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How To Start An Excavating Company

How To Start An Excavating Company

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How To Start An Excavating Company

How To Start An Excavating Business

Do you work in construction but are tired of working for other people?  Perhaps you’ve considered various construction businesses that you could start so that you can work for yourself.  

Starting an excavating business can be a lucrative endeavor, especially with the consistent demand for earthmoving services. This article aims to guide prospective entrepreneurs in their journey, providing in-depth insights and practical steps to establish and manage their own successful excavating business.

Business Overview

An excavating company usually works with residential or commercial customers for site preparation to prepare land for building and for building foundations. They may also demolish existing structures, dig trenches to improve drainage, or prepare land for roads.  They utilize heavy equipment to remove debris, clear the land, and dig holes for spaces like basements or sewers.

These tasks are essential in various fields including residential and commercial construction, infrastructure projects, and environmental restorations. Running such a business necessitates not only substantial capital for equipment and machinery but also the understanding of stringent industry regulations and the complexities of project management. To remain competitive and profitable, business owners must cultivate skills in cost estimation, contract negotiation, and workforce management, alongside maintaining high safety standards and operational efficiency.

Industry Summary

According to IBIS World, the revenue of the excavating contractor industry has 49,584 businesses and generates $80.6 billion in revenue as of 2023, though growth has been mostly flat. Excavation contractors have relied on a healthy housing market for a large portion of business. With interest rates increasing, the number of new builds may be slowing.

Steps To Start An Excavating Company

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If you’re thinking about starting an excavation business, it’s important to do your research first. Here is a checklist to help you get started.

Step 1: Research the Market

Investigating your potential customer base and market demand is an integral step when planning to start an excavating business. Here are several strategies and resources that can help:

Local Building Permits and Construction Data: Monitor the local building permits issued by your local government or municipality. This data will give you a sense of how many projects are going on in your area that might require excavation services. Publicly accessible records can also show the trend of growth or decline in construction over time.

Industry Reports and Forecasts: Review industry-specific reports and forecasts from market research firms like IBISWorld or MarketResearch.com. These provide a comprehensive overview of the market size, growth rate, competition, and trends in the excavation and construction industry.

Networking: Participate in local industry events, trade shows, or join professional organizations like the Associated General Contractors of America (AGC) or the National Utility Contractors Association (NUCA). These can provide excellent opportunities for networking and learning more about potential clients’ needs and how well they are being served by existing businesses.

Competitor Analysis: Conduct a thorough analysis of your potential competitors. Identify their clients, services, pricing, and market positioning. This can provide useful insights into the overall demand, gaps, and opportunities in the market.

Online Platforms: Use online platforms such as Google Trends to determine the volume of search queries related to excavating services in your region. High search volumes may indicate strong demand.

Local Planning and Development Agencies: Get in touch with local planning and economic development agencies. These institutions can provide insights into upcoming infrastructure or development projects that could create demand for excavating services.

Remember, sufficient market demand is just one aspect of starting a business. You also need to consider your ability to compete in terms of price, service quality, experience, and more. Carefully analyze the gathered data and make a decision based on comprehensive research.

Step 2: Write a Business Plan

After researching that there is a market for your services, the next step in starting your excavating business should be to write a business plan. The business plan will make you focus on some important aspects of the business, such as who your customers are, how you plan to reach them, projecting sales and expenses, your value proposition to use for marketing, and more. You’ll also calculate your startup and ongoing expenses.

Not only will a bank require you to have a business plan if you need financing, but multiple studies have shown that having a good business plan increases the odds of starting a successful business.

Related: How to write a business plan

Step 3: Secure Financing

Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start an excavating business is another.  In order to get a loan, the borrower(s) will need to have good credit and be able to invest 15-25% of their money towards the total start-up costs.

Sources of funding can include traditional bank loans, Small Business Administration (SBA) loan guarantees, microloans, investment, and more.

