When a construction business owner makes a choice to expand the company's existing scope of operations into states beyond the company's "home" state, that owner frequently fails to consider what is often one of the more critical steps in multi-state expansion-licensing.
General contractors are often surprised to learn that states in which they seek to operate are unwilling to grant them reciprocity for the licenses they currently hold in their home states. Subcontractors are also often surprised to learn that certain states require them to obtain contractor licenses even when the work is performed under the supervision of a general contractor. Many construction business owners assume they are under no obligation to obtain licensure prior to bidding for contracts outside their home state. In some states, that is a mistaken assumption that can result in civil, and even criminal, penalties. Below are examples of questions that can arise when a construction business expands outside its home state. Also provided is some guidance for avoiding the pitfalls that await the unwary in the multi-state licensing minefield.
My Company has a License in My "Home" State-Won't That Cover Me Wherever I Go?
Many states require general contractors (commercial or residential) to obtain licenses at the state level. Additionally, specialty contractors who do not work under the supervision of a general contractor are also required to obtain contractor licenses in many states. Certain states go so far to require subcontractors to obtain licenses regardless of whether the subcontractors work under the supervision of a general contractor or not. Electrical, plumbing, HVAC and certain other special skilled trades are also required to be licensed in most states. Other states set minimum threshold values for the jobs performed in their states as the determining factor for whether a license is required. A business owner should evaluate whether a license will be required in a particular state in which the owner seeks to do business based upon (a) the anticipated value of the job(s) to be performed in the state, and (b) the role of the business on the job(s)-general contractor, specialty contractor or subcontractor (and if so, whether the subcontractor will be working under the supervision of a licensed general subcontractor).
Can I at Least Bid on a Job in Another State Without a License?
In some states, yes; in others, no. For example, Louisiana requires all contractors who submit bids in amounts of $50,000 or more to be licensed in the classification for which they bid. Likewise, Mississippi requires that all bids submitted for public projects in excess of $50,000 and for private projects in excess of $100,000 must contain the contractor's license number on the front of the bid envelope. Thus, contractors must determine the particular state's laws regarding licensing before even submitting bids in the state.
I Plan to Submit a Job Bid Next Week-Can I Get My License Before Then?
All too often, a contractor is faced with the harsh financial reality of losing out on what could have been a lucrative contract because the contractor fails to take into consideration the lead time necessary to obtain a license in the state where the job will be performed. Unfortunately, many contractors mistakenly believe obtaining a license in a "foreign" state is as simple as submitting a copy of the "home" state license with a simple application. This is typically not the case.
Instead, many states require submission of detailed applications, which may require the following and more:
- Reviewed financial statements prepared and submitted by the company's CPA
- Certificates of general liability and workers' compensation insurance listing the state contractor board as additional insured
- Detailed equipment and asset listings
- Summaries of litigation (prior and pending)
- Banking information
- Supplier references
- State licensing board disciplinary records
The company is normally required to qualify to do business in the state (through the state's Secretary of State and/or Department of Revenue) and apply for appropriate tax identification numbers (sales, income, unemployment, etc.). Further, many states also require the contractor or its company representative to sit for one or more trade or business examinations and participate in training courses.
After all of those requirements are met, the state contractor licensing board approves the application and issues the license. In some states, the board only considers licensing applications at its periodic meetings. Those meetings sometimes occur as infrequently as once per calendar quarter. In those states, a contractor's failure to file its application by a meeting deadline could result in a delay of over three months before the application will even come up for consideration. Thus, it is crucial that contractors include licensing into the initial planning for multi-state expansion to avoid stumbling blocks in the process.
I've Heard My License Will Get Me "Reciprocity" In Another State. What Does That Mean?
Reciprocity can have a different meaning from state-to-state, but typically it refers to the state's willingness to accept the contractor's proof of licensure in the contractor's home state for purposes of waiving an examination requirement. Reciprocity is normally limited to a very few states with which the licensing state has entered into "reciprocal agreements." Reciprocity does not allow the contractor to simply "register" the home state license in the foreign state. The contractor must still go through the application process and meet all other applicable licensing requirements. Also, the licensing state may not waive all examination requirements. The contractor may still be required take the business/law or trade examination. The contractor will usually still be required to participate in any required training courses as well.
