12 pitfalls new contractors should avoid when starting out

Getting a business off the ground can be tough but launching a construction company can be especially challenging. There are so many factors owners need to take into consideration. From technology to cash flow, below are some common pitfalls some contractors face when they start out, and suggestions to avoid them.

New contractors should create a business plan that includes their vision and company mission. The business plan can serve as a secure foundation to keep the company fully functioning in both good times and bad. It can help shape what tools and resources are required to succeed. Every business, no matter the size, can face challenges and it is better to have a strategic plan that provides direction during these rough spots. Revise and modify your business plan frequently.

Establishing and documenting best practices, policies, and procedures is key. From internal day-to-day operations, to expectations around project site management, these processes should encompass all components that churn the business. It isn’t enough to just create the processes. Make sure you clearly communicate them to all employees as well.

You might not need it now but consider getting prequalified to establish surety credit for future projects and growth. Identify key partners that can facilitate adequate support to obtain and maintain this surety credit such as a surety bond producer, a surety company, and a CPA firm that specializes in construction. Make sure you choose a surety company that is financially stable, knowledgeable in construction, and can grow with you. You should also establish a bank relationship to secure a working capital line of credit as a safety net to use for additional cash flow purposes.

Your brother-in-law may be a good guy, but he may be lousy at estimating. You should avoid hiring the wrong people for key responsibilities such as estimating, accounting, and project management. Employing the wrong people in these key areas can wreak havoc early on for the new contractor. New and smaller contractors typically don’t have the liquidity to refinance themselves due to costly errors made internally. Key roles should come with the knowledge and experience that will contribute to the company’s long-term success. And if you do hire the wrong person, it is OK to replace them.

As a contractor it is vital for you to keep track of income, expenses, and cash flow. If possible, spend money on state-of-the-art accounting software that will track accounts receivable and payable, pay suppliers on time, keep corporate and personal credit clean, enable you to download banking transactions, and reconcile accounts monthly. Equally important, invest in the right estimating software. Most contractors can’t bounce back from jobs that were estimated poorly. Similarly, make sure you have internal controls in place to manage costs and profits.

Make sure you exercise due diligence by exploring equipment options and comparing costs. Look at what goes into owning equipment, like maintenance and repair, versus the monthly payments you need to make when leasing.  

It is imperative that you read and understand all contracts. If you don’t have the appropriate legal knowledge, you should partner with a professional that does. Take the time to understand who the parties are, the scope of work to be performed, the duration of the project, the payment terms, and the terms and conditions of what will happen if and when conflicts arise.

Consider whether the contracts offer opportunities for dispute resolution instead of costly litigation. Litigation could be avoided by clearly understanding and defining the rights and responsibilities of the parties to the agreement.

Understand the default and termination clauses in the contract. A contract that outlines what happens in the event of a default, or if one or both parties terminate the contract, will aid in that understanding.

Try to revise or steer clear of contracts that have aggressive deadlines and extended pay application dates. Know that multiyear service contracts that extend over long durations and have longer-than-usual warranty periods may present complications over time.

The inclination of any start-up is to do as much business as possible, but contractors should continuously monitor capacity. Capacity is always going to be important to generate the revenue needed to break even, cover general and administrative expenses, and retain profits to grow the company. Remember to grow steadily, with quality, not quantity, at the forefront. Avoid taking on too much work if you don’t have the additional labor and crews to complete the projects. You should also stay away from projects with less-than-average gross profit margins because earning profits is key to strengthening the company financially in the long term.

Secure projects that are within normal scope of work, size, and territory. You should avoid venturing into work that your company does not generally perform and take extra precautionary measures to check and prequalify subcontractors on work that is not self-performed.

Secure business and construction insurance to cover exposure and liability, as well as any license and permit bonds needed for the company or projects. From a surety perspective, you should research what is required for the company and the industry from federal, state, county, and city levels so that you are not subject to fines.

Make sure teams are meeting frequently to review budgets, goals, key projects, and challenges that could limit profitability. The larger the contractor gets, the less time owners and managers seem to have. Owners should make communication a priority.

Don’t forget to spread the word and promote the company. Create a brand for yourself and launch a website and social media presence. Ask for customer testimonials and remember that customer referrals can be your number-one source of new business.

The foregoing is not professional advice nor legal advice, is provided for information only, and is not a substitute for consulting with a professional.