You’ve earned your chops, are acing your craft, and love being an electrician. But wouldn’t it be nice to be your own boss, make your own schedule, and build your own customer base?
If you are thinking of starting your electrical contracting business, read on. In this guide, we will help you navigate the process of starting an electrical contracting business, providing you with valuable insights and practical steps to get you started.
An electrical contracting business specializes in providing electrical installation, repair, and maintenance services in residential, commercial, and industrial properties. Most electrical contractors specialize in new building construction wiring work, but they also handle renovation projects, repairs, maintenance services, and electrical system upgrades.
To generate revenue, electrical contractors charge clients for labor, equipment, and materials, plus a markup. Profitability hinges on the business’s ability to secure contracts, efficiently manage projects, and maintain a steady flow of clients through quality service and reputation.
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The electrical contractors industry in the United States comprises over 239,000 companies, with combined annual revenues exceeding $233 billion.1 The industry is highly fragmented, with most electrical contracting companies firms employing fewer than 20 people. Industry growth is tied directly to construction activity and the overall economy.
There will always be a need for electrical work, which makes starting your own electrical contracting business a comparatively sound and stable choice. However, as infrastructure ages across the US, demand for renovations and upgrades is expected to increase as property owners invest in energy efficiency and modernize outdated electrical systems. Between 2022 and 2032, the employment of electricians is projected to grow at an annual rate of 6%, outpacing broader economic growth.2
Steps To Start An Electrical Contracting Business
Step 1: Obtain Necessary Qualifications
To set the foundation for your electrical contracting business, the first step is to research and obtain any necessary certifications and licenses that allow you to provide electrical contracting services. Licensing regulations for electricians and electrical contractors vary widely across different states, counties, and cities. In most areas, you will need to acquire certification as either a master electrician or a master electrical contractor, which can involve several years of experience and passing an exam.
Determine the time it will take to become properly certified and licensed in your region. In the meantime, you can begin tackling the other startup steps.
Step 2: Write a Business Plan
You may have the technical expertise and skills, but starting a successful business requires more than that. This leads us to our next step: creating a business plan. Unfortunately, many entrepreneurs tend to skip this step, which can lead to costly mistakes and potential failure down the line. The business plan is more than just a document that a lender would require. It can serve as your roadmap, helping you navigate through the complexities of establishing and running your electrical contracting business.
One section of the plan to focus on is market research. Including market research in your business plan provides valuable insights and helps uncover trends, competition, and customer preferences, enabling you to develop targeted marketing strategies and gain a competitive edge.
Analyzing your competition is another key area of your business plan. The electrical contracting industry is competitive, and there will always be other players who will be going after the same customers. The business plan can give you a competitive edge by potentially finding less competitive services, setting a more effective pricing strategy, and differentiating yourself from the competition.
Another section to mention is the financial projections. Not only will lenders be interested in the projections, but this section gives you a picture of your electrical contracting business’s startup costs and financial feasibility. It has you research the equipment, materials, and resources needed to start your business, in addition to analyzing the income and expenses of the business.
Related: How to write a business plan
Step 3: Source Funding
When starting an electrical contracting business, getting your funding in place is an important step to turning your aspirations into reality. This can be a challenging step and may take longer than expected, so starting early is important. Here are some common funding options to consider:
Personal investment: Using your own savings to fund your business is a common way to start, so take a look at how much personal money you have available to finance the business. If personal savings isn’t enough to cover the startup costs, outside funding sources will be needed. Some of the most common include:
Lenders: Seeking funding from lenders is a very common option when starting a business. Lenders typically require borrowers to invest at least 15% of their personal funds towards the total project cost, have a good credit score, and provide sufficient collateral. In some cases, if the bank requires additional security, they may require a Small Business Administration (SBA) loan guarantee.
Home equity loans: If you have significant equity in your home, this can be an effective source of financing for your business.
Business credit cards: Business credit cards can provide short-term financing for smaller expenses, though this funding often comes with high-interest rates if not paid off quickly.
Friends and family: Another potential funding source is reaching out to friends and family who are willing to invest in your electrical contracting business. Clearly define terms and repayment plans to maintain relationships.