To help reduce startup costs and make sure you are purchasing the right pieces of equipment, consider initially renting equipment and attachments instead of purchasing. Bids can be based on the rental rate of equipment and then simply return when done. This way, you aren’t left paying for equipment that may not be needed. Once there are enough customers that would keep the equipment moving, the decision of what equipment to purchase is much easier.

Related: Finding the money to start a business

Step 4: Establish Pricing

Determining the right pricing strategy for an excavating business requires a thorough understanding of your operating costs, the market rate, and your value proposition. Here are some tips from the perspective of a business owner in this industry:

Understand Your Costs: The first step to determining your pricing is understanding your cost structure. This should include all your variable costs (fuel, maintenance, operator wages, etc.) and fixed costs (insurance, loan payments, office expenses, etc.). Having a detailed understanding of your costs will give you a baseline for your pricing.

Consider Equipment Depreciation: Excavation equipment is expensive and depreciates over time. Make sure you factor in depreciation costs when setting your pricing as at some point your equipment will need to be replaced.

Study the Market: Research your competitors and understand the going rate for excavation services in your target market. This will give you a sense of what customers are willing to pay.

Value-Based Pricing: In addition to simply covering your costs, consider the value you’re providing to the customer. If your business offers something unique—such as specialized services, exceptional speed or quality, or advanced, efficient equipment—you may be able to charge a premium.

Project Complexity: Every excavation project is different. The complexity, risks involved, and the duration of the project should also be factored into your pricing. For example, a project that requires specialized equipment or has to be completed in a short time frame might warrant higher rates.

Seasonality: The excavation business can be seasonal in nature, especially in regions with harsh winters. You might need to adjust your pricing to account for slower business during off-peak seasons.

Price for Growth: Your pricing should also take into account your future growth plans. If you plan to invest in new equipment or hire more staff, your pricing needs to provide enough margin to fund these expansions.

Lastly, keep in mind that pricing is not a one-time decision. You should continually review and adjust your prices as your costs, the market, and your business evolve.

Step 5: Apply for Business Licenses and Permits

The next step in starting your excavating business is to make sure it’s properly registered and legal to operate. It’s important to note, however, that the exact process can vary from state to state, so you’ll need to check the specific requirements for your location. Here’s a general guide to the key registrations:

Form a Business Structure: The first thing you’ll need to decide is what business structure is best for your business. This could be a sole proprietorship, a partnership, a limited liability company (LLC), or a corporation. Each of these structures has different implications for liability, taxes, and administrative complexity. Many small business owners opt for an LLC because it provides personal liability protection and has fewer administrative requirements than a corporation.

Related: Comparison of business structures

Register Your Business Name: 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 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.

Related: Finding a domain name for your business

Obtain Business Licenses and Permits: Excavating work may require a contractor’s license.  This may be at the state level or in each city or town that you are working in.  You and your employees may also need to be licensed to run certain pieces of equipment as well. Depending on the size of equipment, a CDL may also be required to get it to the job site.

Related: What licenses do excavating businesses need?

In addition, you may need certain licenses or permits to operate. This could include a business license, sales tax license, and Employer Identification Number (EIN).

Related: State guides for business licensing

Step 6: Get your Marketing Plan in Place

Marketing an excavating business effectively requires a strategic mix of traditional and digital techniques. Building a strong local presence is key, as many of your clients will be based in your local area.

Participating in local events, networking with local builders, contractors, and suppliers, and advertising in local media can significantly raise your profile.

Equally important is establishing a strong online presence. A professional, user-friendly website that clearly outlines your services, past projects, and client testimonials can provide potential clients with valuable information and build trust in your services. Listing your business on online directories and Google My Business can improve your visibility in local search results.

Social media platforms, particularly visually-focused ones like Instagram, can also be beneficial for showcasing your work. To maximize the impact of social media, regularly post photos and updates of your projects to engage with your audience.

