By Travis Crabtree
As innovation evolves the way we conduct business, industries such as construction have seen significant growth. Single-family residential construction is up 8% compared to the previous year, and commercial construction is up 11%. Now, an influx of people are starting construction businesses. But like with most things, quantity does not equal quality. Just because the construction industry is experiencing a boom, it does not guarantee success for new businesses.
While all new businesses face challenges, the construction industry faces specific challenges that business owners must be prepared for. Without preparation, your company might end up as one of the many businesses that fail within the first five years. In this article, we will identify the opportunities found in the construction industry, list the common challenges that businesses in this industry face, and explain the solutions we recommend.
Why Start a Construction Business?
According to the 2018 State of Swyft report, the construction industry saw the highest volume of new businesses created from 2016 to 2017, a 72.3 percent YOY growth. Just in the commercial construction sector alone, the industry reached an 11% increase in profits in 2018. Due to new technology, changes in logistics, and other improvements in productivity, the construction industry has seen steady growth in recent years and is predicted to have an even more promising future. Now is a good time to start a construction business.
How to Plan Ahead
Without a plan, your business will not operate at its best. Especially in the construction industry, you must manage and mitigate damage before it happens. These are the most common challenges that construction businesses encounter when starting out:
#1: Improper Classification of Employees
The classification of employees (W-2 employees versus independent contractors) is crucial for taxes, benefits, and legal compliance. However, this step is often overlooked. According to the Internal Revenue Service (IRS), if you misclassify an independent contractor as an employee (or vice versa) without a reasonable basis, the employer is liable for paying the taxes due.
The key challenge in properly classifying the people providing services for you is regulation. The more control you exercise over the worker, the more likely the government would consider them an employee as opposed to an independent contractor. Elements of control include whether you tell the individual exactly when they need to appear at the site on a daily basis, whether they use their own tools and supplies, how much you oversee and dictate exactly how they accomplish their part of the project, and if they have the ability to do work for others.
A court will look at a number of factors to make the determination, which also includes the method of payment. Do you pay what looks like a salary, or are you paying for time or for a completed project? This last factor is also why many general contractors require their contractors to form LLCs so they payments go to a company and not an individual.
If you have already misclassified your workers—the Voluntary Classification Settlement Program (VCSP) allows taxpayers to reclassify workers for partial relief from federal employment taxes. To check if your business is eligible, visit the IRS website to download the form and apply.
#2: Shortage of Skilled Labor
The amount of new construction projects far exceeds the number of skilled workers available. According to the Bureau of Labor Statistics, an average of 225,000 construction jobs were taken each month in the first quarter of 2018, a larger number than the construction workers themselves. Additionally, one of the drivers of construction is the use of green building techniques, a style of construction that requires the appropriate skills and experience.
One of the ways to combat labor shortage is to offer a competitive salary and incentives. California Trusted Contractor, a client of Swyft Filings, manages this issue by “paying a very good wage to [their] skilled workers” and in some instances, “supply[ing] them with company trucks as incentives.” If this is not an option for your company, invest in training and programs that would teach the skills required for specific jobs. Either you can outsource training per project, list training before hiring as a requirement, or create the program yourself. Basically, it boils down to two methods: (1) invest in a new, highly-skilled workforce, or (2) invest in the people you have on-hand.
#3: Difficult to Regulate Cash Flow
There are several reasons why construction companies and contractors have difficulty accounting for cash flow. If your company receives payment upon completion, but your projects have flexible deadlines, it is difficult to predict when the company will get paid. This causes issues when paying workers’ wages, subs, and any additional supplies the project may need.
Set a standard when creating the contract with the client including using periodic benchmarks that trigger payments. Also, be aggressive in collecting payment. For example, communicate with the client that you will settle accounts receivable in 40 days or less. Prepare ahead of time for any changes that might be made to the project and protect your cash flow. When it comes to cash, there’s no such thing as too much preparation.
#4: High Liability
Liability expectations are set for owners now more than ever before, including eco-friendly certification guarantees associated with green building, insurance coverage for workers and for the company in the event of any accidents, improved safety training, and more. Acknowledging the company’s liability is expensive, but lawsuits cost even more and may even bankrupt the company.
Luckily, many solutions have already been put in place to prevent any management failures or mistakes. The easiest solution is to make sure you properly form an LLC or corporation and keep it in compliance to protect your personal assets. Water detection, real-time monitoring devices, and various forms of testing assist in risk management. Within the company, invest in good insurance coverage and consistent safety training. These are company-wide solutions and may take time to implement. In the meantime, communicate with your on-site workers and ensure that the most skilled laborers handle the more difficult tasks. Managers, specifically, should have the most frequent training and responsibility.
#5: Inability to Adapt to Technology
Real-time monitoring, drone aerial photography, 3D printers, project management software—all of these devices were created to ease company liability and processes. According to a 2017 global survey by KPMG, 72 percent of the engineering and construction executives stated that technological innovation played a role in their vision, but less than half had a strategy in place to integrate them.
The inability to adapt to new technology isn’t always rooted in pride. Time, energy, and money were put into the processes that businesses create to manage all of these issues. How does one change a process that took months, maybe even years to create?
Construction tech is rapidly changing, so simply following articles and making a wish list will not suffice. One of the ways to manage new technology is to have a dedicated specialist within the company to become well-versed with the technology, create plans to implement, and execute the implementation. Educating yourself is also a good idea, but be careful not to wear too many hats.
There are many options available for both large and small construction companies that solve common issues in the industry. It’s up to you, as the business owner, to implement these changes, and hopefully improve your company in the long-run.
Resources (not already linked in article):
Travis Crabtree is the President and General Counsel of online business filing company Swyft Filings. Swyft Filings has helped form and maintain tens of thousands of companies in all 50 states with all of their filing and compliance needs. His law practice focuses on assisting start-up and technology companies with all of their legal needs.