What Is Involved In The Examination Process?
The examination process varies from state-to-state. Some states require the contractor to first pass the required trade and business/law examination prior to submitting an application to the state's contractor licensing board. The contractor includes the examination results with the licensing application. Conversely, other states require the contractor to first submit an application to the licensing board. The board then makes a determination regarding the required examinations and sends that information to the contractor. The contractor must then successfully complete the examination and submit the exam results to the licensing board.
If the contractor is an individual, he or she sits for the exam. If the contractor is an entity, its principal (corporate officer, LLC member/manager, partner, etc.) is the "qualifying party" that must sit for the exam.
The exam proctors vary depending upon the testing companies and sites approved by the state's licensing board. The exam proctors will identify appropriate study materials as well as those materials that the qualifying party may bring into the exam-many states allow "open book" exams.
Can't I Just Work Under Someone Else's License Number for This One Job?
Bidding or working under someone else's license number is clear-cut fraudulent, unlicensed activity, punishable as same, and just not worth the risk-not even for "just one job."
Even if the contractor owns an interest in the licensed company, bidding under a name other than as licensed is considered unlicensed activity. The contractor must bid in the name as licensed (the licensed legal entity) and, in some cases and in some states, the contractor could then subcontract to the unlicensed entity.
This Licensing Seems Like a Big To Do About Nothing-What's The Worst That Could Happen If I Don't Comply With The Licensure Laws?
Many contractors mistakenly believe the worst that can happen to them if they perform work without a license is they will have to pay a small fine and then they can carry on business as usual. Don't make such a careless and costly assumption. While unlicensed contracting indeed will subject you to monetary fines and penalties in most states, that may be the least of a contractor's concerns. Examples of other penalties include the following:
In Tennessee, a contractor who contracts or bids without a license is ineligible to be awarded the project, is thereafter ineligible for a license for six months and is also subject to monetary fines. Not only does the contractor lose the job he currently is bidding on, but he is suddenly ineligible for jobs in that state for at least six months.
In North Carolina, a contractor who files or presents the license of another, uses an expired or revoked license or attempts to contract or bid without a license can be criminally prosecuted for a Class 2 misdemeanor. The state licensing board may also obtain an injunction to stop work on the contractor's project. As any contractor knows, that can result in substantial liquidated damages if the project is delayed beyond the owner's required completion date. It could also result in the owner calling the contractor's performance bond, canceling the contract or taking other "terminal" measures.
Louisiana also retains the right to suspend or revoke the license of a contractor for violations of its licensing laws, and it also may debar a contractor from future work in Louisiana and issue cease and desist orders to stop work for certain activities.
Once I Obtain A License, How Often Must I Renew It? What If I Fail To Do So?
As with any business license, the contractor license must be renewed on a periodic basis, typically annually or bi-annually. The renewal process usually requires payment of a renewal fee and submission of appropriate renewal application forms to verify continued financial responsibility, maintenance of required insurance and other licensure requirements. As you might expect, the process for renewal is much more streamlined than the initial licensing process.
The state licensing board will revoke the license of a contractor who fails to renew the license within the required renewal time frame. Some boards will issue a warning letter prior to such revocation, others do not. A contractor whose license has been revoked must either submit an application for reinstatement of its license, or in some states, the contractor is required to begin the application process all over again. Thus, it is essential that a contractor maintain its licenses in the multiple states in which it operates (or will likely operate in the foreseeable future).
Bottom line-when expanding a construction business into other states, it is imperative that the contractor analyze and determine what will be required as far as licensing is concerned. Failure to do so can result in significant financial losses, both of potential contract revenues and of fines and penalties if a contractor participates in unlicensed activity.
Construction Business Owner, May 2008