Another effective marketing strategy is to build partnerships with complementary businesses, such as construction companies and landscapers, who can refer clients to you. Your main source of customers, however, will likely be referrals from general contractors and landscapers. Since this may take some time to build, you may need to take a lot of small jobs to build name recognition and trust.

Related: Low-cost ideas to market a new business

Step 7: Hire Employees

As an excavating business grows and takes on more projects, hiring the right team becomes increasingly important. Having competent, experienced employees can significantly improve the efficiency and safety of your operations, impacting the overall success of your business. The hiring process is more than just finding people to operate your equipment; it’s about building a team that understands your business objectives and contributes to your growth.

Employee Types and Wages
Typically, an excavating business will need to hire the following types of employees, with their wages varying greatly based on experience, region, and the specific job role:

Equipment Operators: These are the employees who operate the heavy machinery. Their wages can vary widely based on the type of equipment they’re certified to operate. The median pay for construction equipment operators in the U.S. was about $48,290 per year, according to the Bureau of Labor Statistics.

Laborers and Helpers: These employees assist in various tasks on the job site. Their median annual wage was around $37,000.

Foremen or Supervisors: These are experienced employees who oversee operations on the site. They’re generally paid more than operators or laborers due to their additional responsibilities.

Administrative Staff: Depending on the size of your business, you might also need to hire office workers to handle tasks like scheduling, invoicing, customer service, and more.

Hiring and Training Tips: When hiring and training staff for an excavating business, keep these specific tips in mind:

Certifications and Licenses: For equipment operators, ensure they have the necessary certifications or licenses to operate the machines they’ll be using.

Safety Training: Safety is crucial in the excavating business. All new hires should undergo a comprehensive safety training program, and regular refreshers should be part of your ongoing training efforts.

Machinery Specific Training: Each type of excavating machine requires specific skills to operate efficiently and safely. Provide thorough training for all machinery an employee will be expected to operate.

Related: Hiring your first employee

Step 8: Prepare to Launch

Starting an excavating business is a significant undertaking with various moving parts to consider. While each business will have different requirements, there will likely be several additional tasks to wrap up before launching their business. A few of these include:

Insurance: Ensuring your business is a non-negotiable step. You’ll need to cover your equipment, general liability insurance for potential property damage like hitting underground utilities or due to injuries on site, and workers’ compensation. Always consult with an insurance advisor who understands the specific risks of the excavation industry.

Related: What insurance do excavation businesses need?

Bookkeeping: Proper financial management is crucial. Consider hiring a bookkeeper, accounting software such as Wave Accounting (FREE) or Quickbooks.

Bidding Software: There is software tailored to the construction industry to help manage your finances, track expenses, manage invoices, and prepare for taxes.

Contracts: Contracts are vital in the excavating business. They outline the scope of work, timelines, payment terms, and responsibilities of each party. A good contract can protect your business from disputes down the line. Examples of industry-specific contracts might include excavation and grading contracts or soil removal agreements. It’s best to work with a lawyer to ensure your contracts are legally sound. RocketLawyer and Law Depot have free and inexpensive templates that may be helpful.

Bank Account: Set up a business bank account to keep your personal and business finances separate. This is critical for managing cash flow, paying bills, accepting payments, and accurately tracking your income and expenses.

Payment Methods: It’s essential to establish your payment methods. In the modern business environment, many customers prefer to pay with credit cards or through digital transfers. Make sure your business is equipped to accept these forms of payment by setting up a merchant account.

Starting an excavating business is a unique journey for everyone. The steps may be the same, but the path will vary based on your location, market, and personal goals. These tips are a starting point, and as you move forward, always be open to learning, adapting, and improving.

Greg’s Tip: If you don’t have a lot of experience in the business, before investing a lot money, I would suggest doing some side jobs with rented equipment to find out the price points and if you really want to own this type of business.

