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Starting a Business in Construction
The Construction business has been a long-standing business industry where it’s always on demand. Thanks to the growing population and aging of the buildings, construction remains a growing industry. Offering opportunities for specialization, in order to strive against the other construction companies’ competitors that are in the same industry, some also offer general-contracting services, civic or residential housing, and other work specializations, streamlining the production to train workers to be more adept at what they do and be more efficient and safety-aware.
Starting a business in construction can get started with only a few numbers of staff working and hiring additional labor only when needed for bigger projects, keeping the monthly overhead cost low and giving the business a boost for new construction projects. Being a part of this industry will also boost your standing in the community due to your help in building their community grow and giving them shelter for personal and business purposes.
Though nowadays, the cost of construction is continually rising and making it harder for construction startups or small construction companies to turn a profit, together with the complex legal issues involved and the biggest factor of all, the risk involves for laborers. So, starting a business in construction is not as easy as it sounds.
It may be a process to build a successful construction company, but no worries, the returns are worth your effort and investment. As long as you prepare a solid business plan for a construction business, you will know the direction you need to take to start and also be able to predict circumstances that need to be realized and prepared against, ahead of time.
Organization Structure of a Construction Company
The usual structure and culture that the construction company reflects are due to the arrangement of what it encompasses – Functional Activity Units and Interfaces. Both have an important connection to the usual operations of the company.
Functional Activity Units – also known as FAUs which is split into:
- Area of focus – e.g. refurbishment for a design firm or commercial development
- Departments – e.g. planning, estimating, and purchasing for a contractor
- Subsidiary – e.g. design and build subsidiary
Interfaces - stands as the line of connection between the FAUs. There are four general types of interface in a construction organization:
- Direct – also often referred to as ‘line relationship’ due to the up-down-up lines of communication between a superior and subordinate (command – obligation relationship).
- Lateral – exists between managers of equal standing in terms of authority (lateral relationship), cooperating on issues of mutual interest and coordinate in other related activities.
- Functional – occurs between a specialist performing an advisory role and the rest of the management team. (authority is exercised indirectly through direct interface)
- Staff – an auxiliary role, which authority derives from the executives, acting as a support. (special assistants and private secretaries)
General Contracting vs. Construction Management
In a construction business, you may have often heard of titles like General Contractor (GC) or Construction Manager (CM). Both functions differently and at the same time, somewhat similar. To know how both differentiate from each other, we’ll do a comparison.
- Often older, family-owned-and-run operations
- Employs only a few key personnel full time (office and tradespeople)
- Often engage in full/part-time workers as help for its own forces that are not sub-contracted
- Gives away perks and benefits for full-time workers only e.g. health insurance, vacation, retirement plans, etc.
- Keeping employees on the payroll, an attribute commonly known that GC’s adapt
- Work is obtained mainly through a competitive-bid process, especially for newly formed GC and doesn’t have any reputation or repeat clients, sometimes they also do negotiated works. This is actually a very interesting way of getting a project, we’ll discuss it further later on.
- In a project, the GC’s connection with the owner run through the architect acting as the owner/client’s agent. Hence, the relationship between the client and the GC is more detached than a CM.
- Oversees the project and coordinates all of the sub-contractors, suppliers, and equipment
- Addresses the punch list comments by the architect and give the final payouts
- No establishment of any partnership between the GC, client, and architect
- Generally used for bigger and high-cost construction projects for budgeting purposes.
- Acts more as a fiduciary agent to the owner/client. Generally closer or has an alliance with the owner/client, compared to the GC. Trust must be earned, as well as years of interaction and positive experience between the two, beforehand.
- Responsible for almost all phases of the building/construction process including bid solicitation, job management, and accounting.
- Doesn’t keep many full-time (very rarely to keep part-time) employees.
- All workers below the CM’s administration level are mostly made up of independent contractors and suppliers.
- No employee benefits since CM doesn’t prefer to hire full-timers.
- Rarely involves in the classic competitive-bid events. Competition between CM’s only happens with differences in fees between other CM’s, which are often a percentage higher than the direct cost for the project.
- Works directly with each sub-contractor and supplier (sometimes with a GC) to plan cost-saving ideas for the client. The CM also oversees all their work throughout the construction.
- May or may not supply Architectural services (in some cases the client hires their own architects/engineers).
In conclusion, the main difference between a General Constructor to a Construction Manager is more on the administrative structure and employee relationships, rather than the differences in the work they do in the project itself.
Competitive-Bid Process of a Construction Project
This is a characteristic that is quite unique to get a project for construction works, especially for general contractors. This is also one of the factors that differentiate the GC to CM. This is due to the GC’s not having a more established relationship with the clients so, more often, they take works using the competitive-bid process.
The process goes like this: first, an outside architect is hired by the client to draft the plans and other specifications for the project. Assisting the preliminary budgets, structuring and overseeing the bid process, and then supervising the actual construction, is normally done by the same firm too. Then a few chosen GC’s will be invited to submit blind, competitive-bid proposals for the project (usually around 3 – 6 or sometimes even more). The proposals, of course, will be strictly based on the plans and specifications requested, in a bid-form by the architect.
All the proposals from sub-contractors and suppliers are then filtered out by the GC to gather and incorporate it into their overall proposal to boost their qualification in the bid. Then the GC’s bid is passed to the client within a predetermined date and time – bid opening or bid letting. If it’s an open letting, the bids will be read aloud to the public. If it’s close, only the client’s representatives will know the results of the bidding.
Usually, after the client’s representatives went through the details of the bids and evaluated it accordingly, a qualified bidder (usually the lowest) is then finally selected for the construction project. Though there are circumstances where the client retains to choose another higher bidder(s), to ensure that they will get their overall worth for their funds.
So, it is clear to see, the competition for construction companies, especially general contractors, is very tough and rough, compared to other kinds of business in different industries.
Business Models for Construction Business
A critical part in a construction business is to lay down what they would focus to work on. Otherwise, if they just kept on accepting every project that comes their way, the result would be the source of its downfall. There are many bankruptcy stories regarding this, so, it is best to be clear, what type of business model for construction business you are going to choose.
- Direct to GC, new construction
- Direct to GC, remodels
- Direct to client, construction (outside design)
- Direct to client, construction (design-build)
- Direct to client, service
- Special niche; work type
- Special niche; client type
If you read the topics above, every model should be self-explanatory. These are just a few of the countless models you can pursue, depending on how large your company is. Of course, it is also possible to adopt more than one business model if your company has more resources and the hands to manage each profitably.
Most Common Construction Financing Options
Due to the tough competition between construction companies and firms, getting a source of additional working capital can be troublesome. Hence, they look for construction financing options. Like the other businesses in different industries, there are several ways that one can gather funding. In this case, the most common construction financing options are the following:
- Private financing sources – easiest to attain, comprised of bank loans, construction lending banks, lending exchanges, etc.
- Public sources of financing – attracting interested investors, venture capitalists, etc.
- Government sources of financing – applicable to private projects, comprised of small business association loans, tax increment financing, historic tax credits, industrial revenue bonds, etc.
Of course, the construction company/firm will have to present a financial model to ensure funding from the listed options. Thus, the need to create a sound and professional looking financial model is critical to secure financing for their business.
Construction Companies Financial Model Templates
Are you planning to start a business in Construction? Are you in need of an insight if starting a business in the construction industry is financially feasible? Or do you need construction companies financial model templates as a reference for future investment?
The financial model templates in excel above are designed for businesses in the construction industry and its related sectors. From Valuation, Cash Flow Analysis, and even Staff Management. With these construction companies financial model templates, your plan will look more organized and the management for your business will be more efficient.
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