The benefits of pursuing projects outside of your home state can certainly outweigh the risks, as long as contractors carefully consider the common pitfalls of operating away from home. A contractor’s failure to comply with the unique laws of an individual state may not only make the difference in whether a project ends profitably, but it may also prevent a contractor from returning to the same state to pursue future opportunities in the same community. Innocent mistakes can lead to contractor losses and distractions when those lessons are learned the hard way. For example, Tennessee has severe restrictions against engaging in any form of contracting without a license. The simple act of offering to work on a project can result in costly consequences.
In one case, a general contractor who submitted a proposal to build a facility for an owner before the GC obtained its license was strictly prohibited from doing any work on that particular project, even after it obtained a license. To make matters worse, the contractor later learned that moving forward with the owner of the project in any capacity was considered a continuing violation of Tennessee laws and regulations. In another example, a GC was eager to start a project in Pennsylvania. The GC carefully followed its preconstruction checklist, but that same checklist did not include a unique and important Pennsylvania provision, the Stipulation Against Liens, that alerts all subcontractors and suppliers that they cannot secure a lien on the project. This stipulation places the burden on the subcontractors to secure payment in other ways or forego the project.
When issues with the project arose, several subcontractors filed liens, and the GC was required to discharge them under its hold harmless clause to the owner. As a result, the contractor was forced to cover the cost of posting release of lien bonds and other actions—the cost of not including the Stipulation Against Liens—which exceeded $50,000. These state-specific regulations can cost a contractor valuable time and money. By addressing the following seven key areas before offering to sign on to a project outside of your home state, you can protect your business from costly regulatory surprises.
- Corporation laws—State laws define how corporations, partnerships and other business entities are set up and outline their responsibilities. How the entity is set up may affect its liability. For example, if a contractor and designer create a joint entity for design-build projects, there may be unique criteria for properly structuring the venture.
- Business registration—All states require businesses to register before transacting business in that state. However, what constitutes “transacting business” changes from state to state. The fees and taxes imposed can be steep for failing to register when the state decides you should have. Not filing can also leave a company powerless to pursue or defend claims in that state. Ensure that all issues of that state are addressed. Often, registration documents are returned without being filed because of issues in the forms.
- Licensing—After registering your business, you have to find out what licenses and permits the state requires you to have for that particular project. Without the proper licenses, the contractor could be forced to forfeit payments for work already done and even refund payments already received. The contractor can also be fined several thousands of dollars a day for each day it operates without a license. This puts the GC at risk for not being able to get licenses for future projects.
- Lien laws—All states permit contractors who supply labor or materials for a project to claim a lien against the improved property. But each state may define differently what constitutes improvements, what steps must be taken to preserve or prevent lien rights from being enforced, when and where liens have to be filed, how parties are notified and what types of liens
- State taxes—Failing to fully understand a state’s taxes and assessments can cost you time, money and damage your business’s reputation. Keep current on state taxes to avoid tax liens against property or payments.
- Indemnification laws—Indemnity is a powerful tool to offset the risk of litigation in construction projects. However, some states do not recognize limit indemnity agreements or limit the permissible scope of an indemnity. In states that contain such limitations, the language has to be correct or the entire clause can be unenforceable.
- Prompt payment laws—States often dictate how and when individuals and subcontractors are paid for services and labor. These prompt payment laws can vary depending on whether the project is public or private, the type of payment and who pays. In California, for instance, laws regulate payments between owners and contractors as well as contractors and subcontractors, specifying deadlines and penalties for each.
Contractors enter new markets for a variety of reasons. Whether your company is following a national client to its project or expanding its reach in its region, care must be taken to get it right the first time. To make it equally as advantageous for you as a contractor, fully investigate the state’s laws before you ever cross state lines.