While you aren’t going to make much, if any money, after the rental fees, it’s better to test your idea before investing in expensive equipment.

Greg's Business Tip

Excavating Business Startup FAQs

How much does it cost to start an excavating business?

Starting an excavating business can require a significant upfront investment. Here are some of the key costs to consider:

Equipment: The bulk of your startup costs will be for excavating equipment like backhoes, excavators, loaders, and dump trucks. A new backhoe can cost anywhere from $30,000 to $150,000, and an excavator can range from $100,000 to $500,000, depending on the size and capabilities of the machine. You may be able to reduce these costs by buying used equipment or leasing.

Insurance: Insurance costs will vary based on the value of your equipment, the number of employees you have, and the specifics of your operations, among other factors. The annual cost could range from a few thousand dollars to over $10,000.

Licenses and Permits: Licensing and permit costs will depend on your location. This could range from a few hundred to several thousand dollars.

Office Space: You’ll need a place to store your equipment and conduct office duties. The cost of leasing or buying a suitable location will depend on your area’s property prices.

Operating Expenses: Your operating expenses will include employee salaries, fuel for your equipment, maintenance costs, marketing expenses, office supplies, and more. These costs will vary depending on the specifics of your business but can run into thousands of dollars each month.

Since this type of business is seasonal, the availability of jobs tends to go down in cold weather. Because of the seasonality, be sure to budget for downtimes as bills continue to come in, even if you aren’t able to work. It’s generally recommended to keep three to six months of operating expenses on hand as a buffer. This can help you cover unexpected costs or keep your business running during slow periods. Depending on your monthly operating costs, this buffer could easily be $50,000 to $100,000 or more.

Given these factors, starting an excavating business can easily cost several hundred thousand dollars. However, this can vary widely based on a multitude of factors, including the size of your operations, your location, the condition of your equipment, and more. Always create a detailed business plan and budget before starting your business to ensure you have a realistic understanding of the costs involved.

How much can an excavating business owner make?

The income of an excavating business owner can vary significantly depending on several factors, including the size and location of the business, the number of projects completed in a year, the types of projects undertaken, and the efficiency of the operations.

Generally, excavation companies price their services based on the job type, the equipment required, the labor involved, and other overhead costs, which include insurance, marketing, office expenses, and more.

The average price per job for a small excavating business can vary depending on the size and difficulty of the job. Small excavating jobs can cost about $100 per hour, while larger jobs can range between $1,500 and $5,000

So, as a simple example, suppose an average excavation job nets a profit of $2,000 after accounting for all costs (including equipment, labor, and overhead). If the company can complete an average of 5 such jobs per month, the monthly profit would be $10,000. Over the course of a year, assuming this level of constant demand, would translate to an annual profit of $120,000.

However, it’s important to remember that this is a simplified example and actual profits can vary widely. The excavation business can be cyclical with busy and slow periods, and unexpected expenses can crop up, such as equipment repairs or market fluctuations. Furthermore, growing the business may require reinvesting a portion of the profits back into the company, for example, to purchase additional equipment or hire more staff.

To determine a more accurate estimate, a business owner should calculate their potential earnings based on their specific circumstances and business plan, taking into account their local market conditions, pricing structure, and projected number of jobs. Consulting with a financial advisor or accountant can also provide a clearer picture of potential earnings.

What skills are needed to run an excavating business?

There are several specific skills that you will need to open an excavating business.

Experience.  Experience in excavating is critical, and if you have any management experience as an excavation contractor, it’s a plus.

Business knowledge and experience.  You will need to have at least some basic knowledge of marketing, finance/accounting, and human resources.

People skills. You’ll need to be able to build rapport with your customers so that you retain them as customers and keep them coming back.

What is the NAICS code for an excavating business?

The NAICS code for an excavating business is 238910, which is categorized under Site Preparation Contractors.

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?

How To Start An Excavating Company

How To Start An Excavating Company

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