The top 5 mistakes to avoid when creating your construction company

Setting up your own construction company? Here's what to avoid

The construction industry is booming — with almost one in five of the UK’s 5.5 million small businesses operating in the sector. This goes to show that if you’re in this industry, there’s a huge incentive to go alone and set up your own construction company.

There’s also no shortage of opportunities for business owners to-be. Residential renovation, ground-up development, project managing, public infrastructure projects (to name just a few): whatever your speciality, micro-businesses (those with 10 employees or fewer) are busy making money in all corners of the construction sector.

There’s a wide range of work behind starting a construction company, however. From HMRC notification through to arranging your finances, and outside of the construction side of things, putting in the groundwork helps to ensure your business gets off to a smooth start. 

With this in mind, here’s our rundown of some of the most common early-stage hazards — and how to avoid them.

1. Not pinning down your service offering

As you’ll know if you’re setting up your own construction company, all new firms need a business plan. In it, you set out the essentials: notably, the services you intend to offer, who your intended customers are and your charging structure. Here’s why this is especially important for start-up building firms:

• Clear boundaries for the work you take on: in real life, there is no such thing as a ‘Jack-of-all-trades’. It’s tempting when you first start out, but taking on any and all jobs that come your way can mean getting bogged down in unprofitable work — or finding yourself out of your comfort zone (and damaging your reputation as a result).
• Identifying skill gaps: once you’ve set out what you are capable of doing in-house, it helps you identify the further skills your business will need. For instance, as a joiner who intends to specialise in kitchen refurbishment, who’s going to handle the tiling? At the start, it’s often a case of building up a network of traders who you can call upon as and when required – with a view to employing staff of your own further down the line.

2. Not thinking about your business structure

It’s worth giving this attention right from the start — especially if you want to draw a clear line between your personal and business finances, and even more so if you are going into business with someone else.  

There are three main business structures to consider:

• Sole trader: the simplest business type, whereby there’s no legal distinction between ‘you’ and ‘your business’.
• Partnership: where there are multiple owners, a partnership agreement is essential for setting out the rights and obligations of each partner (a must for avoiding disputes further down the line).
• Limited company: this can be a useful alternative to a partnership where there multiple people with a stake in the business – including sleeping partners. The ‘ltd’ assignation that you are entitled to use if you set up a company can also help to give your business a valuable professional feel.

Your existing income and tax circumstances can also have an impact on the best structure to use. As such, it’s always worth getting accountancy advice at an early stage.

3. Not having access to business borrowing

Even when snow stops work, cherry picker hire charges still have to be paid. What’s more, there will always be “that customer” who forgets to send through their interim payment on account when they promised you it was in hand.

Business running costs have to be paid no matter what — and becoming your own boss usually leads to a crash course on cash flow management. That’s why it’s worth opening a small business bank account at an early stage. In particular, with an overdraft (and possibly a loan) facility in place, you have the reassurance of knowing that funds are available if you unexpectedly find yourself in the red. In other words, a cash ‘plug’ is there if you need it!

4. Overlooking the HMRC essentials

As a sole trader, partner or a company director, you need to register for income tax self-assessment (you can do this here).

If your turnover is likely to be above the VAT threshold, which is currently £85,000, you will also need to register your business for VAT with HMRC. For most work, VAT is charged at the standard rate of 20%, but reduced and zero rates apply for certain types of work (e.g. new builds and work for disabled people). Take a look at the HMRC guide to VAT for builders for further information on this.

5. Ignoring your reputation

For growing your customer list, word of mouth is invaluable for any up-and-coming construction firm. In fact, it can be far more effective than a swish website and expensive ads. So right from the beginning, it’s worth focusing on the following:

• Get listed on a specialist construction review site: Checkatrade and Ratedpeople are two popular examples. That said, it’s always worth researching the most widely used platforms in your local area to ensure maximum exposure.
• Nudge happy customers to leave a review: getting reviews from your customers is incredibly important — it shows that your construction work is good, and helps potential clients trust you.
• Make a great impression: let’s say you’ve been hired for a loft conversion. Best practice involves introducing yourself to the neighbours and checking things like parking needs and nap times for toddlers. But this is also a valuable marketing opportunity. It gets those neighbours thinking about the potential works they were mulling over — and demonstrates that you are exactly the type of considerate, up-front builder they would like to hire (and of course, you happen to be right on their doorstep!).  

What next?

If you’re considering setting up as a limited company, or if you need to register for VAT or acquire an accountant, we’re on hand to help. Our formation packages can help to take the stress away from the formal parts of setting up your construction company — so if you’re interested in finding out more, just head over to the register a company page for more information.