How to start a construction company

Whether your dream is to become a general contractor or an owner-builder, this guide covers the basics of starting a construction company in the UK

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Deciding to start a construction company is an exciting decision to make – but it can also be an incredibly overwhelming industry for newcomers.

Whether your vision is to position yourself as the next big contractor in your local area, or you see yourself tapping into a certain building niche, this specialist industry has tons of safety rules and regulations, financial setup and registration requirements to consider before you even think about trading.

Plus, the sector hasn't escaped the impact of the coronavirus pandemic, with total construction output falling by a record 40.1% in April 2020 according to ONS figures. While the industry is now recovering, there are still plenty of pitfalls to navigate.

Luckily, once you know where to begin, and where the main challenges are, it's a much simpler journey than first appears.

Startups.co.uk has helped SMEs to weather lots of different storms over the past 20 years. Our experts have used their bounty of experience to pull together the below guide to talk you through all of the most important steps to setting up a successful construction business.

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What is the state of UK construction today?

It's never an easy time to start a construction company in the UK, but the industry does now seem to have recovered from the impact of the pandemic – with ONS figures showing that the level of construction output was 1.4% above the February 2020 pre-coronavirus level.

There are also other encouraging signs within the sector.

Construction output grew by 3.0% in the three months to January 2022, as the government's ‘Build Back Better' recovery plan effected huge investment in large-scale infrastructure projects. Moreover, the Construction Products Association expects the industry to grow by 4.3% in 2022.

Such a positive outlook is due to a spending package announced by Chancellor Rishi Sunak in the 2021 Autumn Budget, which allocated £1.8m for brownfield building, as well as £1.7bn from the Levelling Up fund for UK towns and cities.

The government is also focusing on the development of renewable energy projects, pledging £3.9bn to help the country decarbonise its buildings and meet a zero-carbon emissions target of 2050.

Clearly, there are plenty of reasons to be hopeful for construction SMEs. But it is still a time to exercise caution and plan ahead if you're thinking of setting up a new business. Despite the optimism, many big-name companies including £64m-turnover WRW Construction have gone into administration in the past couple of years.

What is a construction company?

A construction company is not a single entity and can encompass a wide range of services and roles, in both private and commercial sectors. You will also quickly discover that there are lots of different types of construction companies including small renovation contractors, general contractors and owner-builders, and it’s important that you can recognise the difference.

Here’s a closer look at the different types of construction companies:

  • Small renovation contractors
    Small renovation contractors tend to work on projects that require small amounts of capital including jobs such as home alterations, office renovations, or small-scale commercial work. As a result, there’s no need for small renovation contractors to have an office or site base, as they tend to complete their paper work at home on evenings and weekends. The majority of small renovation contractors generally expand to general contractors, if they are good enough of course.
  • General contractors
    General contractors tend to be experts in building or alteration work. These companies provide a number of trades within their own workforce. Specialising in a wide range of trades and sectors, you will find that many construction companies operating as general contractors tend to deal with private and commercial work on a larger scale.
  • Owner-builder
    A company that operates as an owner-builder is not classified as a contractor. This is because this type of company only builds buildings for their own ownership in order to rent, operate, or sell on completion (there may be some overlap here with becoming a property developer). You’ll find that the vast majority of own-builders act as a construction manager or general contractor alongside their main business.

Once you've decided whether to become a contractor or an owner-builder, it’s also important that you recognise the differences between sole traders, limited companies, and partnerships as this will impact the type of construction company you start. Take a look at our guide to choosing the right business structure to compare the different liabilities, costs and tax issues you'll need to consider. Now is also a good time to assess good construction company names; read more in our guide on how to choose a business name.

Expert Insight – Parm Bhangal, Bhangals Construction Consultants

How to start a construction company - Parm Bhangal, Bhangals Construction Consultants

For Parm Bhangal, managing director of Bhangals Construction Consultants, a childhood love of Lego led to a career building buildings for real. However, he warns that it can be an extremely challenging sector to work in and you need to be emotionally resilient to deal with the setbacks associated with different projects:

“So many things can go wrong on a day-to-day basis and you have to have a really thick skin to own and run a construction company. It isn’t an easy task and, I think a softer, more sensitive person would struggle.

