Starting a subcontracting business is a rewarding venture that combines your specialized skills with business savvy. The barrier to entry can be lower than for other business models, and you can focus on what you do best, but this accessibility does not guarantee success and requires smart planning.
This guide will take you through the practical steps of validating your business concept, securing funding, obtaining necessary licenses, and acquiring the right equipment to help you launch a successful subcontracting business in the U.S.
Step 1: Plan and validate your business
Define your niche and research the market
First, decide on your exact service. A generalist struggles to stand out. Instead, specialize in a niche like high-end residential tiling or commercial HVAC repair. This focus helps you target clients and command better rates.
Once you have a niche, check its viability. Your local Chamber of Commerce and trade-specific groups like the Associated General Contractors of America (AGC) offer valuable market reports. Also, look at competitors on Google Maps or industry databases to see who is already there.
A frequent misstep is to skip this research. You might find your local market is saturated with plumbers but has a real need for skilled finish carpenters. Let the data guide your final decision.
Calculate your startup costs
With your niche confirmed, you can build a realistic budget. Initial expenses for a skilled trade subcontractor often fall between $3,000 and $15,000, but this varies by trade. Your budget should account for a few key areas.
- Licensing and legal fees usually cost between $100 and $500 for state registration and local permits.
- Insurance for your first year of general liability coverage will likely be $400 to $1,500.
- Tools and equipment are the largest variable, from $2,000 for basics to over $10,000 for specialized machinery.
- Marketing basics like a simple website and business cards can cost around $500 to $2,000.
Always add a 15-20% contingency fund to your total. Unexpected costs will happen, and this buffer prevents early financial strain.
Here are 4 immediate steps to take
- Identify your specific service niche, for example, residential electrical work instead of just 'contractor'.
- Analyze three local competitors to understand their pricing and services.
- Draft a startup budget that includes a 20% contingency fund for unexpected costs.
- Contact a trade association in your field to request local market data.
Step 2: Establish your legal and licensing foundation
Choose your business structure
You should consider forming a Limited Liability Company (LLC). It protects your personal assets if the business faces a lawsuit. Profits pass through to your personal tax return, which simplifies tax filing. This structure offers a good balance of protection and simplicity for new subcontractors.
Once your LLC is registered with your state, get an Employer Identification Number (EIN) from the IRS. You will need this free number to open a business bank account, file taxes, and hire employees. The online application on the IRS website takes just a few minutes.
Secure the right licenses and permits
Licensing requirements change based on your state and trade. Check with your state's contractor licensing board for specifics. An electrician in Texas has different rules than a plumber in California. Neglecting this can result in heavy fines and work stoppages.
In addition, your local city or county government will likely require a general business license to operate. These typically cost between $50 and $400 annually. Project-specific permits, like for electrical or plumbing work, are also common but are often handled by the general contractor.
Here are 4 immediate steps to take
- File for an LLC with your state's Secretary of State office.
- Apply for a free Employer Identification Number (EIN) on the IRS website.
- Visit your state's contractor licensing board website to find your trade's requirements.
- Contact your city hall to ask about local business operating permits.
Step 3: Secure your insurance and manage risk
Your first policy should be general liability insurance. Most general contractors require you to carry at least $1 million in coverage. Expect annual premiums to range from $400 to $1,500, depending on your trade and location.
Key policies for subcontractors
With that foundation, you can add other necessary protections. A few policies are particularly important for subcontractors.
- Commercial auto insurance is for any vehicle used for work. Your personal auto policy will not cover accidents that happen on the job.
- Workers’ compensation becomes a legal need in most states the moment you hire your first employee. Rates vary widely by state and the type of work performed.
- Inland marine insurance protects your tools and equipment while in transit or at a job site. Standard property insurance often does not cover this.
Some new subcontractors get a policy that does not meet a general contractor's minimums, which can cause costly project delays. You might want to look at insurers like Hiscox, The Hartford, or Next Insurance since they understand the specific needs of tradespeople.
Here are 4 immediate steps to take
- Request a quote for a $1 million general liability policy.
- Check your state’s workers' compensation board for employee requirements.
- Ask an agent about adding inland marine coverage for your equipment.
- Find a sample subcontractor agreement online to see typical insurance requirements.
Step 4: Set up your workspace and get your equipment
Find your physical base
Most subcontractors start with a home office. Your main concern is material and equipment storage. Check your local zoning ordinances because some residential areas restrict commercial vehicle parking or outdoor storage of materials. A 100-200 square foot commercial storage unit is a good alternative.
