Starting a General Contractor Business: Licenses, Bids and Cash Flow

Licensing, registration and legal setup

Requirements vary widely by state and sometimes by city. Contact your state contractor licensing board first, then register your entity and obtain an EIN.

Some states require a general contractor license at almost any job size. Others only license above a dollar threshold or leave it to counties and cities. Many require passing a trade and business exam, proof of experience, and proof of insurance or a bond.

Steps to take in order:

1. Check your state licensing board for classifications and thresholds.
2. Choose and register an entity. Read how to choose a business entity.
3. Get an EIN and open a business bank account.
4. Apply for local permits and business licenses.
5. Confirm whether you need workers compensation coverage, which is required for employees in most states.

Working without a required license can bring fines and make contracts unenforceable, so confirm first.

Insurance and bonding

Most general contractors carry general liability, workers compensation, commercial auto and often an umbrella policy. Some jobs require surety bonds for bids or performance.

Clients and licensing boards want to see coverage before you start. Common policies:

• General liability for property damage and injury claims
• Workers compensation for employees
• Commercial auto for work vehicles
• Builder's risk for projects under construction, sometimes bought by the owner
• Tools and equipment coverage

A surety bond is a guarantee to the project owner that you will complete the work. Public projects often require bid, performance and payment bonds. Bond approval looks at your credit, financial statements and experience. Learn more in types of business insurance.

Pick a lane before you bid

Choose the project types you can estimate accurately: commercial tenant improvements, light industrial, repairs, or specialty work. Narrow focus improves bids and margins.

New contractors fail by bidding outside their experience. Choose a lane where you know the costs and the people.

A note on residential: many funders restrict residential remodeling and new residential construction, so if your work is mostly home building or remodeling, expect fewer financing options and plan to rely more on your own cash and customer deposits. Commercial and repair work generally has more options.

Understand the full cost of a project before you bid, including permits, change orders, overhead and the time between spending and getting paid. Our guide to bidding construction jobs covers the process, and SBA loans for construction shows what lenders think about the industry.

Estimating and job costing

Price each job from real costs: materials, labor, subs, equipment, permits, insurance, overhead and profit. Track actual costs and compare them with the estimate.

Illustrative example for a $100,000 job: materials $28,000, direct labor $22,000, subcontractors $20,000, permits and equipment $5,000, insurance and overhead allocation $10,000. That is $85,000 in cost, leaving $15,000 profit, or 15 percent. A 10 percent materials overrun costs $2,800 and cuts profit by nearly a fifth.

Habits that protect margin:

• Add contingency for unknowns.
• Write change orders for any scope change, with price and approval before work starts.
• Record job costs weekly.
• Review each finished job to improve the next estimate.

See construction accounting for the methods that suit contractors.

The cash flow squeeze: pay first, collect later

You often pay crews weekly and suppliers in 30 days, while clients pay on milestones or net 30 to 60. Retainage can hold back a share until the end of the job.

This gap is why profitable contractors run short of cash. Suppose a job pays in three milestones, with the last 10 percent held as retainage until completion. You may fund payroll and materials for weeks before the first payment arrives.

Protect cash with these practices:

• Collect a deposit before mobilizing.
• Tie draws to clear milestones and invoice the day each is reached.
• Negotiate supplier terms.
• Limit how much work you take on in parallel to what your cash can support.
• Know your lien rights and deadlines in your state.

Read what a lien is and keep paperwork tidy for every job.

Hiring crews and managing subs

Use written subcontract agreements, collect insurance certificates and keep worker classification correct. Misclassifying employees as contractors can cost more than the payroll saved.

Most general contractors rely on subcontractors for trades. Before a sub starts, get a signed agreement with scope, price, schedule and payment terms, plus a certificate of insurance and a W-9. Pay on milestones tied to inspected work.

Be careful about classification. The IRS and state agencies look at control, tools and independence to decide whether someone is an employee. Ask an employment attorney or accountant if you are unsure. Our post on the 1099 lifestyle explains the contractor side of the relationship.

When financing helps a growing contractor

Working capital, a line of credit or equipment financing can fund payroll and materials between milestones, or a truck or machine. They fit established contractors with proven revenue.

ROI Funder considers businesses with 6+ months in business, $20,000+ monthly revenue and 500+ FICO. That means a brand-new contractor generally needs savings or other startup sources first. Many funders also restrict residential remodeling and new residential construction, so we cannot promise funding in those niches.

For established commercial and repair contractors, illustrative example: you win a $150,000 job that needs $40,000 of materials and payroll before your first draw in 30 days. A short-term product that costs $4,000 in total might make sense if the job earns $22,000 in profit. A line of credit suits repeating gaps, and equipment financing suits trucks and machines. Compare options in construction lines of credit.