as long as you do things right in the first year. Unfortunately, a lot of construction companies don’t get everything right and they end up folding because of a few simple mistakes. The key to surviving as a new construction company is understanding what those mistakes are and learning to avoid them. These are some of the biggest things that construction companies get wrong in their first year.
Starting The Business With Too Many Loans
The startup costs of a construction business are a lot higher than in most industries. It’s not the kind of business that you can start from home without spending much money, which means that the risks are a lot bigger. You’ll be spending somewhere between $50,000 and $100,000 on all of your equipment and materials, labor costs, insurance, and marketing. That means you’re going to need some business loans and that’s fine.
Unfortunately, a lot of new construction companies struggle because they rely entirely on loans and don’t fund any of the startup costs themselves. This is a big problem because the interest payments will eat up all of your earnings so you will have very little cash flow. Cash flow problems are one of the most common causes of business failure, so if you’re funding everything with loans, you’re putting your business at risk.
That doesn’t mean that you shouldn’t take out any loans at all, that simply isn’t realistic. But you should try to save up around 20 percent of your startup costs before you start looking into loans. That way, you’ll be able to reduce the interest that you have to pay and improve cash flow in the business. You won’t be able to start making any real profit until you pay off those loans so the less you need to borrow, the better.
Insurance is one of the most important initial costs that you have to bear but some construction companies think that they can save a bit of money by skipping out on it. They’re confident in their work and they don’t think that they’re going to have any problems, so not getting insurance won’t be an issue. The truth is, it doesn’t matter how good you are at what you do, things can always go wrong and you need insurance to cover yourself in those situations.
If you accidentally damage a customers property or somebody is injured on site, you will have to pay out. If you have the right liability insurance, it will cover those payouts and it shouldn’t affect you too much. But if you decide to ignore the insurance and go without, you’ll be paying out of your own pocket. In most cases, that will be far more than you can afford and the business will go under. Even though it’s an extra expense, the right insurance could mean the difference between success and failure.
Wasting Money On Equipment
Buying all of the tools and equipment that you need for jobs is your biggest initial cost, especially if you’re planning to take on more commercial jobs that require a lot of heavy machinery. You can never avoid these costs entirely, but a lot of new construction companies spend way more than they need to because they buy everything brand new. But you can save yourself so much money if you buy things second hand, as long as you spend the time doing some research and finding the right sellers. You can usually find used excavators, dump trucks and cranes for sale at a fraction of the cost of brand new ones. If you buy ones that are less than ten years old, they’ll still be in good condition and they shouldn’t require too much maintenance, and you’ll save yourself so much money.
Buying equipment that they rarely use is another common way that construction companies waste money. If you use a piece of machinery on most of your jobs, like an excavator, for example, then buying it is the most cost effective thing to do. But there are certain machines that you only use occasionally, and buying those pieces of equipment isn’t always the best thing to do. You need to consider the return on investment and if you’re not using it that often, it will be a long time before you earn back the money you spent on it. In that case, it’s usually best to just hire things when you need to use them.
Finally, some construction companies waste money by buying cheap tools. They assume that they’re saving money because they’re spending less initially, but the thing is, you’re going to be replacing those tools regularly because they’re poor quality and they will break easily. It’s actually more cost effective to spend more money in the first place and buy better quality tools that will last for years.
Taking Shortcuts With Health – And Safety
Health and safety regulations can sometimes seem a little extreme, but it’s so important that you follow them to the letter. Some construction companies decide to try to save time and money by taking shortcuts, but in the long run, it could end up costing you a lot more. If you aren’t following health and safety regulations properly, you massively increase the chances of an accident and that could cost you a lot of money. If an employee is seriously injured because you weren’t following health and safety rules properly, they can make a compensation claim against you. You also have to consider the lost time on a job because you’ll be a person down. That means that the job will take longer to complete and your profits will be smaller.
You may also be subject to fines if you are found to be in breach of health and safety laws and in some cases, the site may be shut down until you can bring everything up to standard. That’s more lost time and a big fine that you have to cover, which is going to cause a lot of financial issues for a new company. Even if they don’t make sense to you, it’s important that you always follow health and safety procedures properly.
Signing A Bad Contract
Contracts are an important part of any business and they exist to protect both parties in a transaction. In construction, the contract protects the customer and ensure that you complete the job as discussed, for an agreed price. But contracts are also there to protect you in certain situations and if you sign a bad contract, you could land yourself in some serious trouble. This is most common with commercial jobs rather than residential jobs so if you’re taking on any larger jobs, you need to be sure that you read the contract properly.
In some cases, there may be clauses in the contract that waive your right to sue the client if they breach the contract or stop you from taking action if they don’t pay on time. Once you sign these contracts, there isn’t really much you can do if the client decides not to pay or breaks the contract somehow, so it’s vital that you read the small print before you put pen to paper. If a client is including these kinds of things in a contract, you might want to think twice about working with them because it’s an indication that they’re going to be difficult further down the line.
Not Investing Enough In Marketing
Word of mouth is so important in the construction business and if you do good quality work, you’ll get a lot of jobs through recommendations. However, a lot of new construction companies fall into the trap of thinking that they can rely entirely on word of mouth and they don’t need to invest in marketing. Unfortunately, that isn’t the case and the majority of successful construction companies have a strong social media presence. If people are in need of a construction company and they don’t know any local ones already, going online will usually be their first port of call. If you don’t have an online presence, you’re missing out on a lot of potential customers. A social media page is a great place to showcase your previous work and you’ll find a lot of customers if you invest a bit of time and money in your marketing.
You should also use more traditional marketing techniques like leafleting. If you get some professional looking flyers printed out and spend some time delivering them in the local area, you’ll be surprised how much interest you get.
If you’re making these basic mistakes in your first year, your new construction company is going to struggle and in some cases, you may end up having to shut the business down entirely.