Microloans: In cases where traditional lending options are unavailable or for smaller funding needs, microloans can be a viable alternative. These loans are offered by local economic development organizations and may come with additional benefits such as business training alongside financial support.
Step 4: Register the Business
Starting an electrical contracting business involves taking care of several legal and administrative steps to ensure the business is properly registered. Requirements will vary by location, but here is an overview of what to work on:
Choose a business structure: The first step in registering your business is deciding on its structure. There are four main types of business structures:
- Sole proprietorship: This is the simplest business structure, where one individual owns and runs the business. The advantage of a sole proprietorship is the ease of startup and lowest cost. However, the owner is personally liable for all business debts and lawsuits.
- General partnership: In this structure, two or more people share ownership of the business. Like the sole proprietor, each partner contributes to all aspects of the business and shares the liability.
- Corporation: A corporation is a legal entity separate from its owners and protects its owners from personal liability. The downside is cost and administrative requirements.
- Limited Liability Company (LLC): Offers the liability protection advantages of a corporation without most of the administrative requirements.
Related: Comparison of business structures
Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular LLC formation services include:
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Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.
During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.
Obtain licenses and permits: As an electrical contractor, you’ll need to obtain the necessary licenses and permits. This often includes a contractor’s license and an electrician’s license at the state level, which may require passing an exam and meeting certain experience requirements. Additionally, depending on where work is being done, many towns and cities have different requirements for electricians.
Also, depending on your location, a variety of general business registrations will likely be needed before launching the business. These could include a business license, seller’s permit, and Employer Identification Number (EIN).
Related: What licenses do electricians need?
Step 5: Set Up Operations
With funding secured and the business legally established, it’s time to shift your focus to the operational side of things.
For many electrical contractors, a home office is sufficient at the start, especially since you’re providing services on-site at clients’ locations. Be sure to verify your location complies with zoning laws, especially if you’re working from home since some areas have restrictions on operating businesses in residential areas. If a physical space is necessary (for example, for storing equipment or as a base for multiple employees), consider factors like accessibility, proximity to clients, and cost.
Next, it’s time to purchase or lease any tools or equipment that you don’t already have. This may include vehicles, electrical tools, safety gear, and office equipment. Also, begin setting up accounts with suppliers of the materials you’ll need for customer jobs.
Step 6: Hire Staff (if needed)
As an electrical contracting business owner, if you’re planning to hire employees, there are several responsibilities you need to be aware of as an employer. Here is a basic overview of the requirements.
Obtaining an EIN: An Employer Identification Number (EIN) is a unique identification number assigned by the IRS. It is required for tax purposes and allows you to report and pay employment taxes. You can obtain an EIN by applying online through the IRS website.
Employment eligibility: Before hiring employees, you must verify their eligibility to work in the United States. This involves completing Form I-9, which verifies the identity and employment authorization of each employee.
State hiring requirements: Each state has different forms and reporting requirements that you must take care of when hiring employees.
Worker’s compensation insurance: Worker’s compensation insurance is typically required by most states. It provides coverage for medical expenses and lost wages in the event of work-related injuries or illnesses.
Labor laws: Familiarize yourself with federal and state labor laws that govern various aspects of employment, such as minimum wage, overtime pay, breaks, and other rights and obligations of both employers and employees.
Step 7: Prepare to Launch!
Now that the core steps of starting an electrical contracting business are in place, there are a few additional tasks that may still need to be addressed. They will vary based on individual needs but generally include the following:
Business insurance: For electrical contractors, common types of insurance may include general liability insurance, which covers third-party injuries or property damage, and commercial auto insurance if you use vehicles for work.
Setting up bookkeeping: Establish a system for handling daily transactions, taxes, and financial statements. This could involve hiring a bookkeeper or using accounting software such as Wave Accounting (FREE) or Quickbooks.
Contracts: You’ll likely need various contracts, such as service agreements, project contracts, and subcontractor agreements, if you’re hiring other contractors. RocketLawyer and Law Depot have free and inexpensive templates that may be helpful.
Opening a business bank account: This helps in separating personal and business finances, making it easier to manage cash flow and financial reporting.
Purchasing industry-specific software: There are several software options tailored for electrical contractors, such as ServiceTitan, Housecall Pro, and Jobber. These tools can assist with job scheduling, dispatching, invoicing, and more.