“If you’re not outspoken and you don’t have courage in your own convictions, you get left behind. It requires an element of self-confidence. I wish I’d known that sometimes you have to dig your heels in and have the self-assurance and spirit to say exactly what you want.

“You experience the highest of highs and the lowest of lows – and that can all happen in one week, especially with multiple projects running at the same time. One can really fly and another can hit one stumbling block after another and just go terribly wrong. You need to be ready for that.”

Creating a construction business plan

According to the Federation of Master Builders, there are currently 300,000 construction companies in the UK – 99% of which are SMEs.

When you’re starting your own construction business, thorough planning is essential to make sure you can cut through the loud noise of your competitors and attract business.

Market research

Before you even think about starting your own construction company, you should do your market research in order to determine the profitability of your business idea.

This process will also allow you to identify whether or not there are already construction companies operating in your area, providing the same services as you. Sussing out your competition will give you an idea of how your business will fit into the market place and whether it has the potential to thrive.

As part of your market research, it’s also worthwhile looking into what other construction companies are charging in the area you plan to start your business in, as well as what kind of reputation they have.

If there are already a number of credible construction companies offering the same services in the locality, and you cannot identify how your business will fit in, it might be worth rethinking your business plan and your business idea.

Of course, one of the most effective ways to find out whether there is a demand for your services is to get out into the community and speak to local residents. This will allow you to gain a first-hand insight into whether the target market you will be looking to engage with feel that there is a need for a new construction company or contractor firm.

Be sure to always consider the demographics of the area you are targeting, as people need to be able to afford the construction services that you plan to offer.

Writing your construction company business plan

The importance of a thorough business plan should not be underestimated. A detailed business plan will not only allow you to establish clear business goals and procedures, but it is also widely recognised in the business world as an essential step in getting your idea off the ground.

A business plan is a formal document that covers everything you need to know about successfully starting and running your business. If you are planning on approaching a potential lender, you will also be asked to provide your business plan so they can assess the profitability of your idea.

What should your business plan contain?

Your business plan should be split into several sections outlining in detail how you plan to structure your business. It should explain who your target market is, the kind of construction services you will offer, how many employees (if any) you intend to have, and finally, how you will market your construction business and differentiate yourself from your competitors.

There should also be a detailed section that focuses on outlining how you plan to maintain your construction company, as well as a forecast detailing how much money you expect to make.

Download your free business plan template here.

What software will you need as a construction SME?

There are lots of different tools you can use to help streamline fiddly, administrative tasks in your company.

To help with finance and invoicing, small business accounting software is a must. Or, as you'll be dealing with a long supply chain of customers, CRM (or customer relationship management) tools can help you to keep on top of your sales pipeline.

Project management software is perhaps the most relevant tool for construction companies. As you'll be dealing with many jobs of various sizes, the right tool can help you to stay on track of deadlines.

Click here to read more about all of the best available software and tools for small businesses. 

Construction rules and regulations

If you are planning on setting up a construction business, there are a number of industry specific rules, regulations and tax requirements that you should be aware of including The Construction Industry Scheme (CIS).

This scheme was set up by the government to create a payment handling system that contractors could use to handle payments made by contractors to sub-contractors.

Whether you are setting up your business as a limited, sole trader or partnership company, you will be expected to register under the CIS scheme if your business operates in any part of the construction industry.

According to the government, CIS covers most construction work for:

  • A permanent or temporary building or structure
  • Civil engineering work like roads and bridges
  • For the purpose of CIS, construction work includes:
  • Preparing the site, e.g. laying foundations and providing access works
  • Demolition and dismantling
  • Building work
  • Alterations, repairs and decorating
  • Installing systems for heating, lighting, power, water and ventilation
  • Cleaning the inside of buildings after construction work

Construction health and safety regulations

It goes without saying that health and safety is important in all business environments, however it is particularly important crucial within the construction industry due to the demands that come with the job role.

It is paramount that both you and your prospective employees have the necessary skills, knowledge and expertise to confidently carry out their day-to-day role in a safe manner. It is your responsibility to ensure that all members of your staff are up to the job and you will be expected to solve any skill gaps.

