How To Become a Contractor: 2020 Survival Guide

Published: Jun 17, 2020
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The construction industry in the U.S. never goes out of fashion, despite economic and financial crises. Building, reconstructing and servicing houses, office spaces, and public facilities will always be of high priority for the U.S. society, even in challenging times as the 2020 COVID-19 pandemic.

If you are considering construction as your future vocation, you have to learn the steps on how to become a contractor. You will need to start with gaining sufficient knowledge and practical experience in your general or specialty construction field. 

The next step would be to take care of administrative tasks such as registering your company and obtaining your state license and contractor license bond. That’s how you can launch your business successfully. 

You’ll need to craft a business plan and obtain the necessary equipment. Expanding your business network and building a customer base will be next. As in every profession, it’s a wise idea to also keep learning the novelties in your trade. Only then you can stay ahead of the competition.

If you’re ready to start making your dream a reality, here are the most important steps you need to go through. They are the prerequisites that allow you to launch a winning contracting business.   

1. Choose the Type of Contractor You Want to Be

How to become a contractor in the U.S.? The first step that you need to take involves doing a bit of homework. You have to identify the type of contractor work that you wish to conduct. 

There are a couple of common types, including general and specialty contractors. To make your choice, it’s a good idea to research what types of specialists are in demand currently. It should also be a vocation that you can imagine yourself doing. 

General contractors 

General contractors can work on either residential or commercial construction projects.

They may also engage in actual construction, remodeling or renovation. 

Typically, state and local authorities have strict rules on how to become a general contractor.

They offer different license types for residential and commercial contractors, as well as further segmentation based on the exact work performed. 

Specialty contractors

If you want to work as a carpenter, plumber or electrician, you would typically have to become a specialty contractor. The different licensing authorities define the trades in diverse ways, as well as the requirements that you have to meet in order to get a license. 

2. Get the Necessary Knowledge and Skills

For some people, construction is a lifetime vocation that starts as early as high school and the first summer jobs. However, there are other options to take on this path even later on in life. 

Education and Training

Some construction specialists choose to pursue a bachelor’s or master’s degree in construction management, project planning, or architecture, among others. In some states, there are specific requirements regarding the education level necessary for contractor applicants. 

In case you don’t have previous experience or haven’t completed a degree program, you can alternatively seek a contractor school program. This would prepare you how to become a general contractor, or to seek your specialty trade. You may need to complete a specialty training course if you want to take the path of an electrician, plumber, or similar specialist. 

The contractor training can give you knowledge in areas such as construction materials, financing and budgeting, and even business strategy. It can also help you get familiar with building codes and the most important construction regulations in the U.S., such as energy efficiency standards, handling hazardous materials, ensuring workplace safety, and more.

Hands-on Experience 

You need to gain experience as a construction apprentice or in a construction-related job. This is how you can earn hands-on experience as a building contractor or in your specific trade, learning both practical and business aspects from proven professionals. 

Most states have detailed requirements about the years of experience for each contractor type, as well as for training, certification, and apprenticeship programs. The usual minimum is no less than 3 years. You have to find out the exact criteria in your state, county, or city, and make sure you satisfy them prior to applying for a license.

Pass a State Exam

Most licensing authorities would require you to pass a business test to prove your suitability for running your contracting company. You may also have to take a specialty test for your specific skills. Get ahead by learning the general principles of your trade during your apprenticeship, as this will give you an advantage during the licensing exam.

3. Register Your Business

Before you can apply for a contractor license in your state, you have to register your company with a specific business entity and name. 

Choose a Business Structure

You have to choose the structure that best suits your situation in terms of liability and taxes. 

The common types of business entities that you can consider as a contractor include:

  • Sole proprietor
  • Partnership
  • Limited liability company (LLC)
  • Corporation

Register a Trade Name 

You can come up with a preferred trade name under which you want to operate your business. You have to register it with the respective authority in your state as a DBA (doing business as) name.

Get an Employer Identification Number

If you are planning to employ people, you will be required to obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).

4. Craft a Business Plan

There’s barely a business field today where you won’t need a business plan to develop a winning company. The construction industry is no different. 

Set Up the Basics of the Business Plan

Your business plan should detail important specifics about your structure, operations, and goals. It should contain information about your intended services, competitive analysis of the market which you aim to enter, your competitive advantages, financing plan, marketing and sales strategy, and management and personnel, among others.

Many training programs include preparation for creating a solid business plan. This can be of immense help if you’ve don’t have previous experience in business planning and strategy.

Determine Your Competitive Advantage

As a part of the business plan, you have to research the market that you want to enter as a general or specialty contractor. Find out how many similar specialists there are in your area, what their advantages are, and how you can offer your services in a competitive manner. The best approach is to clearly outline the skills that differentiate you from the rest, so you can develop them and win a market share through them.

Prepare Contracts and Forms

You will need a range of different documents for your operations as a contractor. It’s a good idea to prepare the templates in advance, so that you’re ready for the first customer. These include contractual agreements with clients, payment terms, and pricing schemes, among others. 

5. Get a State License

How to become a licensed contractor? Every state sets different criteria for obtaining a general contractor license and for specialty licenses. The authority in charge of licensing and monitoring contractors’ activities is usually a contractor’s license board. 

You can find the exact body that is in charge of the contractor licensing process in your state in the National Association of State Contractors Licensing Agencies. Then, you can easily determine the specific state requirements that apply to you.

Some counties and cities may also have requirements for contractors. Make sure to check with your local authorities if they have other criteria you need to meet before you start your operations on their territory.

You can check the contractor licensing requirements for your state in the list below:

Research the License Types 

Usually, there are two main categories of licenses. 