Accepting credit cards: Setting up credit card processing allows your customers to make payments conveniently. Merchant service providers like Square or Stripe can make it easy to collect payment while on the go.
Creating a marketing strategy: Develop a marketing plan to introduce your business to potential customers. This could include building a professional-looking website and designing eye-catching business cards and flyers. You can also network with general contractors to gain valuable referrals.
Common Questions When Starting An Electrical Contracting Business
How much does it cost to start an electrical contracting business?
The cost to start an electrical contracting business can vary significantly based on location, scale, and specific business needs, in addition to the amount of equipment already owned. However, a general estimate to kickstart an electrical contracting business can range from $20,000 to $50,000. Here is a breakdown of the estimated costs
Equipment: The most significant expense is typically equipment, including tools, vehicles, and safety gear. This can range from $10,000 to $50,000, depending on the quality and quantity of equipment needed.
Location: Rent or lease costs for your business location, plus any renovation or build-out costs, can vary widely. Figure on a minimum of $1,000 to $5,000.
Equipment: The cost of equipment can be one of the most significant expenses for an electrical contracting business. This includes everything from tools and safety gear to vehicles. Depending on the scale of your operations, you could spend anywhere from $5,000 to $50,000 on equipment.
Business registration: The cost of registering a business can vary depending on the state and the type of business entity you choose. Generally, you can expect to pay between $50 and $500 for business registration fees.
Insurance: Initial costs for business insurance, including general liability, workers’ compensation, and commercial auto insurance, can range from $1,000 to $3,000
Marketing: Initial marketing costs, including creating a logo, website, and promotional materials, can range from $500 to $2,000
How profitable is an electrical contracting business?
Estimating the profitability of an electrical contracting business involves considering various factors such as revenue sources, operating expenses, and market conditions. For illustrative purposes, let’s make some assumptions:
Revenue: Assume the business secures small to medium residential and commercial projects. On average, a small electrical job (like a residential repair or minor installation) might charge $150-$300, while larger projects (like full home rewiring or commercial installations) can range from $2,000 to $10,000 or more.
If the business completes an average of 10 small jobs per month (averaging $225 each) and 2 large jobs per month (averaging $6,000 each), the monthly revenue would be: 10 x $225 + 2 x $6,000 = $2,250 + $12,000 = $14,250. Annually, this equates to $14,250 x 12 = $171,000 in revenue.
Expenses: Key expenses include equipment maintenance, vehicle costs, insurance, marketing, utilities (if operating from a physical location), and employee salaries (if applicable).
Assuming annual expenses break down as follows:
– Equipment maintenance: $2,000
– Vehicle costs: $4,000
– Insurance: $3,000
– Marketing: $2,000
– Utilities: $1,200
– Employee salaries (2 employees at $40,000 each, totaling $80,000)
The total annual expenses would be $2,000 + $4,000 + $3,000 + $2,000 + $1,200 + $80,000 = $92,200.
Profit: Subtracting the total annual expenses from the annual revenue gives the annual profit: $171,000 – $92,200 = $78,800.
These numbers are hypothetical and can vary greatly based on a number of factors.
What skills are needed to run an electrical contracting business?
Professional expertise and competence: Staying up to date and adhering to relevant codes and local requirements is perhaps the most critical part of running a successful electrical business.
Keeping in touch with the latest innovations and emerging trends and showing your affiliations and certifications will help you assure customers that they will get top-notch, professional know-how and advice.
Excellent organizational skills: A positive can-do attitude, attention to detail, and solid organizational skills are vital in this business. Of course, you are your own boss, so you can decide how much – or how little – you want to work and what contracts you’d like to take on. But there will always be an urgent need for this work, and you may be called in after hours or on weekends.
Regardless of your workload, you must organize your time well and plan each work project to meet your customers’ requirements and expectations. Good time management is part of good customer service, which, in turn, will ensure repeat business and will help expand your brand through word of mouth.
Good time management also means you assign time to look after your business administration, meet with potential clients, develop your marketing, and keep up with quotes and invoicing.
What is the NAICS code for an electrical contracting business?
The NAICS code for an electrical contracting business is 238210.
The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.
Related: What is a NAICS code?