The construction sector is a major economic segment in the US that offers around 7 million job openings annually. The US construction market is valued at $1.31 trillion, which is one of the largest in the world. It’s not surprising why many ventures in this industry through general contracting.
Different Types of Construction Projects
Qualified contractors can take on various types of construction projects. In general, these projects can be broadly categorized as either public or private.
- Public construction projects refer to those funded by the government, either federal, state, or locally. These can be highways, bridges, roads, buildings, and anything that the government commissions.
- Private construction projects are every type of construction owned or commissioned by private parties, such as individuals, homeowners, companies, organizations, etc. In short, anything that is not funded by the government. These projects come in different sizes, scope, and complexity. Hence, private construction projects are also divided into different sub-categories that include residential, industrial, and commercial construction
- Residential construction refers to any project related to homes or residential facilities but is limited to 3 or 4 units. There are various residential construction projects available to contractors, such as building from out-of-the-ground, renovation, expansions, etc.
- Industrial construction comprises a small segment of the private construction sector. These are often major engineering projects with highly technical specifications such as manufacturing plants, refineries, power plants, etc. Usually, industrial projects are also considered commercial construction as they are owned by a company.
- Commercial construction is a broad sub-classification that covers diverse types of projects. Any buildings, establishments, or edifices intended for commercial purposes fall in this category. These include shopping centers, hospitals, condominiums, grocery stores, restaurants, private schools, sports facilities, etc. The project may vary depending on the scale or complexity of construction work. Commercial projects can be small-scale (office space, building renovations, structure updates, build-outs, and other construction work requiring minimal manpower), medium-scale (building expansions, remodeling of commercial buildings, structural redesign, and other projects that require major work), or large-scale (ground-up constructions or other major projects that require intensive planning, time, and execution.)
Due to the wide variety of projects in commercial contracting, one may think that it is the most profitable category of private construction. But is it really better?
First off, the commercial construction market segment has relatively fewer competitors compared to the residential segment. According to tenant build-out contractors from AFS General, Florida, contracts in this sector (particularly large-scale projects) require sophisticated equipment, robust manpower, and hefty capitalization. As such, fewer contractors take on commercial and institutional buildings.
On the other hand, if you decide to be fully dedicated to commercial contracting, you need to have deep financial resources. Commercial construction projects are larger and require bigger capitalization. Clients would normally prefer contracting companies with a proven track record. Hence, if you are new in the market, landing your first contract as well as future projects might take some time. In the residential construction sector, projects are smaller in scale and experience is not a major issue.
Having said that, the debate as to which market segment is more lucrative brings us to the pros and cons of commercial contracting.
Pros and Cons of Commercial Contracting
Commercial contracting pros
- Diverse nature and scale of projects
- Larger contracts offer more stable employment
- All project follow safety and building regulations
- More detailed project specifications and programs
- Develop connections with various business entities
- Opportunities to learn new things and grow professionally
- Projects are managed by team/s of construction professionals
- An equitable market as clients look at qualifications, experience, and bids
Commercial contracting cons
- Extended payment terms
- Long-running projects that can be affected by external factors
- Working with various sub-contractors and team members
- Pricing based on bids
- More complicated contracts and legal implications
- Voluminous paperwork
- Meticulous and complex project details
- Costs on retention, bonding, pre-qualifications, insurance
Whether you specialize in residential or commercial contracting, both segments have their unique rewards and drawbacks. This makes it extremely difficult (and even impossible) to definitely tell which one is better.
Is Commercial Contracting the Most Profitable Market?
In terms of profitability, a general contractor’s profit would depend largely on how you run the business. In construction, profits don’t just come instantly and are not generic. The sector just doesn’t work that way.
Many factors can affect the profitability of a contractor, regardless of whether it’s a residential or commercial contract. Some aspects that can affect your profitability include your company’s productivity, cost-efficiency, access to affordable suppliers, sub-contractors, and providers, financial obligations, and management and organizational culture. You can start with razor-thin margins and eventually turn your general contracting company into a multi-million company. With the right approach, you can achieve these goals.
Whatever your preference, there are opportunities in the various segments of the construction industry. Building a name based on respect, expertise, and track record will benefit you. It requires a personal approach, communication, dedication, and time. Perhaps, the best segment is the one where you are most satisfied and allows you to grow financially, professionally, and personally. Work on construction projects that will serve your overall business goals and personal preferences.
Better yet, you can take a variety of construction projects. Many general contractors dabble in multiple segm