When you look at a lease for a small workshop or storage space, ask for a shorter initial term, like six months. This gives you flexibility as the business grows. Also, try to negotiate a gross lease where one flat rent payment covers taxes and maintenance.
Acquire your gear
Your trade dictates your equipment needs. A frequent misstep is buying everything brand new. High-quality used gear from auctions or online marketplaces can reduce your initial spend by 30-50% without a drop in performance. Focus on what you need for your first few jobs.
For a finish carpenter, a starting list might look like this.
- Miter saw: $300 - $800
- Portable table saw: $400 - $1,000
- Professional drill and driver set: $250 - $500
You can find these items at suppliers like Grainger, Fastenal, or local trade-specific supply houses. Open a trade account with them early. This often gives you access to better pricing and credit terms down the line.
Here are 4 immediate steps to take
- Check your local zoning laws for home-based material storage.
- Price out a 150-square-foot commercial storage unit in your area.
- Create an equipment purchase list with new versus used price options.
- Open a trade account at a supplier like Grainger or a local equivalent.
Step 5: Set up your payment processing
Define your payment terms
Establish clear payment terms from the start. For subcontractors, "Net 30" (payment due in 30 days) is common with general contractors. For larger jobs, you should request a 30-50% deposit upfront to cover your initial material costs and secure the booking.
Some subcontractors get stuck with cash flow problems because they did not ask for a deposit. Always include these terms in your written agreement. This protects you and sets clear expectations with the general contractor or client before work begins.
Choose a payment solution
For subcontracting businesses that need to accept payments on-site, JIM offers a streamlined solution. With JIM, you can accept debit, credit, and digital wallets directly through your smartphone. Just tap and you are done. It is a simple way to manage transactions without extra hardware.
At just 1.99% per transaction with no hidden costs, it is a great value. This rate is lower than many other payment solutions, which often charge between 2.5% and 3.5%. It's particularly useful for collecting a deposit on the spot or final payment the moment a job is complete.
- Get Started: Download the JIM app for iOS.
- Make a Sale: Type the sales amount, hit sell, and ask your customer to tap their card or device on your phone.
- Access Funds: Your money is available right on your JIM card as soon as the sale is done. There is no wait for bank transfers.
Here are 3 immediate steps to take
- Draft your standard payment terms, like Net 30, for client agreements.
- Set your deposit policy, for example, a 40% upfront payment for jobs over $1,000.
- Download the JIM app to see how it works for on-the-go payments.
Step 6: Secure your funding and manage finances
Explore your funding options
The Small Business Administration (SBA) is a great starting point. Their Microloan program offers up to $50,000 and is well-suited for startup costs. Interest rates typically range from 8% to 13%. These loans are often more accessible than traditional bank loans for new businesses.
Another route is equipment financing. Lenders are often more willing to approve these loans because the equipment itself serves as collateral. This can be a smart way to get your gear without a huge upfront cash payment. Many equipment suppliers have financing partners.
A business line of credit is also useful for managing cash flow. It gives you flexible access to funds to cover materials or payroll while you wait for client payments. You only pay interest on what you use, which helps manage costs.
Plan for your first six months
You will need enough working capital to operate for three to six months before revenue becomes consistent. Calculate your total monthly expenses like insurance, fuel, and materials. If your monthly burn is $5,000, you should have $15,000 to $30,000 in the bank.
A frequent mistake is underestimating cash needs. General contractors often pay on Net 30 or even Net 60 terms. Without a cash buffer, you could find yourself unable to buy materials for the next job. This is a common reason new subcontractors fail.
Here are 4 immediate steps to take
- Research SBA Microloan lenders in your state.
- Ask your top equipment supplier about their financing options.
- Calculate your total monthly operating expenses to determine your 6-month working capital goal.
- Open a dedicated business checking account to separate your finances.
Step 7: Hire your team and set up operations
Your first hire will likely be a Skilled Laborer or an Apprentice. Depending on their experience, you can expect to pay between $20 and $35 per hour. You might want to look for candidates who already have an OSHA 10 safety certification.
A frequent misstep is to hire someone without a practical skills test. Have them perform a basic task during the interview. This simple check confirms their ability and can save you from expensive rework on a real job site.