For detailed health and safety regulations you should visit the Construction Skills, the Sector Skills Council and the industrial training board as they help business solve skills gaps.

Building regulations

Prior to starting a  construction company, you should have a solid understanding of building regulations as these are the standards of design and construction that will apply to the majority of commercial and private projects you will work on.

You should understand what building regulations cover, how they are enforced and who is responsible for them. The same applies for planning permission regulations.

To learn more, see The Health and Safety Executive's detailed breakdown of UK Construction Regulations.

Charging VAT

If you’re expecting your annual turnover to exceed £85,000, then registering for VAT is compulsory. If you’re annual turnover is lower than £85,000 then the decision is voluntary.

VAT is charged on the vast majority of transactions in the UK, especially within the construction industry. If you are VAT registered you will be able to charge VAT on all of the goods or services you provide, and then claim back the VAT on goods and services you purchase for your business.

You should be aware that there are three different types of VAT, standard, reduced and zero however, nearly all construction work completed within the construction industry is charged at a standard rate of VAT.

How much does it cost?

Contrary to popular belief, the vast majority of start-up businesses are now able to get up on their feet with relatively modest budgets, especially in more traditional sectors such as the construction industry.

In fact, industry estimates indicate that the average budget for a new construction UK start-up business is approximately £5,000.

This is because many construction companies do not require a base to work from as much of their manual labour is completed off-site. This means that business owners can complete much of their paperwork and communications from home.

If you are considering starting own construction company, it’s highly likely that you have already worked in the trade, which means you will have the necessary equipment and maybe even regular clients to get your business off to a good start.

Of course, despite the low cost of starting your own construction company,  you should still plan ahead and cut down on how much you think you will need to borrow. The number of employees you will need to hire is a particularly high overhead that needs considering.

How is the talent shortage affecting construction SMEs?

Construction companies are currently combatting a talent crisis that is hurting a lot of SMEs, as a skills shortage means there is a low number of people who are eligible to work in construction jobs.

There are various government funds and schemes available to help sub-contractors tackle the issue – such as apprenticeships and work placements. However, recruitment is still a major topic in the industry, and one that you'll need to be aware of in order to attract fresh new talent to your company.

Read our guide to learn more about how construction SMEs can attract future talent to their workforce.

How much can you earn?

How much you will earn from setting up your own construction company is difficult to say, as every construction company is entirely different. However, as a general rule of thumb, you should expect to be paid around 8% of your total sales as salary – if you have been in business for less than five years.

Of course, if you survive the five-year point (which you should if you remain focused, motivated and driven!) your construction company should continue to go from strength to strength.

As you gain more experience operating within the world of business, you will start to notice even more opportunities for growth and progression which should allow you to increase your salary to 10% of your total sales after year five. Going forward, you can begin to increase your salary steadily based on the income your construction company is generating.

Construction finance: cashflow solutions for construction businesses

Do bear in mind that you will need to keep a strict eye on cashflow in the construction industry as you may have high upfront costs for materials and labour before earning money from your efforts. One way to combat this is to use an invoice finance service, which allows you sell your unpaid business invoices to a finance company and free up most of their value to make new purchases and payments.

This is known as ‘invoice factoring', and it's so common within the construction industry that there are many finance companies who offer dedicated ‘construction finance' invoice services. Take a look at our dedicated guide to how construction finance works to learn more.

Tips and useful contacts for starting a construction company

 Remember:

  • Consider your options carefully first when forming your company: do you want to be an independent contractor or are you looking to own a construction firm? 
  • Do your market research, analyse competitors in your local area and find a niche where your construction business will stand out to customers.
  • Write a business plan to steer your construction company in the right direction – and stick to it.
  • Adhere to the rules and regulations of the construction trade; make sure you comply with health and safety, building, VAT and CIS regulations.
  • It’s possible to start a construction company for as little as £5,000 so do your research and you could well be on your way to making your construction company a success!

Useful contacts:

Startups.co.uk can help your business succeed

At Startups.co.uk, we're here to help small UK businesses to get started, grow and succeed. We have helpful resources for helping new businesses get off the ground – you can use the tool below to get started today.

What Does Your Business Need Help With?
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