Licensing in the construction industry is often viewed as a roadblock to “business-as-usual.” Understandably, with a need to bid on and deliver projects within tight schedules, owners of construction firms may have little time or energy to devote to the complexity of licensing compliance requirements across states. However, failing to comply with state licensing requirements can adversely impact a contractor’s ability to get paid on time (if at all). It can even stand in the way of long-term profitability.
As a matter of course, then, the most effective way to avoid payment, legal, and many other noncompliance issues is simply to pursue licensure where required. The focus of this post is not to compare or to analyze state-specific requirements. Instead, we’ll discuss how to frame compliance in a positive light and how to make compliance part of a proactive strategy for growth.
Ensuring Licensing Compliance During the Bidding Process
Let’s imagine the following scenario. Your firm is bidding on a large project in a new state. As the deal enters its final stages, you discover that proper licensure is required to submit the proposal, and the due date is Friday. That’s doable, your management team says, the new state must be as easy as our home state, right?
The answer to that question depends on your level of preparation for this exact scenario. Clearly, without the proper licenses in place in time, you could lose the opportunity to a competitor.
When applying for a contractor license in a new state, a number of factors may delay or stall out the process, including whether:
- The legal entity has foreign qualified and appointed a registered agent
- A new state does or doesn’t allow for reciprocity of another state’s license
- Qualifiers have not completed their examinations or met work experience requirements
- The company submitted the correct applications and all attachments, which may include surety bonds, proof of liability insurance, and financial statements
- External factors impact licensing, such as board meeting schedules (which can happen irregularly) and agency processing times, which draw out the licensing process over weeks or months
From this non-exclusive list, it’s readily apparent that proper licensure should be part of the planning process. Firms should accept RFPs and seek additional projects only when they understand the requirements of the new state and have time to comply. By doing so, the answer to the above scenario truly becomes, “No problem!”
Vetting for Licensing Compliance During the Selection Cycle
When it comes to business relationships, it’s common sense to vet vendors and contractors based on competency and culture fit. When it comes to the construction industry, it’s just as important to select vendors and contractors that meet compliance standards. I’ll note here that the term “compliance” is fairly broad, but for the purposes of this article, I refer to the proper licensure of firms and individuals, and adherence to key related requirements, like prompt payment.
In the above scenario, it’s a reasonable expectation that contractors submit proof of licensing compliance when bidding for a project. Likewise, your firm should require licenses from subcontractors. Particularly those contributing to a project within particular specialty trades, which often have different licensing and examination requirements. General contractors overseeing a project are often not authorized to practice in specialty lines, which risks charges of unauthorized practice and the accompanying penalties for doing so. More broadly, engaging with an unlicensed or noncompliant vendor or subcontractor can lead to payment issues, state-enforced fines, and further legal consequences.
Your firm should also understand and vet contractors for compliance with prompt payment requirements. These requirements help to ensure payment between contractors and subcontractors happen within a designated period of time, typically 7-14 days. Prompt payment requirements protect the cash flow of both parties. Vetting during the selection cycle avoids immediate payment issues, the further expense of pursuing restitution, and the general malaise of “being stuffed” by another contractual party.
Prompt payment requirements are nearly universal, but vary greatly by state or even by project. Your firm should be aware of the requirements at a high level in order to review the track record of other parties and avoid abusive relationships. Then, knowing the complexity, understand that there are experts help you fill in the details.
Maintaining Compliance During the Project
By now, you probably realize that maintaining licenses for the duration of the project is equally critical to ensuring timely deliverables, cash flow, and profitability in turn. In some states, failing to apply for (or maintain) a license means your firm may not be able to file a mechanics lien or recover payment. Notably, in Twentynine Palms Enterprises Corporation v. Bardos, an unlicensed contractor was ordered to return all money received from the project (approximately $750,000). The decision set a precedent in California that unlicensed or improperly licensed contractors could not sue to recover compensation from work that otherwise requires a license.
There’s a highly public component, as well. The California Contractors State License Board, for instance, maintains a public page of its Most Wanted unlicensed contractors. It’s easy to imagine how your clients and competition would react to seeing your firm on one of these online stockades!
Leveraging Licensing Compliance for Success
If your firm isn’t properly licensed, it negatively affects your ability to negotiate work, deliver on projects, and collect payment. Now that you’re aware of the challenges, it’s time to discuss a path forward; a path that leads to compliance.
Conduct a gap analysis
Proper licensure of your firm, its qualifiers, and subcontractors forms the crux of your ability to do business. The first step is to do a gap analysis of where your firm is operating, who is operating it, and with whom you’re working. Identify where licensing requirements apply to the relevant parties. Check whether proper licensure has taken place. Take action to pursue licensing compliance immediately.
Review business objectives
It’s also important to review your business development objectives over a 12-18 month timeline. You should do so on a recurring basis. Licensing process can take a long time. Firms should pursue licenses in advance of upcoming projects, particularly those in new states. Proactive licensure has another positive component, as well, which is the ability to seek out additional projects in a given state.
Develop a system for license tracking
Then, it’s time to ensure that your firm has developed effective internal systems for tracking licenses of your firm, any qualifiers, subcontractors. First, designate individuals to prepare, submit, and track license applications. (Yes, you may need more than one, and a backup is always a good idea!) These individuals will need access to company records, information, and financial statements. They should be in proximate contact with company leadership and qualifiers in order to collect signatures and at times, personal information.
Then, review the methods by which these individuals track the approval of license applications and due dates, which unsurprisingly vary by state and occur throughout the year. This is the stage where your firm might consider specialized software to assist with the tracking process.
Analyze the results
As with any process, the final best practice is to analyze the results. By complying with state licensing and prompt payment requirements, there’s a good chance that you got paid on time and were able to step into new and even larger opportunities. Remember the cost of pursuing licensure? There’s a good chance you already have seen a return on that investment. It’s also a good idea to revisit your internal systems and process periodically to ensure clear communication and efficiency.
On the surface, compliance requirements for construction firms and contractors can seem like a world of complexity. But therein lies the ability to operate and receive payment, and forms a foundation for long-term profitability. Contractors that demonstrate a commitment to compliance set themselves apart in the eyes of their clients, vendors, and regulators. Construction companies can leverage their licensing compliance as a core competitive advantage. Take the opportunity to discuss the advantages of a compliant strategy with your firm’s leadership, and go forth with confidence!
Harbor Compliance is not an accounting or law firm and does not provide tax, financial, or legal advice.