Breaking Into Commercial Construction

Commercial construction covers a huge swath of construction projects. Projects range from retail spaces to tenant upgrades and public works. Developers and GCs can fill their entire calendars with commercial construction jobs and can therefore be appealing to expand into commercial projects, especially if your existing portfolio is struggling or shrinking. 

Breaking into the commercial development field is far more complicated than simply scaling up your budgets and crew size. In this article, we’ll take a look at the basics of commercial construction and strategies for breaking into the field.

What is commercial construction?

Commercial properties are buildings primarily used for business. This includes retail buildings like box stores and malls, as well as residential apartment buildings containing more than five units. Office buildings, doctors’ offices, banks and sports/music venues are also commercial buildings.  

Commercial buildings must adhere to strict safety, environmental and accessibility requirements that don’t come into play on residential projects. Fire safety measurements need to be in place, including using fire resistant materials, fire protection systems and clearly marked emergency exits. The Americans with Disabilities Act (ADA) dictates accessibility requirements for commercial buildings. 

The cost of commercial projects is generally higher than residential, which means GCs are taking on far more risk. There are much stricter regulations for prequalification, including an increase in bonding capacity. Approval from local governing bodies and councils is typically necessary to qualify for financing. 

Getting Into Commercial Contracting

The paths GCs take into commercial construction typically follow two trajectories. Either an existing GC decides to expand their portfolio, or workers decide to start their own company. 

Expanding Construction Portfolios

Work on residential jobs is tied to many factors including the health of the economy and the desirability of your area and can ebb and flow with the market. In comparison, demand for commercial projects is typically more stable. This could make expanding into a commercial market enticing to GCs who have primarily worked in residential. 

Beyond mitigating any losses from shrinking markets, there are few construction companies that want to stay stagnant. Companies are always trying to insulate themselves by booking a backlog of work and expanding their book from previous years. With this kind of expansion, though, companies need to make sure they don’t overpromise and underdeliver. 

Contractors looking to break into commercial construction typically focus on a version of what they already do, or bring in a partner with a specialty in the industry who can speak with credibility in the space. 

Starting a New Commercial Construction Company

When starting a new company, workers with project management and superintendent and estimating skills typically leave an existing GC. Early on in a small company, workers may wear several different hats across different departments — HR, safety, financials, payroll or procurement. 

New general contractors may operate at a loss in this early stage, which can last up to a year and a half, even in a successful venture. Ensuring that bids are fair and accurate is critical at this point. Underbidding or overbidding on a project could easily put a new company out of business. 

Utilizing a good construction management software during this stage can be immensely helpful. Software helps streamline communication and make sure the entire team has easy access to the correct information. 

Growth and Expansion Strategies

GCs expanding into the commercial market often start by securing smaller projects in areas they already feel comfortable and then incrementally working towards larger, more complicated ones. Contractors often focus on specific market segments, such as restaurant renovations, tenant improvements, or big box retail constructions, to build a steady stream of work and establish a name in the industry. 

Expansion also necessitates strategic hiring. Bringing on individuals with expertise in commercial projects to lend credibility and forge important connections is key. Additionally, contractors must be mindful of their bonding capacity, which can act as both a qualifier for larger projects and a barrier to entry for newcomers. 

Bonding Capacity and Insurance Challenges

When taking on larger commercial jobs, GCs will need to obtain both insurance and bonds — both of which can be difficult to get early on in the commercial space. 

Bonds are purchased by the GC from a surety company to protect the project owner from potential losses due to performance, financial or warranty issues. A company’s bonding capacity refers to the amount of credit a surety company is willing to extend. Typically a surety will look at three years of third-party vetted financial statements when deciding whether to extend a GC an initial bond. 

Additionally, in commercial construction GCs need to do substantially more administrative work than on small residential projects. All subcontractors must carry a certificate of insurance (COI) insuring them for the dollar amount of the project and the region they are working in. They also need to have proper licenses for the jurisdictions of the projects. It’s the GC’s responsibility to keep all of this paperwork in order. 

Entering Joint Ventures

GCs just entering into the commercial construction space might opt to enter into a joint venture (JV) – where two or more companies join together to tackle a project. Joint ventures are particularly advantageous when one party has more connections, but perhaps not the bonding capacity or size necessary to tackle a project, while the other needs connections and has size. 

Typically, the larger company or the one taking on the most risk will take a majority of the profit – 80-20 or 60-40 splits are the norm. A JV allows new GCs to build your book of business, as well as their brand and credibility in the space while also providing insulation from some risk. 

Building Essential Relationships

Community

Commercial construction more than residential requires the buy-in and support of community members. Community boards need to approve new builds and Authority Holding Jurisdictions (AHJs) have the final say on many aspects of a project including approvals and inspections. Therefore having ties with these specific bodies is of the utmost importance. 

Subcontractors

Sometimes subcontractors can establish themselves in the commercial construction space long before a new GC breaks into the industry. It’s possible that they’ll have critical connections and knowledge. Additionally, subcontractors might have four crews of five people and they know which ones are their A team, B team, C team and D team. 

Building and maintaining a strong relationship could mean getting that A team rather than getting stuck with less sophisticated teams. 

Vendors

Having a relationship with a vendor can mean the difference between having an order filled in a timely manner, and losing money because of a long wait. If a large company is buying 1,000 yards of concrete today and a smaller company is ordering 10 yards of concrete, the vendor is probably going to care more about the 1,000 yards and the 100 trucks that need to go out carrying it. Without a relationship, an order for 10 yards of concrete could get pushed down a long list of other contractors’ needs. Respecting vendors and establishing solid relationships with them can ensure they will respect a GCs schedule and need for materials and supplies. 

Management Skills and Project Scaling

The order of operations is the same no matter the size of the project – surveying, grading, foundation, framing, rough in, sheet rock, ceilings is about the same on all vertical construction projects. Where GCs can get tripped up is knowing where that scaling breaks. Commercial projects aren't one-to-one to residential projects – a project that’s twice the amount of money doesn’t necessarily mean it will take twice the amount of manpower, liability insurance or material. 

Regardless of the size of the project, though, good construction management is good construction management. What that means is the GC’s should enable their teams to have access to the right information at the right time and to work in concert with each other.

The biggest job of a GC is to maintain job site culture – on large commercial projects that can mean getting 15 to 20 trades to work together and not step on each other’s toes. Additionally on large job sites, GCs won’t be able to personally oversee every step of the project, so it’s even more important to empower subcontractors to create a safe and collaborative environment. 

Logistics and Fleet Management

After establishing themselves in a commercial space, GCs may choose to begin to purchase their own equipment or storage space. As companies scale in this way, they become intricately involved in logistics, essentially operating as specialized coordination entities, ensuring materials and equipment are delivered just in time to the job site to avoid costly delays or storage fees. 

Effective fleet management is essential for earthwork and infrastructure contractors, as they must not only keep expensive machinery operational, but also track maintenance costs and optimize asset allocation. 

When purchasing large equipment, GCs must weigh whether they have the capability to manage a fleet of vehicles and equipment efficiently, tailored to various job site needs and locations. This necessitates a keen industry insight to identify gaps in the market where the right piece of equipment can carve out a lucrative niche for the contractor.

Navigating the Commercial Construction Landscape

A big part of entering the commercial construction landscape is learning what that existing landscape looks like, who the competitors are and what kind of relationships they already have. At the end of the day, GCs are resources to owners, vendors and subcontractors in bringing together different providers. 

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