The first year as a contractor is unlike anything that comes after it. You’re building a business while simultaneously doing the work, which makes you feel like you’re wearing seven different hats at the same time. It’s exciting and exhausting. It’s also why the contractors who come out of year one with momentum tend to be the ones who plan ahead and get the right foundational pieces in place.
If you want to be one of the contractors with a successful first year – and not one of the many who stumble out of the starting gates – you need to do a few things well. Let’s take a look together.
Price Your Work Correctly From the Start
Pricing might be the single most important decision you’ll make in your first year. (At the very least, it influences everything else that happens downstream.) It’s also one of the things that new contractors get wrong most often.
The instinct is to come in low to win jobs and build a client base. And while that logically makes sense, it can create other problems. When you underprice your work, you’re training your market to expect a rate that isn’t realistic. It makes raising prices later much harder. Plus, it strains your finances in the short-term and makes it difficult to stay afloat.
Your pricing needs to account for more than just your time on the job. You have to factor in things like materials, fuel, insurance, tools, vehicle costs, taxes, and the hours you spend on tasks that don’t happen on a job site. Build a real cost model where you know exactly how much time you’re spending on a job and all of the inputs that go into it. Your price should cover that number with margin left over.
Not sure where to start with this? Talk to other contractors who have been at it longer. You don’t want to copy their pricing, but you should pick their brains to understand how they think about setting rates and bidding on jobs.
Get Your Insurance Sorted Immediately
Operating without proper insurance as a contractor is both risky and illegal. One accident on a job site and you’re exposed to costs that could be expensive enough to put you out of business. You’re going to need a good policy at the foundation of your business.
Rather than settling for a one-size-fits-all policy that wastes money on irrelevant coverage, contractor insurance can be tailored to the specific risks of your trade. That flexibility matters because a roofing contractor has very different risk exposure than an electrician or a painter. Getting the right coverage for your specific trade protects you without overpaying for things that aren’t relevant to your work.
Beyond having basic liability policies in place, talk to an insurance professional about what additional coverage makes sense given the type of work you do. Get this handled before you take on your first client.
Manage Your Cash Flow Like Your Business Depends on It
Cash flow problems kill more first-year contracting businesses than anything else. Here are a few habits that prevent this from becoming a crisis:
- Require deposits before starting work. A deposit of 30 to 50 percent on materials and work is standard in most trades, and most clients expect it.
- Invoice promptly. The day the work is complete or the milestone is reached, the invoice goes out. Every day you wait to send an invoice is a day added to when you get paid.
- Keep a cash reserve. In the early months, this is difficult, but building even a small buffer of operating cash gives you the ability to absorb a late payment or an unexpected expense without it turning into a full-blown crisis.
There are obviously other steps you can take to avoid preventable cash flow issues. However, if you just start with these, you’ll be better off than 90 percent of contractors who just sort of “wing it” and hope for the best.
Build Systems Early, Even Simple Ones
You don’t need expensive software or elaborate processes in year one. But you do need some kind of system for managing the core functions of your business. Building those habits early is way easier than trying to retrofit them later when you’re busier.
At a minimum, you need a reliable way to track estimates, schedule jobs, communicate with clients, manage invoices, etc. A simple project management tool or even a well-organized spreadsheet paired with a calendar can do the job.
Adding it All Up
The temptation in the first year is to say yes to everything. However, it’s best if you’re a little selective with your approach. This allows you to focus on the type of work that you do best (and produces the strongest margins for the business).
The first year is a foundation. What you build on top of it depends largely on how solid that foundation is. If you get these things right, you’ll come out ahead.