There are general contractor licenses, which allow contractors to engage in a residential and commercial building. 

Specialty trades have separate license types, such as electricians, plumbers, HVAC contractors, roofing specialists, and many more. The classifications vary greatly from state to state, and between cities and counties.

Go Through the Licensing Process

In the typical case, you will need to undergo an application process that involves completing an application form

The contractor license requirements that you can expect include:

  • Business entity documents
  • Personal information for all owners and stakeholders
  • General liability insurance
  • Worker’s compensation insurance
  • Contractor license bond

Take Care of Licensing Fees and Renewal

In addition to meeting the licensing criteria, you will have to pay licensing fees. They may be required on an annual or biennial basis, depending on the period of your license. The typical yearly amounts are between $50 and $200. 

At regular intervals, you will also have to renew the license and provide all paperwork to extend its validity.

6. Obtain a Surety Bond

One of the important contractor license requirements that you typically have to meet is to post a surety bond. This is a security mechanism that is often required from professionals in order to guarantee their legal compliance. Being bonded as a contractor is a sign that you are safe to do business with. 

Surety bonds are commonly used in construction– and there are two main types you should keep in mind.

Differentiate Between Contractor License Bonds vs Contract Bonds

The first type of bond that you will need when starting your construction company is contractor license bonds. They are necessary when undergoing your licensing process with state authorities. 

The bond functions as a guarantee that you are a suitable candidate for a construction licensee. It ensures you will adhere to the law in your activities as a contractor.

Licensed and bonded contractors can then bid on public and private projects. For that purpose, you will usually need to post contract bonds. They are required on a project basis and protect the project owners. Contract bonds guarantee that you will execute the contracted work on time and according to the agreed quality.

Understand Surety Bond Claims

Surety bonds don’t protect your business. They are a security mechanism for the state, your customers, or project owners

If you fail to follow the law or to deliver on your contractual obligations, you can end up with a claim against your bond. This is how harmed parties can seek fair compensation for the damages they have suffered as a result of your illegal activities or default on construction work. 

As you are fully liable for all claim costs, it’s best to avoid actions that can lead to problematic situations.

Get a Fair Bond Premium

Your surety bond cost depends on the strength of your personal and business finances. It represents a small percentage of the required bond amount. The main factors that affect it include your credit score, company financials, as well as any fixed and liquid assets you may have. 

The contractor license bond rates for applicants with stable finances typically range between 0.75% and 5% of the bond amount. If you want to pay less for your bonding, make sure you clear out outstanding payments and polish your credit report prior to applying for a bond.

Want to see the exact cost of your contractor license bond? Fill in the short form below! 

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Have more questions about obtaining your contractor license and bonding? You can reach our bonding experts at 877.514.5146

7. Collect the Proper Equipment

When it comes to construction equipment, the spending can go in the millions. At the same time, you cannot start your operations without ensuring you have all the tools you need for doing your job well. 

Obtain the Gear You Need

Balancing between finances and needed equipment can be tough, but there are variants to handle it. You can rent tools at first, or negotiate a borrowing deal with fellow contractors. 

The best option, of course, is to purchase everything you need. For this purpose, it may be worth looking into external funding in case you don’t have initial capital at hand.

If you’re looking for equipment investments for your business, you may want to consider the Small Business Administration’s Loan Program. Other options for funding include getting a business line of credit, a loan from a community bank, or joining a credit union.  

Get the Right Software 

Don’t forget you’ll also need a solid construction management software. It can help a lot, especially if your team is rather small and has to handle numerous tasks at once. 

There are also a number of good project management software options on the market. It’s worth selecting one that fits your trade and specific business needs, as it will tremendously improve your productivity and work organization.

8. Invest in Marketing and Business Relations

A major point in a solid business plan is how your construction company would advertise its services, find customers, and establish a brand name on the market. 

Boost Your Marketing Efforts

Making a name in your field is essential, and you should start working on it from day one. You should allocate resources for your marketing efforts – whether in-house or outsourced, so that you build up your construction brand. 

Creating Your Business Network

It’s important to also forge good working relationships, both among your peers and with current and potential customers, who can refer you to other people too. Joining industry associations is also a wise step in this direction.

Industry events are a good way to meet fellow professionals and potential project leads, as well as to expand your knowledge in your trade. Don’t miss out on frequenting conferences and workshops.

9. Don’t stop expanding your knowledge and skills base

The construction field evolves constantly, with new building materials and methods getting ever smarter and more efficient. The same goes for the way a business can be managed. 

Get continuing education training

If you want to run a successful contracting company, you have to stay on top of the newest knowledge and trends in the field. You also need to be up-to-date with the latest management styles and business strategy. 

Continuing education is a must to achieve that. In addition, the licensing authorities in your area may require you to take training every time you renew your contractor license.

You can seek a contractor certificate program if you want a less intensive training option. If you want to ace your skills, however, you may also consider an associate contractor’s degree or a Bachelor’s degree from a university.

Get started with your contractor business

Launching your construction company is a lengthy process, but knowing the steps helps a great deal in their realization. The actions listed here apply to most contractors in the U.S. They give you a good rough idea of the procedure you will need to follow to become a successful contractor.

 

We’ve summarized the steps above in an infographic format. Have a look and share it with your peers. If you want to embed it on your website, feel free to use the embed code below it!

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Victor Lance is the founder and president of Lance Surety Bond Associates, Inc. He began his career as an officer in the U.S. Marine Corps, serving two combat tours. As president of Lance Surety, he now focuses on educating and assisting small businesses throughout the country with various license and bond requirements. Victor graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan's Ross School of Business.