Streamline your daily workflow
With a team member on board, you need to coordinate your work. Project management software built for trades, like Jobber or Fieldwire, lets you schedule jobs, track hours, and share notes from the field. Basic plans typically start around $49 per month.
As you bid on jobs, aim to keep your labor costs between 20% and 40% of total revenue. This is a common benchmark in the trades and helps ensure each project is profitable. It also signals when you can afford to expand your team.
Here are 4 immediate steps to take
- Draft a job description for a Skilled Laborer with your target pay rate.
- Create a simple, hands-on skills test for your interview process.
- Sign up for a free trial of a management app like Jobber or Fieldwire.
- Calculate your target labor cost percentage to use in future bids.
Step 8: Market your business and find clients
Build relationships with general contractors
Most of your work will come from general contractors. You can connect with them at local meetings for groups like the Associated Builders and Contractors (ABC). Introduce yourself, collect business cards, and follow up with a brief email introducing your services.
Establish your online footprint
GCs will look you up before they call. A simple one-page website with photos of your work is enough. Also, claim your free Google Business Profile. This puts you on the map and lets clients leave reviews. A professional online presence shows you are a serious business.
Use targeted outreach
Do not wait for the phone to ring. Identify 10-15 local general contractors who do the type of work you specialize in. Send them a professional one-page capabilities statement that outlines your skills and insurance coverage. A 5-10% response rate is a solid start.
Here are 4 immediate steps to take
- Join a local trade group like the ABC or AGC and attend one meeting.
- Create a free Google Business Profile for your company.
- Draft a one-page capabilities statement with your services and insurance details.
- List 10 local general contractors to contact this month.
Step 9: Price your services and create bids
Choose your pricing model
You have two main options. A Time and Materials (T&M) contract bills for your actual hours and material costs. This model protects you on jobs with unknown variables. A Fixed Price bid offers one total price for the entire project, which clients often prefer.
Many new subcontractors get burned on fixed-price work. They forget to include costs for things like fuel, waste disposal, or an extra trip for supplies. Your bid must account for every single detail to protect your profit on these jobs.
Calculate your costs and profit
Your price should cover direct costs, overhead, and profit. Start with your materials and apply a markup. A 30-50% markup is standard. This means a part that costs you $100 is billed to the client for $130 to $150.
After you cover all costs, you need to add your profit. Aim for a net profit margin of 15-20% on each job. If your total costs for a project are $4,000, a bid of $5,000 gives you a 20% profit margin ($1,000 profit).
Here are 4 immediate steps to take
- Decide if you will use a Time and Materials or Fixed Price model for your first jobs.
- Set your standard material markup, for example, 40%.
- Calculate your target profit margin for each bid, like 20%.
- Create a simple bid template with sections for labor, materials, and overhead.
Step 10: Maintain quality and scale your operations
Establish your quality standards
Your reputation is your most valuable asset. A key metric to watch is your callback rate, the percentage of jobs that need a return visit for fixes. You should aim to keep this under 5%. Also, track if you complete projects on time and within budget.
While not always mandatory, trade-specific certifications build trust. Credentials from the National Center for Construction Education and Research (NCCER) show general contractors you are serious about your craft. This can give you an edge over competitors.
Know when to grow
Growth should be deliberate. A clear sign to hire is when you turn down over 20% of qualified leads for two consecutive months. Another is when you personally work over 50 hours a week just to keep up. This pace is not sustainable.
Many subcontractors make the mistake of expanding too fast, which hurts their quality. It is better to grow at a pace that lets you maintain high standards. For equipment, consider a purchase when your monthly rental costs for an item exceed 10% of its purchase price.
As you add jobs and people, you will outgrow spreadsheets. This is the time to adopt dedicated accounting software like QuickBooks Online. It helps you manage more complex payroll and job costing, which is vital for profitable growth.
Here are 4 immediate steps to take
- Track your callback rate for one month to set a quality baseline.
- Research one trade-specific certification, like an NCCER credential.
- Calculate how many qualified leads you turned down last month.
- Review your equipment rental receipts from the last quarter to spot buying opportunities.
You now have the steps to launch your subcontracting business. Your relationships with general contractors and your on-site professionalism will define your success more than anything else. Focus on being the reliable expert they can always count on, and the work will follow.
As you manage your cash flow, a simple payment process helps. JIM lets you accept cards right on your smartphone for a flat 1.99% fee, with no extra hardware. It keeps things simple so you get paid fast. Download JIM and get ready.
