How to Start an Excavating Business

Overview

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.  An excavating business could be a profitable opportunity for you to consider.

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.

Industry Summary

According to IBIS World, the revenue of the excavating contractor industry is $80.2 billion as of 2021 and has grown annually by 4.4% for the last five years. The strong housing market and the number of new builds have driven this growth.  It is, however, expected to decline .1% in 2021, in part due to the end of government stimulus.

Industry Trends

The construction industry is expected to increase 8% in 2022, which should lead to continued growth in the excavating market.  The industry is very sensitive to market fluctuations because, during economic downturns, both residential and commercial new builds decrease.

Target Market

Your target market will generally be construction companies, both commercial and residential, but you may also have residential homeowner customers for projects such as driveways.

Checklist for Starting an Excavating Business

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: Write a Business Plan

After coming up with the idea, 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 need to do some research to calculate exactly what your startup expenses will be and what your ongoing expenses will be.

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. Writing the plan helps you to think through all the aspects of the business and then serves as a guide as you begin.

Related: How to write a business plan

Step 2: Form a Business Entity

A business entity (also referred to as a business structure) refers to how a business is legally organized to operate. There are four primary business structures to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

When deciding on which business entity is best for an excavating business, it normally comes down to the sole proprietorship and Limited Liability Company.

A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
 
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.

That leaves the sole proprietorship and LLC.

The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is that the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.

Related: Guide to forming your LLC
 

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:


IncFile - $0 plus state fees & free registered agent for 1 year!

IncAuthority - $0 plus state fees & free registered agent the first year!

ZenBusiness - $49 plus state fees & free registered agent for 1 year!

Step 3: Name the Business

Finding the perfect excavating business name can be challenging. Not only does the name have to reflect what you do and be appealing to customers, but it also has to be available to use. You can check your state’s website to see if the name is available and register your name.  Your name should make you stand out, reflect your brand, and tell potential customers exactly what you do.

Step 4: Select your Location

The ideal location would be close to construction companies so that you can network with them.   Otherwise, your location just needs adequate space for your equipment.

Related: Choosing a business location

Step 5: Apply for 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.

In addition, your business may also need some general registrations as well such as a business license, sales tax permit, and an Employer Identification Number.  

Related: Common business licenses, permits, and registrations by state

Step 6: Find 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.

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 7: Open a Business Bank Account

Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
 
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.

Step 8: Get your Marketing Plan in Place

An excavation business will need to set aside a budget to cover marketing costs on a continuous basis. Common marketing techniques for an excavating business include social media marketing and online advertising.  Developing a website can be a significant expense, but it will give you the necessary online visibility.

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

One important marketing task is developing an online presence. A website developer may be out of the budget, but Wix makes it easy for non-technical people to get a website running quickly and affordably.

Step 9: Get Business Insurance

There are several types of insurance to consider when starting an excavating business. A few of these include:
– General liability insurance can help protect you from third-party claims of bodily injury and property damage.
– Surety bonds (sometimes referred to as a performance bond) may be required, depending on the job. Commercial and state jobs will often require one and is a form of insurance that if the bond’s requirements are not met, such as not performing contracted work or failing to pay suppliers or vendors, a claim may be filed against the bond.
– Worker’s compensation insurance covers expenses like medical bills and legal fees that a business might face if an employee were ever hurt while working.

The costs to insure an excavating business will vary on several factors. To get the most accurate idea of what to budget for insurance, request quotes from multiple providers. When comparing the quotes, consider not only the premiums but also how the plan exclusions, coverage limitations, and deductibles compare.

Related: What types of insurance does an excavating business need?

Step 10: Hire Employees

You will need employees to help you run your excavating business.  Make sure that you select people with appropriate experience and licenses.

In addition to payroll costs, your budget will also need to include other employee-related expenses. Workman’s comp insurance, unemployment insurance, and paid time off are common expenses that a business will need to cover when hiring staff.

Related: Hiring your first employee

Step 11: Set up an Accounting System

Setting up an accounting system for your excavating business is critical to the long-term success of your business.

Staying on top of taxes not only keeps the business out of trouble with the government but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up the accounting for your business

The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:

- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.

Find bookkeepers in your local area or use a service like 800Accountant.

How much does it cost to start an excavating business?

Here are some of the typical costs you will face when you open an excavating business.
– Excavation equipment such as mini excavators, bulldozers, backhoes, cranes, dump trucks, trailers, etc., and tools $10,000 – $100,000 +
– Space rental large enough to store equipment $2,000 – $5,000 per month
– Licenses and permits $1000 +
– Insurance $500 – $2000
– Initial marketing such as Facebook ads or search engine optimization for your website $500 -$1000

How much can an excavating business owner make?

It’s difficult to predict the revenue of an excavating company.   Large companies make millions of dollars in revenue per year.  If you are a smaller company and average $10,000 per job (which can vary greatly) and you did 1 job per week, you would make $520,000 in revenue per year before expenses.

It is important to point out that this business is seasonal, and will vary depending on your location. Be sure to budget for downtimes as bills continue to come in, even if you aren’t able to work.

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.

Are there grants to start an excavating business?

It’s extremely rare to find a grant to start an excavation business. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.

Legitimate federal grants can be found at Grants.gov, and you can check on your state’s economic development office to see if they have any grants available.

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?

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